Stock inventory – preparation, process and settlement under the Accounting Act

This article answers the following questions:

• When should a stock inventory be carried out?
• What is subject to inventory?
• How should inventory discrepancies be settled?

Stock inventory is an important component of internal control in every entity. When performed correctly, it should help establish the actual status of the stock and its usability, detect inventory discrepancies, and determine the responsibility of individuals materially accountable for entrusted assets. This process is also significant for verifying the accuracy of accounting records, improving asset security and preventing irregularities in asset management within the company.

As inventory constitutes an important element of accounting, the obligation to carry it out is stipulated in the Accounting Act of 29 September 1994 (hereinafter: the “Accounting Act”), in Articles 4 and 26.

When is stock inventory scheduled?

As a rule, inventory is carried out on the balance sheet date. Pursuant to Article 26(3) of the Accounting Act, an entity meets the deadlines and frequencies if:

1. inventory of assets – except for cash, securities, work in progress, and materials, goods and finished products specified in Article 17(2)(4) (i.e. materials and goods expensed upon purchase, or finished goods expensed upon production) – is started no earlier than three months before the end of the financial year and completed by the 15th day of the following year, (what is important, the inventory level must be determined in this case by adding to or deducting from the inventory level – established by means of a physical inventory count or balance confirmation – the receipts and outgoings that occurred between the date of the inventory count or confirmation and the date of establishing the level resulting from the accounting books, whereas the level resulting from the accounting books cannot be determined after the balance sheet date),
2. inventory of supplies of materials, goods, finished products and semi‑finished products kept in secured storage facilities with quantity‑value records – is carried out once every two years,
3. inventory of real estate classified as fixed assets and investments, as well as other fixed assets and machinery and equipment included in the fixed assets under construction located in a secured area – is carried out once every four years,
4. inventory of supplies of goods and materials with value‑based records in the entity’s retail outlets – is carried out once a year,
5. inventory of timber in forest management entities – is carried out once a year.

Most commonly, however, inventory is carried out annually regardless of storage location, as this enhances both the credibility of the audited annual financial statements and internal control over asset management.

Forms, methods and scope – What is subject to inventory?

Inventory may be carried out not only as required by the Accounting Act but also on a cyclical or ad hoc basis – for example, due to random events (such as fire or theft), changes in materially responsible personnel, external controls etc.

Types of inventory by scope:

• full inventory – covers all assets,
• selective inventory – covers selected assets.

Types of inventory by mode:

• periodic – conducted at a pre‑determined time,
• continuous – carried out according to a set plan and cycle.

A continuous inventory must include all items of a given type, be supported by quantity‑value records, and adhere to the established cycle.

Article 26(3) of the Accounting Act clearly states that an entity may carry out an inventory of supplies covered by quantity‑value records even once every two years – provided that they are stored in secured storage facilities. The expression “within a specified period” is understood to mean both the possibility of conducting a single physical count on any day within that period, as well as the possibility of conducting partial physical counts of individual assortment groups in such a way that the entire stock is inventoried within that period.

Inventory methods:

• physical count – for materials, goods, finished products and work in progress,
• reconciliation with accounting records – for items that cannot be physically counted, such as goods in transit; this requires verifying both documentation and valuation.

Proper preparation for carrying out an inventory

The person responsible for the inventory is the head of the entity, who announces it and determines its duration – in accordance with the above‑mentioned deadlines and the Accounting Act. This process is formalised through an inventory order issued sufficiently in advance to ensure that the entity has enough time to prepare.

To conduct the inventory correctly, it is essential to develop and implement an inventory order and an inventory instruction. The instruction should include, among other things, information on:

1. the organisation and course of the inventory (including its principles, adopted methods and the procedures for settling and valuing the results),
2. the selection of procedures for counting and recording the various types of stock (counting, weighing, measurement, estimation) as well as the established schedules,
3. the principles for appointing members of the inventory commission and stocktaking teams, along with a description of their competencies,
4. the separate inventorying of all assets: free‑standing, those with reduced economic usefulness or those owned by third parties,
5. the method of controlling inventory forms,
6. ensuring control over movements during the physical stocktaking process so that the results are not distorted by ongoing operations (e.g. production, sales),
7. determining the degree of completion of work in progress,
8. any simplifications applied during the inventory,
9. the documents required to perform the activities (their description should include: the order implementing the inventory instruction, the management order on conducting the inventory, a declaration of the person materially responsible prior to the inventory, and the protocol documenting the course of the inventory).

The inventory instruction should continually evolve so as to incorporate, on an ongoing basis, the conclusions drawn from previous inventories. This helps prevent the repetition of the same errors. If the company is subject to an audit by an audit firm, it is advisable to submit the instruction for review to the statutory auditor, who may identify potential irregularities. All individuals participating in the stocktaking process should subsequently familiarise themselves with the instructions approved by the management.

