The inventory forms the basis and the prerequisite for the preparation of the annual balance sheet. Here you can find out how the inventory should be optimally planned, what you have to pay particular attention to when carrying out the inventory and what different inventory procedures and types there are.
Taking inventory: General information and tips
The term “inventory” (lat. invenire to find something; lat. inventarium totality of what is found) is an accounting term. During a stocktaking, an inventory list is drawn up, which forms the basis for drawing up the annual balance sheet. An inventory is therefore a process by which the current stock of assets in a company is determined. Two values are decisive: the actual stock and the target stock. The determined actual stock from the inventory is compared with the target stock. In this way, possible differences can be uncovered and the actual asset or debt situation of a company can be determined.
Conducting an annual inventory is the basic prerequisite for a company to be able to keep proper accounts and prepare a balance sheet. During the inventory, both tangible and intangible assets can be recorded, which are located in the fixed and current assets of the company. Tangible and intangible assets are identified by weighing, counting or measuring and recorded on tally sheets. Intangible assets include, for example, receivables, debts, goodwill, rights, licences, patents or other property rights. Tangible assets include physically tangible objects such as vehicles and office equipment. The number of units of a product is counted (e.g. the number of vehicles in a company’s fleet), litres or lengths are measured (in the case of drinks or metre goods such as fabrics) and weights are weighed (fresh food such as meat).
The inventory procedure
In order to avoid disruption of the company’s daily operations, the inventory is usually carried out after closing time. The larger the company and the more extensive its stock of goods, the more time and personnel must be planned for the inventory. In these cases, it may also be necessary to close the business temporarily. In the case of large retailers, it is now even common for stocktaking to be carried out on a monthly basis so that the head office always has an overview of the actual stock of goods in the individual branches.
If there is a difference between the actual and target stock, this must be booked out and flows into the company’s profit and loss account. Shortages can occur, for example, if goods have been labelled incorrectly or have been broken during transport. Other possible explanations are theft or technical problems such as a defective cash register.
The inventory process should be planned step by step so that it can run smoothly.
Step 1: Set a date
Set a date for the inventory. Usually, an inventory is taken at the end of a business year. For larger companies, it may make sense to take inventory piecemeal during the current business year so that the main inventory at the end of the year is less time-consuming. It is also possible to combine different methods of stocktaking (annual inventory, postponed inventory and perpetual inventory).
Step 2: Create a schedule
In order for the inventory to run smoothly and for each helper to know when to do what, a well-organised schedule is necessary. Make a plan in advance of how much time the inventory will take. Also consider whether ongoing operations should be interrupted for the duration of the inventory or whether it can be carried out in parallel with business operations. Depending on the scope and duration of the inventory, the business may have to be closed temporarily, as no stock changes may be made during the inventory.
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Step 3: Allocation of tasks for staff
The larger a company and the more extensive the inventory of a business, the more staff is needed to carry out the inventory. Since an inventory is usually done in teams of two (one person counts, the second person keeps the list), you should plan for enough staff. In addition, there should be a stocktaking manager or controller who supervises the stocktaking and, if necessary, randomly checks the stock lists of the employees to ensure that the stocktaking is carried out correctly.
Step 4: Prepare the inventory
To ensure that the inventory can start without delay, some organisational details should already be prepared in advance. These include, for example:
Prepare all premises where the inventory will take place accordingly (for example, tidy up the warehouse, production and sales areas).
Combine the same or similar stocks into one product group for the sake of clarity.
Store defective or spoiled goods separately in one place.
Store third-party stocks, such as goods on consignment or products that have already been sold, in a separate place as well.
Check that all items are correctly marked and labelled.
Establish a recording procedure in advance for each item in stock (weigh, measure, count, etc.).
Make sure that there are enough working materials for the inventory assistants. This includes, for example, calculators, notepads, pens, containers, measuring tapes or folding rules, inventory lists, protocols and forms.
Step 5: Carry out the inventory
To ensure that no results can be falsified during the inventory, the company’s target stock level must never be communicated to the inventory staff. Ideally, the actual stock determined should agree with the target stock of a company at the end of a stocktaking. To conduct a stocktake correctly, staff should consider the following aspects:
The counter of a team of two tells the second team member the item, item number, age, quantity and price of the goods. The clerk notes this information in a list and marks the goods that have already been included in the inventory list. When a range of goods has been completely included in the inventory list, the marking is removed again.
It is always counted from left to right and from top to bottom.
Spoiled or defective goods must be listed separately.
If goods are taken by measuring or weighing, the values are rounded up or down.
During the inventory, an inspector should always be present to randomly check the lists of the teams of two.
The names of the respective list leaders, the name of the inspector and the date of the inventory must be noted on the inventory lists.
Step 6: Finalise the inventory
If the inventory results in differences between the actual and target stock, these must be recorded accordingly so that the subsequent balance sheet can be carried out correctly. Afterwards, all inventory documents must be filed away properly. As with other important company documents, the retention of all records for ten years is required by law.
The different inventory procedures
When an inventory is carried out, a distinction must be made between three different procedures. The three types of inventory deal with different assets.
The physical inventory
The physical inventory is an inventory of tangible assets that can be determined by counting, weighing or measuring. In some cases, an estimate of the stock of goods is also permitted if an exact recording is not possible.
The book inventory
Here, all assets of a company that are intangible in nature are recorded. It is therefore a purely value-based inventory. This includes, for example, the assets and liabilities of a business such as accounts receivable, bank appraisals, liabilities, patents, rights and licences.
The asset inventory
An asset inventory is an inventory of a company’s movable tangible assets. These include, for example, vehicle fleets, machinery and factory and office equipment. Each asset must be individually recorded in the asset inventory with a corresponding asset card. Such an asset card must contain detailed information about the asset, such as:
Exact name of the asset
Balance sheet value of the asset at the balance sheet date
Date of acquisition
Cost of acquisition
Amount of annual depreciation