Stocktaking of inventories is one of the most important elements of the accounting system of every entity keeping accounting books (full accounting). The obligation to carry it out follows directly from the Accounting Act and is crucial for the reliability of financial reporting. A properly conducted stocktake of all assets and liabilities makes it possible to prepare financial statements that give a true picture of the entity's assets, financial position and financial result for the financial year. We record stocktaking results and differences in the books of clients for whom we handle keeping accounting books.
Stocktaking of inventories requires proper preparation, knowledge of the legal rules and the use of appropriate control methods. Errors made during the stocktake can distort the company's financial picture and, as a result, lead to wrong business decisions. That is why it is so important to understand every aspect of the process and avoid the most common pitfalls.
Legal basis for stocktaking of inventories
Stocktaking is a legal obligation arising from the Accounting Act. The basic stocktaking date is the last day of each financial year, when entities must establish the actual state of their assets. The Act sets out precisely the scope and methods of stocktaking, dividing assets into categories that require different approaches. The deadline is deemed to have been met if the count of inventories started no earlier than 3 months before the end of the financial year and was completed by the 15th day of the following year (Article 26 section 3 point 1). Exceptions: inventories in guarded storage facilities covered by quantity-and-value records — once every 2 years (point 2), inventories at retail outlets covered by value records — once a year (point 4), while materials and goods expensed on the day of purchase (Article 17 section 2 point 4) and work in progress are counted as at the balance sheet date. The documents prepared during a count are described in our article on stocktaking documentation.
Under Article 26 section 1 of the Accounting Act, entities carry out a stocktake as at the last day of each financial year. This applies, among others, to cash assets (except those held in bank accounts), securities in physical form, tangible current assets and fixed assets. The process covers a physical count of quantities, their valuation and comparison with the book data
Stocktaking covers various categories of assets, each of which requires an appropriate method. Cash assets, except those held in bank accounts, securities in physical form, tangible current assets, fixed assets and real estate classified as investments are inventoried by a physical count of their quantities. The process also includes valuing these quantities, comparing the values with the data in the accounting books and explaining and settling any differences.
Financial assets held in bank accounts or kept by other entities, including dematerialised securities, receivables and the entity's own assets entrusted to business partners, are inventoried by obtaining from banks and business partners confirmations that the balance of these assets shown in the accounting books is correct. Here too, any differences must be explained and settled.
A stocktake by physical count also covers assets located at the entity that belong to other entities. This applies to items entrusted for sale, storage, processing or use. The entity must notify the owners of the results of the count (Article 26 section 2; the obligation does not apply to entities providing postal, transport, freight forwarding and storage services)
Methods of stocktaking inventories
The Accounting Act provides for three basic stocktaking methods (Article 26 section 1 points 1–3), which, for inventories, are applied depending on the type and location of the assets being inventoried. Choosing the right method is crucial for the reliability of the process and the correctness of its results.
The first and basic method is the physical count, which consists of physically counting and measuring the assets. This method is used mainly for goods and materials located at the entity itself. A physical count requires establishing the actual state, comparing it with the book state and identifying and explaining any differences found during the stocktake.
The second method is obtaining balance confirmations from business partners, used for inventories located at other entities. This method consists of obtaining written confirmations from external parties of the state of the assets they store or process.
The third stocktaking method is comparing the entries in the accounting books with the relevant source documents. This method is used in particular for materials in transit and uninvoiced deliveries. It requires a careful review of the documentation and a comparison of the book state with the actual state of deliveries
Each of these methods has its specific uses and requires a different approach. The physical count is the most labour-intensive, but also the most accurate for physically accessible items. Balance confirmations allow items located outside the entity to be verified, while comparison with source documents makes it possible to check transactions still in progress.
Preparing for the stocktake — key steps
A properly conducted stocktake requires careful preparation and planning of all steps. The success of the whole process depends above all on proper preparation, which includes a range of organisational and substantive tasks.
An entity preparing for the stocktake should first make sure the people who will carry it out are properly trained. The people appointed to carry out the physical count must know their duties well and understand the purpose of the count. Inadequate preparation of staff can lead to errors and make the whole process unreliable.
A key element of preparation is drawing up comprehensive documentation governing the course of the stocktake. This documentation should cover all aspects of the process and serve as a guide for the people taking part in the stocktake.
