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Year-end inventory count: how to do it and what to record

A year-end inventory count turns the stock on your shelves into a number your accountant can use. That number feeds your cost of goods sold, your profit and the current assets on your balance sheet, so errors flow straight into your tax return. A reliable count needs a plan, a clean cut-off, a written record and a short list of differences to explain. This article walks through each step and what to bring to your accountant. It is written for owners of stores, workshops, restaurants and online sellers who hold stock.

Sora Accounting & Tax · General information · Editorial policy
Updated · 5 min read

From shelf count to reported inventory

A year-end inventory count moves from preparation and cut-off through counting, reconciliation and valuation to the records you keep.

Visual labels: Prepare and set cut-off; Count and check; Reconcile and value; Keep the records.

What to take away

  • Count at the end of your fiscal period, or keep a perpetual system with periodic counts and a written record of each one.
  • Agree a clean cut-off for receipts, sales and returns so each item is counted once and in the right period.
  • Value stock consistently, keep the count sheets, and make the opening figure match last year’s closing figure.

Why the count matters for your tax return

For income tax, the cost of goods you sell is generally claimed in the period in which you sell them. The CRA describes the calculation as opening inventory, plus purchases for the period, less closing inventory. That means every dollar of closing stock you report reduces the cost deducted this year and increases profit, and the same dollar becomes the opening figure next year.

A count that is too high overstates profit and may mean you pay tax on stock you cannot sell. A count that is too low understates profit and weakens the picture you give a lender. Either way, the starting point is an accurate physical record, not an estimate from memory.

Do you need a full count or a perpetual system?

The CRA’s guidance for self-employed people says to do an actual stock count at the end of each fiscal period, unless you use a perpetual inventory system. Under a perpetual system, your software or records update stock with every purchase and sale. You still do periodic counts and keep a written record of each one.

In practice, a small shop with a few hundred items usually counts everything on one day. A business with thousands of lines may count in sections across the year and reconcile at year end. Whichever you choose, keep it consistent, and ask your accountant which fits your size and software. Your fiscal period may not be the calendar year, so confirm your year-end date before you schedule anything.

Prepare before count day

Choose a quiet time as close to year end as you can, and decide who counts and who checks. Two people per area works well: one counts, the other records, and a third person spot-checks. Tidy the storeroom, group like items together and set aside damaged, expired or returned goods so they can be assessed separately.

Print or export the stock list from your records, but consider hiding the expected quantities so counters record what they see. Prepare numbered count sheets with item, location, unit of measure and quantity. Tag or mark counted areas so nothing is counted twice, and note any stock held elsewhere, such as at a customer’s site or in a vehicle.

Set a clean cut-off

Cut-off is the line between this year and next. Decide the exact date and time of the count, then record the last invoice, receiving report, shipment and return before and after it. Goods you have received but not yet been billed for still belong in stock and in payables. Goods you have sold and shipped should be out of stock even if the invoice goes out later.

Be careful with stock you own but do not hold, such as goods in transit, and with stock you hold but do not own, such as items on consignment. Pause receiving and shipping during the count if you can. If you cannot, log every movement so it can be adjusted afterwards.

Count, check and record

Count each item in the unit used on your list and write the number in ink or enter it directly. Have a second person recount any line where the count differs sharply from your records, and recount high-value items regardless. Record condition at the same time: slow-moving, damaged, obsolete or past its best.

Sign and date each count sheet and keep them together. A written record of the count is part of your inventory records, and the CRA asks you to keep these with your other business records. For how long, see our article on how long to keep business records in Canada. Photographs of shelves and storage areas can help support the sheets if questions arise later.

Reconcile differences and value the stock

Compare the counted quantities with the records. Most businesses find discrepancies between what the system says and what is on the shelf, and the reasons are usually ordinary: unrecorded returns, breakage, theft, mis-keyed receipts or goods used personally. Investigate the largest differences first, correct the records and keep a short note of what you found.

Then value the stock. In its guidance for self-employed businesses, the CRA allows two methods for income tax: value all inventory at fair market value, or value each item at the lower of its cost and fair market value. Cost includes the price paid and the expenses of bringing the item to your location. Once you pick a method, use it consistently. Your opening inventory must equal last year’s closing inventory, so do not restate it casually.

An illustrative example

Suppose, for illustration only, a small retailer starts the year with $20,000 of stock at cost, buys $80,000 of goods during the year and counts $25,000 of stock at year end. The cost of goods sold is $20,000 plus $80,000 less $25,000, or $75,000. If the count had missed $5,000 of stock stored in a back room, cost of goods sold would be $80,000 and profit would be $5,000 lower than it should be.

Now suppose $3,000 of that stock is damaged and could only be sold for half its cost. Under the lower-of-cost-and-market approach, you would generally value it at the lower figure, but how to document that is something to settle with your accountant. The numbers are round and simplified, and they leave out sales tax and other adjustments.

Common mistakes and what to bring

Frequent problems include counting after the year-end date without adjusting for movements, ignoring stock at other locations, leaving obsolete items at full cost, and changing valuation methods without a reason. BDC also notes that inventory on a balance sheet may be overstated because it often includes items already marked down or written off, and that dead stock still ties up space and money.

Bring your signed count sheets, the reconciliation notes, your valuation method, a list of damaged or slow items, and the last receiving and shipping documents before and after the cut-off. Our year-end accounting checklist covers the other items your accountant will want. If your stock level is rising faster than sales, our financial management service can help you look at what that means for cash.

Sources & editorial notes

Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.

Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.