Stocktaking of goods is one of the most important processes in the accounting of trading businesses. In practice, the actual quantity in the warehouse often differs from the data shown in the accounting books. These differences can take the form of shortages or surpluses of goods, which must be settled properly in line with the Accounting Act.
Stocktaking of goods in accounting books involves a number of complex procedures that must be carried out with due care and in line with the rules in force. Businesses engaged in trade must be aware both of their legal obligations and of the practical side of settling stocktaking differences.
In this article we present a comprehensive guide to stocktaking of goods, focusing on the practical aspects of settling shortages and surpluses in accounting books. We also discuss the accounting procedures, settlement deadlines and the different categories of stocktaking differences that can arise in practice.
Legal basis for stocktaking of goods
Stocktaking of goods in accounting books is a mandatory part of accounting in trading businesses. The legal basis for this obligation is the Accounting Act, which regulates in detail the rules, deadlines and procedures for stocktaking.
The Accounting Act requires entities engaged in trade to carry out stocktaking of goods by physically counting their quantities. The process includes valuing the quantities found, comparing the values with the book data, and explaining and settling any differences
Stocktaking can be defined as a set of activities aimed at establishing the actual quantity of goods shown in the accounting books as at a given balance sheet date. The key element of the process is comparing the actual quantity with the book quantity and properly settling any differences found.
Under Article 26(3)(1) of the Accounting Act, the deadline and frequency of stocktaking of goods are considered met if the stocktaking began no earlier than 3 months before the end of the financial year and was completed by the 15th day of the following year. This means that an entity whose financial year is the calendar year can start stocktaking on 1 October and finish it on 15 January of the following year. This rule does not cover goods and materials expensed on the day of purchase (Article 17(2)(4) of the Accounting Act) — their quantity is established as at the balance sheet date. For goods in guarded storage facilities with quantity-and-value records, a count once every 2 years is enough, and for goods in retail outlets with value-only records — once a year (Article 26(3)(2) and (4)). Different deadlines and methods apply to the stocktaking of fixed assets.
The quantity of goods is established by adding to or subtracting from the quantity found in the physical count the receipts and issues that took place between the date of the count and the day on which the book quantity is established. Importantly, the book quantity cannot be established after the balance sheet date.
The Accounting Act requires stocktaking to be carried out systematically and accurately. All differences found between the actual and book quantities must be properly documented and settled in the accounting books of the financial year to which the stocktaking date relates
Obligations relating to settling stocktaking differences
If the stocktaking reveals surpluses or shortages of goods, the entity must settle them properly in its accounting books. This obligation follows directly from Article 27 of the Accounting Act.
This provision clearly states that the stocktaking process and its results must be properly documented and linked to the entries in the accounting books. All differences found during stocktaking between the actual quantity and the quantity shown in the accounting books must be explained and settled in the accounting books of the financial year to which the stocktaking date relates.
The deadlines for settling stocktaking differences follow indirectly from the Accounting Act. Under Article 24(5)(2) of the Accounting Act, accounting books are considered to be kept on a current basis if trial balances of general ledger accounts are prepared at least for each reporting period, no less often than at the end of each month, and for the financial year — no later than the 85th day after the balance sheet date. At year end, alongside the count of goods, balances with business partners are also reconciled – we describe this under receivables stocktaking.
For entities whose financial year is the calendar year, stocktaking differences must be settled in the books before the annual trial balance is prepared, i.e. no later than the 85th day after the balance sheet date — 26 March (25 March in a leap year) of the following year
The procedure for settling stocktaking differences includes the following stages:
- Accurately documenting all differences found
- Explaining the causes of the shortages or surpluses
- Classifying the differences according to their nature and causes
- Choosing the appropriate accounting treatment
- Making the adjustments in the accounting books
Remember that all activities related to settling stocktaking differences must be properly documented. The documentation should contain detailed explanations of the causes of the differences and the reasons for the chosen way of settling them.
Characteristics of shortages of trading goods
Shortages of trading goods are among the most common stocktaking differences in practice. They arise when goods shown in the accounting books are not confirmed during the stocktaking.
Differences between the actual state and the data in the accounting books revealed by stocktaking are precisely what shortages are. They can have various causes, from recording errors, through theft, to natural losses related to the nature of the goods.
