What is Physical Inventory?

Physical inventory is a process of determining that the inventory quantities are exact, or if there are
differences in quantity mentioned physically present and that mentioned in the SAP system. Basically,
after you are finished with physical inventory, your system and physical stock levels must be the same.

It is mandatory for legal reasons, and in the most of the times it is conducted once a year.

To simplify the process, check the below diagram, these are the most common steps for doing physical
inventory.

Besides the legal reasons it is extremely helpful having the correct stock quantities in the system
matching the physical stock. Management can have the correct information on the value of stock
materials. Not having the correct stock levels in the system means quite the opposite. Management has
the wrong picture on the financial aspect of the stock in possession.

Types of Physical Inventory

The following physical inventory procedures can be used in SAP system:

 Periodic inventory
 Continuous inventory
 Cycle counting
 Inventory sampling
Periodic inventory Most of the time companies use this kind of inventory. In most cases, it is
done once a year, and this kind of inventory is called annual physical inventory. That means
that material stock is counted once a year. Most of the times at the end of the year or after the
season ends (in seasonal industries).

Continuous inventory All materials are counted at some point in the year, but that can be at
any day appointed for. So we can count some material in February, others in April and so on. A
single material can be counted on a single date. This type of inventory is mainly utilized in
warehouse management based warehouses, but it can be done in inventory management too.

Cycle counting This type of inventory allows us to set a period for regular intervals for physical
inventory on the material level. So a fast moving and high value material can be counted four
times a year while slow moving and low value material can be counted once a year. The
indicator for this is set in material master in the Plant/Storage Location 1 View, in the field

CC phys. Inv. Ind. Inventory sampling Only a number of randomly selected materials are
counted on the balance sheet key date, and if those materials show small enough differences,
the other materials can also be considered to have a correct stock levels. Not really used that
often, as it is essentially an approximation, but in some cases it can be used if material and
warehouse structure imply that.

1. Creating Physical Inventory Document – MI01

The following procedure can be used in creating and processing of the physical inventory
document.

Go to Tcode MI01  enter  give document date and planned date for counting (leave
the default for today)  Enter Plant/Storage location/Special stock indicator Choose
if you want Posting Block (if there is a possibility that someone will do a posting while
physical inventory is in progress enable this – material level), Freeze book inventory
(current book inventory balance will be recorded in the physical inventory document if
this option is enabled), and if you want to count batches with deletion flag.  Enter (as
showed Below image)
Enter the material numbers  enter and save the transaction.

Your physical inventory document gets generated.

 T code MI02 – Change/Delete Physical inventory stock

Go to Tcode MI02  enter  Double click on the item if you want to check if the
counting has already been done  or if you want delete select line and click on deletion
option at header level as showed in below image  enter  save.

** You can see in the item level that our material has not yet been
counted.

If it is counted, then the description is in below image

*** On header level, you can edit the data entered during the creation of the physical inventory
document.

You are now finished with creating (and changing the physical inventory document). You can
display the document with MI03 transaction code.
2. Entering the Counting Results – MI04
Here in this you can enter the counting results in the physical inventory document. The process
is fairly easy, but it needs to be accurately executed because the error in entering the counting
results in poor stock balances later. So, there is high need that the counting process as well as
entering process both be accurate.

Path:
Go to tcode MI04  enter  give your physical document number, fiscal year  enter
counting date , variance percentage (% of difference between physical stock and system stock)
 enter