The basic elements of stocktaking documentation include:
- An order of the head of the entity on carrying out the stocktake
- A detailed site plan setting out the areas to be inventoried
- A stocktaking schedule broken down into stages
- Stocktaking instructions containing detailed procedures
- Templates of stocktaking documents to be completed
- Procedures to follow when differences are found
- Rules for documenting and settling shortages and surpluses
The stocktaking schedule should take into account the specific nature of the entity's business and its organisational capacity. Plan enough time for each stage of the process, allowing for unforeseen situations. A well-prepared schedule allows the stocktake to run smoothly without disrupting day-to-day operations
Verifying inventories in transit and uninvoiced deliveries
Particular attention during the stocktake should be paid to verifying inventories in transit and uninvoiced deliveries. These categories of inventories are a frequent source of errors and inaccuracies in the stocktake, so they require special control procedures.
Inventories in transit and uninvoiced deliveries are verified by comparing the entries in the accounting books with data from the relevant source documents. This process requires particular accuracy and care, because it concerns transactions that had not yet been fully completed on the stocktaking date.
When verifying inventories in transit, check carefully whether the stated quantities of materials and goods really result from invoices received that have not yet been confirmed by PZ goods received notes. The PZ document confirms that materials or goods from outside have been received into the warehouse and is a key element of the verification process.
The fact that a delivery has not arrived and no PZ document has been issued should be confirmed by warehouse staff. Every discrepancy between the book state and the actual state requires careful explanation and proper documentation. Failure to verify properly can lead to significant errors in the stocktake
The verification process also requires checking delivery dates, the terms of contracts with suppliers and the payment status. Make sure that all inventories in transit shown in the books have actually been ordered and are being delivered. Pay particular attention to deliveries that were due before the stocktaking date but were delayed for various reasons.
Physical count — rules and most common mistakes
Stocktaking of inventories by physical count is the basic and most important method of verifying the actual state of the entity's assets. It consists of physically counting and measuring the assets, and its main purpose is to compare the actual state of inventories with the records and detect any differences.
For a physical count to be carried out reliably and actually confirm that the counted inventories exist, specific rules and procedures must be followed. One of the most important requirements is to ensure the objectivity of the process by preparing the count sheets properly.
The people carrying out the physical count should not receive count sheets showing the quantities in the warehouse system on the day of the count. A count sheet containing system data may suggest the quantity of particular items, which leads to selective counting and increases the risk of errors in the stocktake. Count sheets for a fixed asset stocktake are prepared in the same way.
A proper physical count requires blank count sheets on which the counters record the quantities actually counted. Only after the physical count has been completed can the results be compared with the system data. This approach increases the objectivity and reliability of the stocktake
An example of incorrect practice is an entity that, wanting to make the stocktake easier and speed up the physical count of goods, printed out the warehouse balances and handed them to the people carrying out the count. One of them used the count sheet received to first check how many of particular goods should be in stock, and then counted the goods selectively. Even though the actual stock matched the warehouse balance, the physical count was carried out unreliably — the actual state was not established by a physical count of quantities, as required by Article 26 section 1 point 1 of the Accounting Act. We show a reliable count step by step using the example of stocktaking of fixed assets.
A manufacturing company was carrying out a stocktake of raw materials in its main warehouse. The warehouse manager prepared printouts of stock balances from the ERP system and handed them out to the counting teams, explaining that this would speed up the process. One employee, seeing 500 kg of a particular raw material on the printout, checked only some of the shelves and confirmed that the quantities agreed. Only a check carried out by the accountant showed that the actual stock was 450 kg, and the difference resulted from previously unrecorded damage to the packaging.
Controlling warehouse movements during the stocktake
When carrying out a physical count of materials and goods, the entity must ensure proper control over changes in warehouse stock occurring during the stocktake. Lack of proper control over warehouse movements can contribute significantly to errors in the stocktake and distort its results.
Controlling warehouse movements is particularly important for entities that, because of the nature of their business, cannot completely stop warehouse operations during the stocktake. This may be the case in trading businesses serving customers around the clock, manufacturing plants operating continuously or entities with contractual obligations regarding delivery dates.
An example of problems caused by a lack of proper control is an entity carrying out a stocktake of goods in a warehouse. During the stocktake, 500 units of goods that had already been counted as being in stock were issued to a customer. This issue was not properly noted for the purposes of the stocktake, although it was recorded in the warehouse software with a WZ goods issue note when the goods were released. At the end of the stocktake, the entity generated a printout of warehouse balances from the system and compared it with the figures from the physical count, which resulted in a surplus of 500 units of goods.