Shortages of goods can be classified according to various criteria, which is important for choosing the right way to settle them in the accounting books. Each category of shortage requires a different accounting approach
The first classification divides shortages into material and immaterial. This distinction affects how detailed the explanations and documentation must be, but it does not exempt you from settling them — every difference must be explained and settled in the books (Article 27(2) of the Accounting Act). The materiality criterion is set individually by each entity as part of its accounting policy (Article 4(4) and (4a)).
Another classification divides shortages into natural and non-natural. Natural shortages arise from natural causes related to the nature of the goods. Such shortages are linked to natural losses that occur during storage and warehousing.
Examples of natural shortages include:
- Evaporation of liquids during storage
- Drying out of food products
- Losses related to fermentation processes
- Natural loss of weight as a result of evaporation
Non-natural shortages, in turn, are differences caused by external factors such as theft, recording errors, mechanical damage or poor stock management.
The last classification divides shortages into culpable and non-culpable. Non-culpable shortages arise from random events of an objective nature caused by force majeure over which the entity had no influence. A classic example of a non-culpable shortage is the loss of goods as a result of fire, flood, earthquake or another natural disaster.
Culpable shortages, on the other hand, result from the actions or omissions of people responsible for managing the goods. They may result from negligence, improper handling of goods or deliberate actions aimed at misappropriating the entity's assets
Surpluses of goods in stocktaking
Surpluses of goods are the opposite of shortages and arise when stocktaking shows that the entity holds more goods than the accounting records indicate. Although surpluses may seem favourable, they also need to be explained and settled properly.
Surpluses can have various causes, including both errors in the accounting records and a genuine increase in stock. Correctly identifying the causes of surpluses is key to choosing the right way to settle them in the accounting books. We post stocktaking differences for clients whose full accounting we keep.
Surpluses can be divided into genuine and apparent. Apparent surpluses are those caused by errors in the accounting records or during the stocktaking. They may result from:
- Incorrect entry of data into the accounting system
- Mistakes made during the physical count
- Incorrect processing of accounting documents
- Errors in converting units of measure or weight
Genuine surpluses, on the other hand, are an actual increase in stock, which may result from inaccurate recording of goods received, errors in settling customer returns or incorrect recording of donations and other free-of-charge receipts
Surpluses can also arise from:
- Inaccurate recording of goods received
- Errors in settling customer returns
- Incorrect recording of donations and other free-of-charge receipts
- Mistakes in converting exchange rates for imported goods
As with shortages, surpluses require a detailed explanation of their causes and proper settlement in the accounting books. The process must be accurately documented and carried out in line with balance sheet law.
Accounting procedures for settling stocktaking differences
How shortages and surpluses are recorded in the accounting books depends above all on their causes. Stocktaking differences are recorded in the accounts "Settlement of shortages and damage" or "Settlement of surpluses", which are used to organise and control the settlement process.
Account 242 "Settlement of shortages, damage and surpluses" is the basic accounting tool for settling stocktaking differences. It is a transitional account used to collect information on differences before they are finally settled to the appropriate income statement accounts. The account numbers in this article are examples — each entity uses its own chart of accounts adopted in its accounting policy (Article 10(1)(3)(a) of the Accounting Act).
Recording shortages where an employee bearing material liability is responsible for them requires particular care and accuracy in documenting all the circumstances
Example of recording shortages in the accounting books where an employee bears material liability:
- Recording the shortage in the settlement account
- Transferring the shortage from the goods account
- Charging the employee with the value of the shortage
- Settling the transitional account
| Transaction | Debit account | Credit account | Description |
|---|---|---|---|
| Recording the shortage | 242 | 330 | Settlement of shortages / Goods |
| Charging the employee | 234 | 242 | Settlements with employees / Settlement of shortages |
| Payment by the employee | 101 | 234 | Cash / Settlements with employees |
Different categories of shortages are recorded differently:
Non-culpable shortages within natural loss norms are transferred at acquisition price or production cost to cost accounts by nature or by function. Such shortages are a normal cost of running a trading business.
Non-culpable shortages above the norms and culpable shortages that cannot be recovered from the person responsible are other operating expenses and are recorded in the other operating expenses account. Culpable shortages are charged first to the person responsible (settlements with employees).
Shortages offset against surpluses are offset in the records in the "Settlement of shortages, damage and surpluses" account. This can happen when the stocktaking differences concern similar goods and offsetting them can be justified.
