Inventory

What it means

Inventory is current assets held for consumption or sale: materials, work in progress, finished goods, merchandise and livestock. On the balance sheet it sits among assets, measured at purchase cost or at own production cost.

Purchase cost includes freight, duty and insurance - on import those are allocated across the items rather than expensed separately. Which is why the cost of goods in the warehouse does not equal the supplier’s invoice total.

An item that lasts longer than a year can still be inventory. Tools, small equipment or spare parts whose cost is below the threshold for fixed assets may, under the company’s internal policy, be booked as inventory and expensed when issued for use. Such low-value assets are still tracked in an operational register afterwards.

How it works in practice

Records are kept under method A or B by the company’s choice; under B the position is established only at the closing, which distorts the result during the year. Physical quantities are verified by stocktake.

Inventory ties up cash, so turnover is tracked by product group. It is one of the three levers of working capital management, alongside payment terms on both sides.

An e-shop keeps its goods with a fulfilment partner rather than in its own warehouse. The goods still belong to the e-shop and are part of its inventory. For the year-end close we therefore ask the partner to confirm stock at 31 December and reconcile it with the records, including goods in transit and returns not yet booked in.

What to watch out for

Slow-moving and damaged stock does not write itself off: it is reduced by an impairment allowance and, when scrapped, documented by a protocol. Without that the balance sheet shows goods nobody will buy and profit looks better than it is.

The difference after the stock count is booked as ordinary consumption and the shortage is never quantified. A shortage above the norms for natural loss is, in principle, a non-deductible expense unless it is a loss evidenced, for example, by a police report. An inspection easily works it out from the count sheets and raises the tax base.