Before conducting the inventory, it is also necessary to properly prepare and organise the stocktaking area. A good practice is to clearly demarcate stocktaking zones, ensuring that the counting teams have no doubts about the area they are responsible for inventorying. Inventory items that have already been counted should be appropriately marked, which helps avoid duplication of counts. Each product category should be unambiguously assigned to a specific stocktaking zone. Items that are not subject to inventory must also be clearly labelled.

The course of the inventory and the physical stocktaking process

To ensure the correct course of physical stocktaking and to obtain the highest quality inventory results, it is recommended that the entity suspend all receipts and issues for the duration of the stocktake and, in the case of a production unit, also suspend the production process.

The physical stocktake should be carried out by stocktaking teams, performing this task under the supervision of the appointed inventory commission and with the participation of managers or employees appointed by them from the relevant functional units. Individuals involved in the stocktaking process should be properly trained in the established procedures and methods. To avoid influencing the assessment of quantities, stocktaking teams should not have access to warehouse inventory records. Moreover, individuals performing the stocktake should not be materially responsible for the area being counted, to prevent potential bias towards particular outcomes.

The position of the Accounting Standards Committee, announced in Communication No. 2 of the Minister of Finance dated 20 July 2016, concerning inventory by physical stocktaking of inventories, materials, goods, finished products and semi‑finished products, emphasises that an inventory must also include an assessment of the qualitative condition of inventories and their suitability for economic use. Stocktaking teams should therefore evaluate, among other aspects, the physical condition of inventories (e.g. damage or spoilage) and the expiry date.

Inventories owned by the entity but located outside its premises are verified on the basis of stocktaking sheets received from contractors or confirmations of the quantities recorded in the entity’s accounting books.

Conversely, third‑party inventories (e.g. goods or finished products that have been sold but not yet collected) held at the premises of the inventoried entity must also be included in the physical stocktake and their quantities determined. As indicated in the aforementioned position of the Accounting Standards Committee, the results of the physical stocktake of third‑party inventories should be recorded separately from the results of the stocktake of the entity’s own inventories – on a separate stocktaking sheet – and subsequently transmitted to the owner.

Settlement of inventory differences

The settlement of the inventory focuses on explaining the causes of inventory discrepancies and considering the requests of materially responsible persons regarding the offsetting of shortages with surpluses of similar items. The next step is to prepare and present to the management a proposal for the method of settling these differences, formulated by the inventory commission. The management then makes a decision which forms the basis for recognising the inventory result in the accounting records.

Discrepancies identified during the inventory between the actual state and the state recorded in the accounting books must be settled in the books of the financial year in which the inventory date falls. The following types of differences are distinguished: surpluses, shortages, or damages. Depending on their causes, these differences may be classified as natural losses, culpable losses, or non‑culpable losses.

Non‑culpable shortages and damages, as well as natural losses, include loss of quantity or utility arising from causes beyond the control of materially responsible individuals.

The inventory process is concluded with the approval of the settlement of differences, prepared by the management in the form of a protocol documenting the verification carried out by the inventory commission. The protocol should contain information regarding:

1. recognising surpluses as other operating income,
2. recognising non‑culpable shortages as other operating expenses,
3. any charges imposed on materially responsible persons for culpable shortages and damages,
4. recognising any extraordinary damages under extraordinary gains or losses,
5. the offsetting of shortages and surpluses carried out.

In the area of performing compensations, an entity may independently decide whether it wishes to apply them. When value‑based inventory records are maintained, no compensation of inventory surpluses and shortages is performed. Compensation may apply solely to shortages and surpluses identified within the same inventory field, supervised by the same person materially responsible, and discovered during the same stocktaking procedure. Importantly, when performing compensation, the principle of the lower price and the smaller quantity is applied. This means that, in order to determine the admissible quantity and value of compensation, the lower of the two quantities and values – that of the shortage and that of the surplus – is adopted. It should also be noted that only non‑fault shortages are subject to compensation rules.

The protocol of verification of differences, approved by the management board, constitutes the basis for the accounting department to record the results in the accounting books.

The summary of inventory results should also contain a brief report on the course of the stocktaking procedure, including remarks aimed at improving the method of storing inventories, the warehouse management practices, and the organisation of future stocktaking processes.

Preparing in advance for the stocktaking process is highly advisable

Properly conducted inventory of supplies means meeting the requirements of the Accounting Act. At the same time, it naturally contributes to improving the management and operational efficiency of the entity.

In the case of an inventory carried out for the first time, particular emphasis should be placed on the correct preparation of the stocktaking instructions. Equally important is the adequate preparation of the stocktaking teams and the inventory fields within the warehouse. Thorough preparatory work will enable the stocktaking process to run smoothly, while adherence to the rules mentioned earlier will positively influence its quality and generate added value in the entity’s operations.

References:

1. The Accounting Act of 29 September 1994 (consolidated text: Journal of Laws of 2023, item 120, as amended),
2. Position of the Accounting Standards Committee on stocktaking by physical inventory of supplies, materials, goods, finished products and semi‑finished products, published in the Communication No. 2 of the Minister of Finance of 20 July 2016.