Culpable shortages, where the person with material liability for them disputes their responsibility, are transferred to the "Receivables pursued in court" account in the amount stated in the statement of claim filed with the court
Special cases of settling stocktaking differences
In practice, special situations may arise that require an individual approach to settling stocktaking differences. Each case requires a careful analysis of the circumstances and the choice of an appropriate accounting treatment.
Offsetting shortages against surpluses is one of the most common procedures in accounting practice. The Accounting Act does not regulate it — the rules are set by the entity's internal stocktaking instructions. It is usually allowed where the differences concern similar goods (easy to confuse), the same stocktaking period and the same responsible person, up to the smaller of the two quantities and at the lower of the prices.
A trading company selling electronics found during its annual stocktaking a shortage of 5 units of smartphone model A worth PLN 10,000 (PLN 2,000 per unit) and a surplus of 3 units of a similar smartphone model B worth PLN 6,000 (PLN 2,000 per unit). The analysis showed that the differences arose from mistakes when issuing goods, so 3 units worth PLN 6,000 were offset, and the remaining shortage of 2 units worth PLN 4,000, found to be non-culpable, was settled as an other operating expense.
Shortages and surpluses can also result from errors in converting exchange rates, especially for entities trading in imported goods. In such situations, the import documentation must be carefully analysed and the accounting entries corrected accordingly.
Pay particular attention to settling shortages caused by force majeure. In such cases, shortages are settled as other operating expenses (random losses), provided the circumstances in which they arose are properly documented. The item "extraordinary losses" today applies only to banks, insurance and reinsurance undertakings and cooperative savings and credit unions (Article 3(1)(33) of the Accounting Act).
Settling culpable shortages requires particular care, especially where the person with material liability disputes their responsibility. In such situations, it may be necessary to conduct an internal investigation and possibly take the case to court.
All special cases require accurate documentation and justification of the chosen settlement method. The documentation should contain detailed explanations of the circumstances in which the differences arose and the legal basis for the solution adopted
Stocktaking during the financial year
The Accounting Act sets the minimum stocktaking deadline, but nothing prevents an entity from carrying out an additional stocktaking during the financial year. This may be necessary in special situations that require the stock to be verified.
Reasons for a mid-year stocktaking may include:
- Very large discrepancies between the warehouse stock and the book entries
- Suspected theft or other irregularities
- A change in the warehouse or accounting system
- An internal or external inspection
- Preparing the business for sale
Balance sheet law requires accounting books to be kept reliably, accurately, verifiably and on a current basis. This means that the entries in the accounting books must reflect the actual state, which may require a mid-year stocktaking
A stocktaking carried out during the financial year is subject to the same rules as the annual stocktaking. All differences found must be properly explained and settled in the accounting books. The results of such a stocktaking can be taken into account in the next stocktaking required by the Accounting Act.
The mid-year stocktaking procedure includes:
- Preparing the stocktaking documentation
- Appointing a stocktaking committee
- Carrying out the physical count
- Comparing the actual quantity with the book quantity
- Explaining the causes of the differences found
- Settling the differences in the accounting books
- Drawing up the stocktaking report
The results of a mid-year stocktaking must be properly documented and reflected in the accounting records. All differences found are subject to the same settlement rules as differences found during the annual stocktaking.
Documentation and control of the stocktaking process
Proper documentation of the stocktaking process is a key element ensuring compliance with the Accounting Act and making it possible to verify that the activities were carried out correctly. The stocktaking documentation must be complete, reliable and allow the course of the stocktaking to be fully reconstructed.
The basic stocktaking documents include:
- The order to carry out the stocktaking
- The stocktaking instructions
- The physical count sheets
- The stocktaking reports
- Documents explaining the differences
- Decisions on settling the differences
The stocktaking committee is responsible for carrying out the stocktaking correctly and should consist of people with the appropriate qualifications and experience. The composition of the committee should ensure the objectivity and reliability of the work carried out
Control of the stocktaking process includes verifying:
- The completeness of the physical count
- The correctness of the valuation of goods
- The correctness of the comparison with the book data
- The validity of the explanations of differences
- The correctness of the settlement in the books
The internal control system should ensure that the person carrying out the control is independent of the people responsible for managing the goods. The control may be carried out by an internal control unit, a financial controller or other designated persons.
The stocktaking documentation must be kept for the period set out in the Accounting Act, which is at least 5 years from the beginning of the year following the financial year to which it relates (Article 74(2)(7) and (3)). These documents may be examined by the tax authorities, statutory auditors and other authorised institutions.
