What is an inventory?
Inventory explained simply: A prerequisite for proper accounting
Every company is obliged to prepare a balance sheet at regular intervals and to present all assets transparently in it. Especially in trading companies and the manufacturing industry, it is somewhat more difficult to provide evidence of all assets. While licenses, property rights or receivables can be verified by drawing up balance lists (so-called book inventory), tangible assets need to be actually counted, weighed or measured.
Definition of inventory: According to which standards must assets be accounted for?
In order for the tax authorities to be able to check any information or for auditors to give their opinion, standardized rules are needed for carrying out the inventory. The term itself is derived from the Latin: "invenire" means "to find something", "inventarium" can be translated as "all that has been found". The inventory thus corresponds to a stocktaking, i.e. a comparison of assets and liabilities on a specific date (so-called reporting date).
A proper inventory is given if the principles of proper accounting (GoB) are complied with:
- Complete inventory (so-called balance sheet truth, i.e. correctness of content, completeness and freedom from arbitrariness)
- Consistency of the inventory in accordance with § 252 HGB
- Correctness of the inventory in accordance with § 246 para. 1 HGB
- Verifiability and clarity (so-called balance sheet clarity, i.e. following a formal organization and structure)
- Individual recognition of all goods, merchandise or intangible assets
In short: the inventory must be carried out regularly, in a recognized form, according to clear rules, with a specific designation and in full. According to section R 5.3 para. 3 EStR on the invalidity of the balance sheet.
Overview of the main inventory procedures
There are various types of inventory that make it possible to obtain an overview of all relevant items. As mentioned at the beginning, different approaches are required depending on the asset in order to quantify the value for the preparation of the balance sheet.
In the following, we first present the inventory procedures that are available:
- Physical inventory
Assets such as computers, printers, pencils, handheld terminals, labels, etc., i.e. everything that is physically present, is either weighed, measured or counted. For many small items, an estimate is explicitly permitted, especially if the effort required for an exact determination would be uneconomical or even impossible.
- Book inventory
All documentation provided as part of financial accounting is recorded as an inventory by means of the so-called book inventory. This involves receivables, liabilities or credit balances at banks - they result from the submission of receipts, account statements, receipts, balance lists or invoices.
- Asset inventory
Instead of a physical inventory, the asset inventory is carried out in the form of an asset register, from which values for operating and office equipment, the vehicle fleet or machinery are derived. The item must be described precisely, and the acquisition or production cost, useful life, carrying amount on the balance sheet date, the amount of annual depreciation and the date of acquisition and disposal must also be recorded.
Important: All differences that are documented as part of the inventory must be included directly in the income statement. In technical jargon, this is also referred to as inventory differences.
These inventory types are provided for under HGB
In accordance with Section 241 HGB, there is a simplified inventory procedure that allows companies to determine the inventory using "recognized mathematical-statistical methods" and on the basis of random samples. This is always possible if the "informative value" is equivalent to that of the physical inventory.
This means that the inventory types that can be used for this are clearly defined.
Instead of the inventory as at the reporting date, i.e. the "classic" inventory at the end of a reporting period, there are three other procedures, which are described below:
- Inventory sampling (in accordance with Section 241 (1) HGB)
Restriction to selected and representative samples in the sense of random sampling procedures. After the survey, an extrapolation is made to the total population; the sampling error may not exceed one percent of the total population. Only recognized mathematical-statistical methods such as mean value estimation can be considered for this purpose.
- Perpetual inventory (in accordance with Section 241 (2) HGB)
If there is a stock book as well as clear documentation of receipts and issues, a total record can be made in the sense of a permanent inventory. The prerequisite for this is that a physical inventory is carried out at least once per financial year - and that a comparison is made between the target stock in the stock records and the actual stock.
The advantage: stocktaking does not have to take place at the same time, but can be spread out over time. However, a basis based on a sample or a representative cross-section is permitted.
- Inventory before or after the balance sheet date (in accordance with Section 241 (3) HGB)
If, regardless of the reason, it is not possible to take an inventory on the reporting date, an early or late inventory may be considered. For this purpose, a physical inventory must be carried out on a day within the three months before or within the two months after the balance sheet date. Inventories determined in this way are updated or recalculated with regard to their value.
