Physical Inventory

What is physical inventory?
The process of counting physical inventory, posting corresponding document and posting the difference is called Physical Inventory.

Why we do physical inventory?
1. To know the correct stock in hand. Due to some inconvenience (like some materials have been stolen or broken) it may happen that the stock reflecting in sap system differs from the actual stock in storage location. Physical inventory is then carried out to synchronize the stock in hand with the stock reflecting in SAP system.
2. In many countries there is a law that Company have to do physical inventory to check the current stock in hand and that stock or assets is taken into consideration in Company’s financial statement.

At which level Physical inventory is carried out?
1. Material
2. Plant/storage location
3. Batch
4. Special Stock
5. Stock type
(These levels are called stock management unit. These are all an IM level. At WM level physical inventory is carried out at storage type and storage bin level)
Standard process flow of Physical Inventory

Alternative process flow of Physical Inventory






Important Tcodes in Physical Inventory

MI01 Create Physical Inventory Document
MI02 Change Physical Inventory Document
MI03 Display Physical Inventory Document
MI04 Enter Inventory Count with Document
MI05 Change Inventory Count
MI06 Display Inventory Count
MI07 Post Inventory differences
MI08 Create List of Differences with Doc.
MI09 Enter Inventory Count w/o Document
MI10 Post document, count and difference
MI11 Recount Physical Inventory Document
MI12 Display changes
MI20 Print List of Differences
MI21 Print physical inventory document
MI22 Display Phys. Inv. Docs. For Material
MI23 Disp. Phys. Inv. Data for Material
MI24 Physical Inventory List
MIAD Delete Phys. Inv. Documents
MIAR Archive Phys. Inv. Documents
MIDO Physical Inventory Overview
MB51 Material Document List

Physical Inventory Document
From a Physical Inventory document we can get the following information
1. Where the counting has been taken place ( eg Plant , storage location0
2. Count date
3. Which are the materials to be counted
4. The status of the items
5. The status of the Physical Inventory Document
6. The stock types to be counted

Post difference
1. When inventory difference is posted a Material document and if the material is valuated material then an accounting document is also posted.
2. A tolerance group for each user group can be maintained so that cone cannot post more than that difference .Tolerance group is maintained in IMG -> Materials Management -> Inventory Management and Physical Inventory -> Physical Inventory -> Define Tolerances for Physical Inventory Differences (Tcode OMJ2).
3. While posting the difference, one can maintain the reason for posting the difference also.
4. Be careful when posting the difference. The posting date should lie in the same posting period of the count entering date .If backposting is allowed the you can post the difference in following period also . If your posting date of the post difference is not satisfying these two conditions then you cannot post the difference.

Some important terminologies and settings in Physical Inventory

Posting Block
When you check the posting block check box for any physical inventory document, it will not allow any goods movement until the count results are posted. If you allow goods movement during counting inconsistency in counting result may occur due to that goods movement. So it is best practice to block the goods movement during counting.

Freeze book Inventory
When you check the freeze book inventory check box for any physical inventory document, it will allow goods movement but that will not reflect in the system until the count results are posted. If the time lag between physical inventory document creation and counting is high, this indicator is set, so that business can go on with goods movement. To use freeze book inventory you have to enable it by following the path given below.

IMG -> Materials Management ->Inventory Management and Physical Inventory -> Physical Inventory -> Allow Freezing of Book Inventory Balance in Storage Location.
If you don’t enable it and try to check Freeze Book Inventory while creating the document or changing the document then system will through the following error

Freezing of book inv. balance in stor. loc. is not allowed Message no. M7764

Adjusting book inventory
This is a customizing setting. These setting controls the system behavior when a material is subjected to active physical inventory goods movement of the same inventory has been posted. To set this indicator follow the path given below.

IMG -> Materials Management ->Inventory Management and Physical Inventory -> Physical Inventory -> Settings for Physical Inventory

Batches with deletion flag
If you wish to include those batches of a material that are flagged for deletion in the physical inventory document check this check box.





Business example of Physical Inventory count with solution
Example 1: In your Plant 0001 , storage location 0001 there are 10 nos. of material XYZ according to the SAP system .But physically the quantity is different ( assume only 6 nos. of the material exists in that storage location .Do the physical inventory and post the difference. And also block the goods movement during the counting.

Solution:
1. Create Physical Inventory document.
• Type MI01 in command filed and press enter.
• In plant field give 0001, storage location filed give 0001.
• Press enter.
• In material field give material no XYZ and press enter ( if the material is batch managed then enter the batch also )
• Save the document.
• Note down the document no.

2. Block the goods movement
• Type MM02 in command filed and press enter.
• Give the physical document number created in 1st step and press enter.
• Click on header (the CAP button ) or press shift + F4
• Check the Posting block check box
• Save the document.

3. Enter the count
• Type MI04 in command field and press enter.
• Give the Physical Inventory document no. and press enter.
• In the quantity field in the line item containing material XYZ give 6 and press enter.
• Save the document.

4. Post the difference
• Type MI07 in command field and press enter.
• Give the Physical Inventory document no. and press enter.
• In the reason field give 3 (damaged) and press enter.
• Post the document.
• Note down the material document no.

5. Optional but some important steps.
• Check the stock of material XYZ using TCode MMBE.
• Check the movement type of the material document generated in step 5.Type MB03 in command field. Press enter .Give the material document no. and press enter. Note that the movement type is 702.
• Check the accounting documents ----In MB03 on accounting documents. Note the accounting entries. In this case your Inventory account should be credited and Loss-difference account should be debited.