Cycle counting refers to physically counting a portion of the inventory items on many days throughout the year instead of counting all of the items on a single day near the end of the year.

For example, cycle counting could mean counting one-twelfth of the inventory items each month. Therefore, each month one-twelfth of the inventory records would be adjusted so that they agree to the physical counts.

Another possibility would be to physically count the most important 15% of the inventory items every month and to cycle count the remaining 85%. Perhaps one-twelfth of the remaining 85% would be counted every month.

Cycle counting reduces the need for the costly process of shutting down the manufacturing process in order to count inventory. Cycle counting can also result in more accurate interim financial statements since inventory is a key part of a company's current assets and the calculation of its cost of goods sold.