Inventory accounting methods A and B

What it means

Slovak accounting procedures allow two ways of recording the same stock movements. Under method A a purchase goes to the inventory accounts and reaches expenses only on consumption or sale; under method B it goes straight to expenses and the balance is corrected at the year-end.

Method B does not mean the warehouse goes untracked: stock records are kept either way. Neither method settles how outgoing stock is valued, which is the job of FIFO or of a weighted average.

The choice of method has no effect on the profit or loss for the whole year if the stocktake is right: both methods arrive at the same closing stock and the same costs for the year. They differ in when and where the balance can be seen, in other words in the quality of information during the year, not in how much tax the company ends up paying.

How it works in practice

Under method A the ledger shows the stock balance at any moment, so monthly interim figures mean something. Under method B the balance is right only after the stocktake, and a month with a big purchase looks like a loss although nothing went wrong.

At the year-end under method B the opening balance is charged to expenses and the counted stock is posted back to the inventory accounts. Differences must be documented as shortages and damage or as a surplus, and the chosen method written into the internal accounting policies.

A small company buying materials for direct use, such as a tradesman or a construction s. r. o. with a small store, usually manages with method B. For trading in goods or for manufacturing with work in progress we recommend method A, because without it the monthly margin and costs say very little.

What to watch out for

A company picks method B because it is simpler and then stops keeping stock records. In an audit it cannot show where the goods went: a shortage above the norm set for natural wastage is not deductible, so tax and a penalty follow.

A change of method is sensibly made only from the start of an accounting period and described in the notes together with its effect on comparability. Moving from B to A also needs an exact, valued stock balance by item on the first day, and without one the new year starts with a warehouse that does not agree with the accounts.