What is an inventory?

In principle, all physical inventories belonging to the company must be recorded. This includes goods and stock (all sales products and inventories), raw materials and supplies, work in progress and finished goods as well as operating and office equipment. Cash in cash registers and safes as well as machinery, tools, spare parts and office supplies are also included in the assets to be counted. It is important that the inventory is complete: all tangible assets must be recorded. Anything that cannot be counted directly - such as small parts in very large quantities (e.g. screws, nails) - may be estimated in exceptional cases.

Intangible items such as bank account balances or outstanding receivables are not physically counted, but are also part of the inventory; their values are recorded by book inventory using account statements and receipts. The aim is to obtain a complete picture of all the company's assets.

An inventory is required in various situations. As a rule, it is required by law once a year at the end of the financial year (usually on the balance sheet date, e.g. December 31). In addition, the German Commercial Code prescribes an inventory when a company is founded, taken over or dissolved (closure of business). Many companies plan their key date inventory for a time when the business is closed or there is little customer traffic - for example after closing time or at the weekend - so that the count can be carried out in peace.

In addition to these mandatory dates, an inventory can also be useful during the year, e.g. in the event of suspected theft or major discrepancies in stock levels. Larger companies can use inventory simplification procedures such as random sampling or permanent inventory, but a complete inventory must still be carried out at least once a year. This remains important: A comprehensive inventory must be carried out at least once a year in order to comply with legal requirements and obtain reliable figures.

In certain cases, the German Commercial Code allows companies to postpone the inventory from the balance sheet date (usually December 31). In accordance with Section 241 (3) No. 1 HGB, it is permissible to carry out the physical inventory up to three months before or up to two months after the balance sheet date. The value of the inventory determined on the inventory date must be updated or recalculated to the balance sheet date - a quantitative adjustment is not required.

If the inventory can take place close to the balance sheet date, a narrower tolerance of 10 days before or after the balance sheet date is possible. In this case, however, a quantity and value-based recalculation or update is also mandatory.

The dual control principle means that two people always record the stock together in order to avoid errors or manipulation. In practice, a team of two is formed for this purpose: One person pre-counts the items, the second person records the quantities in the inventory list. This double check ensures that no counting errors go unnoticed and that no one can record incorrect figures alone - experience has shown that stocktaking without the dual control principle tends to be inaccurate and prone to errors. It has therefore proven to be a good idea to use counting teams of at least two people. In the case of very large inventories, the inventory manager or an auditor often carries out additional spot checks to ensure accuracy.

In the context of stocktaking, the term "shrinkage" refers to the unintentional reduction in stock - i.e. the difference between the target stock in the accounts and the actual stock determined during the stocktaking. Such stock losses can be caused by various factors: Shoplifting by customers or employees, incorrect bookings, inventory errors, spoilage or damage to goods and unrecognized stock withdrawals.

A distinction is made between known shrinkage, which occurs deliberately - for example due to rejected goods, spoilage or active price promotions - and unknown shrinkage, where the causes remain unclear and are often due to organizational or personnel errors.

From an accounting perspective, shrinkage is treated as an inventory difference and is usually recognized as an expense in the income statement. Companies should be aware of the shrinkage rate and evaluate it regularly in order to identify losses at an early stage and introduce suitable countermeasures such as employee training, better warehouse organization or security measures.

After the physical inventory, the actual values determined are recorded in writing in the inventory and form the basis for preparing the balance sheet and the annual financial statements. If there are differences between the book inventory and the counted inventory, the actual inventory results apply - these inventory differences must be recorded as an expense in the accounts. The inventory is shown in aggregated form in the balance sheet and forms the basis for the presentation of all assets and liabilities - including the reported equity.

Careful evaluation and documentation of the inventory results is necessary to ensure the correctness of the bookkeeping: Errors or incomplete inventories may entitle the tax office to estimate the profit or even result in the annual financial statements being deemed improper. In addition, it is typically checked whether adjustments such as write-downs are necessary, for example in the case of damaged or obsolete stock, and whether provisions need to be made.