What is an inventory?
Inventory simply explained: a prerequisite for proper accounting
Every company is required to prepare a balance sheet at regular intervals and to present all assets transparently in it. Particularly 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 lists of balances (so-called book inventory), tangible assets require actual counting, weighing or measuring.
Definition of inventory: According to which standards must assets be accounted for?
In order for the tax authorities to be able to verify any information or for auditors to be able to give their opinion, uniform rules are needed for carrying out the inventory. The term itself derives from Latin: "invenire" stands for "to find something", "inventarium" can be translated as "totality of what 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 deemed to have been taken if the principles of proper accounting (GoB) have been complied with:
- Complete inventory (so-called balance sheet truth, i.e. the content correctness, completeness and arbitrariness).
- Consistency of the inventory in accordance with § 252 HGB
- Accuracy of the inventory in accordance with § 246 para. 1 HGB
- verifiability as well as clarity (so-called balance sheet clarity, i.e. following a formal outline and structure)
- Individual recording of all goods, merchandise or intangible assets
In short, the inventory must be carried out regularly, in a recognized form, according to clear rules, a specific designation and completely. The absence of a physical inventory leads, according to section R 5.3 para. 3 EStR on the invalidity of the balance sheet.
Overview of the main inventory procedures
There are different types of inventory with which it is possible to provide an overview of all relevant items. As mentioned at the beginning, depending on the asset, different approaches are needed to quantify the value for preparing 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 or similar, i.e. everything that is physically present, is either weighed, measured or counted. For many small items, estimation is explicitly allowed, especially when the effort to accurately determine it would be uneconomical or even impossible.
- Book inventory
All documentation given within the framework of financial accounting is recorded by the so-called book inventory as an inventory. This involves receivables, payables or credit balances at banks - they result from the presentation of receipts, bank statements, receipts, lists of balances or invoices.
- Asset inventory
Instead of a physical inventory, the asset inventory takes the form of an asset register, from which values for operating and office equipment, the vehicle fleet or machinery are derived. In addition, the acquisition or production costs, the useful life, the balance sheet value on the balance sheet date, the amount of annual depreciation and the date of acquisition and disposal must be recorded.
Important: All differences 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 the HGB
Pursuant to Section 241 of the German Commercial Code (HGB), there is a simplified inventory procedure which allows companies to determine the inventory using "recognized mathematical-statistical methods" and on the basis of random samples. This is always possible when the "informative value" is equal to that of the physical inventory.
This means that the inventory types that can be used for this purpose are clearly defined.
Instead of the annual inventory, 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 from selected as well as representative samples in terms of random sampling methods. After the survey, an extrapolation is made to the total population; the sampling error may not exceed one percent of the population. Only recognized mathematical-statistical methods such as mean estimation can be considered for this purpose.
- Perpetual inventory (in accordance with Section 241 (2) HGB)
Provided that a stock ledger as well as a clean documentation of additions and disposals is available, a total recording in the sense of a permanent inventory can take place. The prerequisite for this is that a physical inventory is carried out at least once per fiscal year - and a comparison is made between the target stock in inventory accounting and the actual stock.
The advantage: stocktaking does not have to take place simultaneously, but can be spread out over time. However, a basis based on a sample or representative cross-section is permitted.
- Pre- or post-balance sheet date inventory (in accordance with Section 241 (3) HGB)
If, regardless of the reason, it is not possible to take inventory on the reporting date, a pre- or post-postponed inventory may be considered. For this purpose, a physical inventory must be taken on a day within the three months before or within the two months after the balance sheet date. Stocks determined in this way are updated or recalculated with regard to their value.
