Stocktaking technology

Annual inventory

In accordance with the regulation concerning receipts and transfer book for tax purposes, before establishing such book and at the end of each fiscal year (also in case of partners change, change in proportion of partners’ shares or in case of liquidation of business activity) a taxpayer is obliged to make and to enter into a book of inventory through physical counting all commercial goods, basic and auxiliary materials, semi-products, finished products, rejected products and wastes (hereinafter - inventory through physical counting). Such inventory must be made also at monthly intervals if the business activity so requires or if based on the separate provisions such inventory is ordered by the tax office. If business activity is being put into liquidation the inventory through physical counting should include also equipment. The regulation concerning receipts and transfer book for tax purposes defines what should be included in the inventory through physical counting. The explanations concerning all the concepts relating to property items that undergo the inventory can be found in the provisions of the regulation. Thus, goods are defined as commercial goods, basic and auxiliary materials, semi-products, finished products, rejected products, wastes and materials designed for further processing, considering that:

• commercial goods are products designed to be sold as they are and by-products obtained during agricultural special production processes;
• basic materials are materials which during the production processes or during providing services are becoming the main substance of finished products; included are materials which make a part of a product closely related to it (for instance a bottle as a packaging) and reusable packaging (for instant pallets), if they are not fixed assets;
• auxiliary materials are materials that are not basic materials and which are used during business activity and which give their properties to a product;
• finished products are products manufactured by a company, the manufacturing process of which has been accomplished, services, development and research work, design work, map and survey work, accomplished work (including construction work);
• not-finished production is a production under construction and semi-products and also work and services before their accomplishment;
• rejected products are finished products manufactured by a company which are not compatible with technical requirements and commercial goods damaged/destroyed during transportation, of partially lesser value;
• Wastesare materials, which due to technological processes or due to damages/destruction have completely lost their use value.

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Final inventory

Final inventory is the inventory of commercial goods, basic (raw materials) and auxiliary materials, semi-products, finished products, rejected products, wastes made as of the end of each fiscal year.

Final inventory makes also an initial inventory for the following fiscal year.

Initial inventory

Initial inventory is the inventory of commercial goods, basic (raw materials) and auxiliary materials, semi-products, finished products, rejected products, wastes made before establishing receipts and transfer book or it is the final inventory made as of the end of the previous fiscal year.

Inventory in a company

The companies subject to the Accounting Act must verify the actual state of the possessed property items against records in books of accounts. The inventory is made as of the last day of a financial year. In some case this requirement is deemed as observed if the activities are being started three months before the end of a financial year and accomplished on 15th day of the next year.
The Accounting Act enumerates three main stocktaking methods:

• 1. Stocktaking through a physical counting -relates to the establishment of the actual balance of assets and regarding to its type consists of counting, valuating, weighting or measuring the activities that should be accounted for in a special inventory sheet. This method applies mainly to:
• • buildings
  • machines
  • fixed assets
  • tangible current assets
  • cash at the entity’s cash-desk
  • securities
• 2.Coordination of balances - relates to the confirmation of the balance of assets and liabilities in books of accounts by contractors and creditors and debtors. The company should receive from contractors and banks written confirmations of the correctness of the balances. In case of banks, an abstract of account revealing the balance of the bank account makes such confirmation. In case of contractors and debtors one should request a written confirmation, which is to be attached to the inventory documents as a proof of the conformity of the actual balance with books of accounts records. If there are discrepancies, they should be explained. This method applies mainly to:
• • financial assets deposited in bank accounts
  • receivables from contractors
  • own assets entrusted to contractors
• 3. Verification method - consist of the comparison of records in books of accounts with source documents This method applies among others to:
• • land and fixed assets which are difficult to access (for instance installations)
  • doubtful receivables and in case of banks – non-performing receivables
  • receivables and liabilities in respect of employees and state and local authorities
  • non-material and legal assets
  • prepaid and deferred costs and accruals
  • equity capital (ownership capital)
  • special funds (excluding ZFŚS which requires balance confirmation by bank)

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Inventory defines activities primary leading to establishing actual quantity of goods owned by a company and then comparing it with the quantities arising from the relevant documents such as: invoices, PZ documents, cash-desk reports and logistics software. The notion “inventory” is often interchanged with the notion stocktaking.

Stocktaking - is an act of a physical counting process leading to the preparation of a detailed list of property assets and sources of their origin as off specified date.

Stocktaking consists of the establishment by means of actual physical counting of all property, plant and equipment and monetary assets it also provides an explanation of a difference between actual state established during the inventory and the state resulting from books of accounts.

The main objective of a stocktaking process is to establish the actual balance of assets and liabilities. In particular, it consists of:

• correlating entries in books of accounts with actual balance
• clearing accounts with people responsible for entrusted to them property items
• assessing business usefulness of property items undergoing the inventory
• counteracting irregularities having been stated during the inventory (surplus, useless items)
• establishing proper financial outcome

Stocktaking concerns the following activities:

• inventory through a physical counting of all the property items that remain at a business entity disposal
• valuation of property items
• obtaining written information from a business entity's contractors on:
• • financial assets deposited in bank accounts
  • granted loans
  • receivables and liabilities
  • the company’s own assets entrusted to contractors
• comparing inventory records of some items (for instance land) with referential documents
• establishing and explaining the causes of losses and discrepancies in quantities
• proposing and substantiating motions concerning methods of settlement of inventory differences
• indicating ways of removing irregularities in the management of a given entity's property

There can be named the following types of stocktaking:

• Stocktaking through physical counting - performed by members of a stocktaking commission on the basis of direct observations and measurement of property items conducted in a given business entity. It comprises such accessible items as:
• • fixed assets
  • tangible current assets
  • cash at the entity’s cash-desk
  • securities
• Coordinating balance with contractors comprises mainly:
• • state of financial assets deposited in bank accounts
  • loans and credits
  • receivables
  • liabilities
• Verification of records concerns - assets and liabilities the balance of which cannot be established through inventory or through coordinating balance with contractors In particular it relates to:
• • arable lands
  • state or local authorities’ receivables and liabilities
  • other items impossible to access

Liquidation inventory

As of the date an entity discontinues its operation, a liquidation inventory is being made separately for the purpose of personal income tax, goods and services tax; stocktaking through physical counting is also being prepared. Stocktaking should comprise:

• commercial goods
• materials (row materials) – both basic ones and auxiliary ones
• semi-products
• finished products
• rejected products and wastes
• equipment at the moment of the liquidation of business activity

Stocktaking through physical counting is indispensable to establish income from business activity for the period from 1 January of a given year (of from the date of the stocktaking through physical counting being made during fiscal year) to the liquidation date.

Liquidation inventory for the purposes of income tax is indispensable to establish income tax from the remaining property items of the liquidated firm, which are being transferred into private property of a businessperson.

Liquidation inventory for the purposes of VAT VAT is indispensable to establish VAT on property items intended for satisfying personal needs of a businessperson or intended to be sold within 12 months of the firm liquidation.

Income from the inventory is charged with a lump income tax of 10 percent. Tax from the income from the liquidation of business activity is defined as 10 percent of this income. It is paid in the form of an advance payment for the last month of business activity. A taxpayer is obliged to include liquidation inventory to the declaration. If the liquidation of business activity is being made in December of the fiscal year, the income from the liquidation should be revealed in the tax return.

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