What are inventory records?

They are records in which, throughout the year, you record which materials and goods you purchased, when and for how much, and when particular items were consumed or sold. You must also keep inventory records for work in progress. Keeping proper records is not a pointless obligation but a tool that gives you a picture of your stock levels. 

Business owners often neglect this duty, but remember that, during a tax inspection, you must be able to demonstrate what happened to the materials and goods purchased.

How should you keep inventory records?

In simpler cases, records can be kept in Excel. In more complex cases, where you have many stock items, I recommend purchasing software for inventory management.

Generally, you keep record cards for individual goods (which can also be thought of as rows in Excel). You need a description of the goods or materials – a name or other identifier. Also the acquisition date and number of units (or another quantity measure). Finally, you must record the unit price and, if you manufacture to order, the job to which the inventory relates.

All these details should be traceable for everything you have in stock. In practice, whenever a shipment of goods or materials arrives, you enter it in your inventory records after putting it into stock.

If you hold identical stock items that you purchased at different prices, you should record them separately. The reason is simple and relates to issuing that stock. When the stock leaves the warehouse (you sell it, use it in production or it is destroyed), you must also record that.

For example, you have 10 units of goods at CZK 200 each and 10 units of the same goods at CZK 250 each. What price do you record when issuing, say, 12 units? The rules leave no room for creativity here. There are only 2 correct methods to choose from. You must use the chosen method throughout the year:

  1. First in, first out (FIFO) method – issue the oldest goods first (in our example, 12 units are issued at 10*200+2*250 = CZK 2,500)
  2. Arithmetic average – the unit price is always determined as the arithmetic average of all units of the same stock (in our example, the average price is (10*200+10*250)/20 = CZK 225/unit, so goods are issued at 12*225 = CZK 2,700)

If you carry out production to order – you should keep records separately for each job.

Physical stocktake

If you keep inventory records continuously, you can carry out a physical stocktake. Essentially, you check whether everything that should be in the warehouse is actually there. During the year, this stocktake is entirely voluntary. 

The situation changes, however, at the year-end. To close the year correctly, you must count the materials and goods in stock as at 31 December. You determine the number of units simply by physically counting them. You must then compare the value of stock actually on hand with the value of stock that should be there according to your inventory records. The figures either match or there are surpluses and shortages that need to be dealt with in the accounts.

Materials and goods you did not manage to sell during the year do not enter the income tax calculation as expenses. That is why this is so important.

If you do not keep inventory records even though you should, I recommend at least carrying out a careful physical stocktake as at 31 December, so you know what was not consumed or sold during the year and must therefore be excluded from that year’s expenses.

If you are unsure, do not hesitate to get in touch and we can look at it together. 🙂