To avoid errors resulting from a lack of control over warehouse movements, the entity should record all changes in warehouse stock occurring during the stocktake. It is also necessary to establish whether a given change concerns goods already counted. The best solution is to stop warehouse operations completely for the duration of the stocktake
If stopping warehouse operations is not possible because of the nature of the business or delivery dates already promised for goods or products, the entity must introduce special control procedures. During the stocktake, particular care should be taken and consideration given to introducing appropriate procedures or additional records during the physical count.
Alternative solutions include:
- Planning for more staff to be present in the warehouse during the stocktake
- Carrying out the stocktake outside normal working hours
- Introducing additional procedures for documenting all warehouse operations
- Appointing people responsible for coordination between the stocktaking team and warehouse operators
- Using additional markings for goods already counted
- Keeping additional records of operations carried out during the stocktake
Stocktaking documentation and settling differences
Proper stocktaking documentation is a key element of the whole process and is fundamental to its legal effectiveness. The documentation must contain all the information needed to fully reconstruct the course of the stocktake and justify the decisions taken on settling any differences.
The basic elements of stocktaking documentation are count sheets, comparison statements of the actual state against the book state, reports explaining the causes of differences and documents confirming how they were settled. The Act requires the conduct and results of the stocktake to be properly documented and linked to the entries in the accounting books (Article 27 section 1); detailed document templates are set out in the entity's stocktaking instructions.
Count sheets are the basic stocktaking document, recording the actual state of individual assets. They should contain an exact description of the items inventoried, their quantities in natural units and, after valuation, their values according to the adopted valuation rules. Count sheets should be signed by everyone taking part in the count and approved by the person responsible for the stocktake.
All differences found during the stocktake must be carefully explained and properly settled. Explanatory reports should contain a detailed justification of the causes of the differences and proposals on how to settle them. This documentation is the basis for deciding how to record the stocktaking differences in the books
Settling stocktaking differences requires appropriate accounting procedures in line with accounting principles. Shortages may be settled as operating costs (natural losses within norms), other operating expenses (e.g. non-culpable shortages above norms, losses caused by random events) or charges to persons with material responsibility, depending on the cause established. The item “extraordinary losses” is shown only by banks, insurance and reinsurance undertakings and SKOK credit unions (Article 3 section 1 point 33 of the Accounting Act). Surpluses, in turn, increase the value of inventories and are recognised as other operating income. Differences are settled in the books of the financial year in which the stocktake deadline fell (Article 27 section 2).
Specific situations in stocktaking
Stocktaking of inventories may involve various specific situations that require a particular approach and appropriate procedures. These situations may arise from the nature of the entity's business, the type of inventories held or specific circumstances surrounding the stocktake.
One such situation is stocktaking of inventories in different locations, including external warehouses, at business partners' premises or in transit. Inventories entrusted to business partners (e.g. an external warehouse, processing) are inventoried by balance confirmation (Article 26 section 1 point 2), which means obtaining written confirmations from external parties; inventories in transit — by verification of documents (point 3). This process must be properly planned and started well in advance to make sure the confirmations are received before the stocktake closing date.
Another specific situation is stocktaking of seasonal inventories or inventories subject to natural losses. For agricultural products, food or other materials subject to natural ageing or losses, these factors must be taken into account in the stocktake and the causes of differences properly documented.
Stocktaking of consignment inventories requires particular attention and appropriate marking in the documentation. These items are not owned by the entity, but they must be covered by the physical count and properly documented. The owners of these inventories must be notified of the results of the count
Inventories of high value or strategic importance to the entity can also be problematic. Such inventories may require additional security procedures, the involvement of specialists or additional checks. Pay particular attention to inventories with a high unit value, which can significantly affect the stocktake result.
A table showing the different categories of inventories and the appropriate stocktaking methods:
| Category of inventories | Stocktaking method | Frequency | Special notes |
|---|---|---|---|
| Goods in the main warehouse | Physical count | Annual (guarded storage facility with quantity-and-value records — once every 2 years) | Ideally stop warehouse movements; where impossible — control procedures |
| Materials held by business partners | Balance confirmation | Annual | Written confirmations must be obtained |
| Inventories in transit | Verification of documents | Annual | Check invoices and transport documents |
| Consignment goods | Physical count | Annual | Notify the owners of the results |
| Raw materials in the production process | Physical count | Annual, as at the balance sheet date (work in progress) | Take the stage of completion into account |
