A physical inventory - When should it be taken?

There comes a day in the year, and most often it is around January, when a businessman accounting on the basis of a ledger must do an inventory, a physical inventory, or stock-taking. All three terms mean the same thing - they are a series of activities to calculate or examine the company's assets and then compare them with accounting documents. These activities are carried out for various reasons, but the most common reason is to fulfill the entrepreneur's obligation under the Accounting Act. After all, no one wants to pay a fine. There are, of course, more reasons for inventory. A physical inventory upon liquidation of a business, or control inventory, is a common practice. There are, of course,various types of inventory. Here is an overview of the most important information.

What is a physical inventory?

As we mentioned, inventory or physical inventory are activities aimed at determining the actual state of a company. Depending on the type  ofinventory, physical inventories are divided into continuous, periodic and random. Such solutions are most often used in stores or warehouses. This is when the inventory is of great importance, because this is the only way to determine whether sales need to be improved and no excessive amounts of goods are slipping through the warehouse. It turns out that a physical inventory can also apply to service activities. However, then the inventory is taken primarily of fixed assets, such as real estate, equipment, machinery or vehicles. The physical inventory report is a key document that is taken into account when updating the income and expense ledger. Based on the information contained in it, the tax office calculates the appropriate tax rates. The physical inventory for vat purposes is one of the key reasons.

Is a physical inventory mandatory?

A physical inventory is mandatory for any bookkeeping entrepreneur whose business involves material production or trade. There are also entities obliged to this activity in the service industry, but only because a component of their service is a product that they must first purchase. For example - a hairdressing establishment to carry out a hairdressing service needs auxiliary materials such as shampoos, conditioners or sprays. These items directly give the product, which is a haircut, its properties. The owner of the establishment, despite the fact that he does not produce anything, should conduct an inventory. This follows directly from the provisions of the Accounting Law. A physical inventory at the time of liquidation of the business is mandatory. Often, before taking such a final inventory, stores sell off an assortment. This is done precisely in order to cash in as much merchandise as possible and, at the same time, to pay less tax at the close of business. How to properly fill out a physical inventory sheet? Keeping a few basic rules will avoid mistakes.

Which entrepreneurs do not need to take a physical inventory?

The Accounting Law does not explicitly say who does not need to conduct a physical inventory. This is evidenced by the precise provisions determining such necessity. However, some companies cannot take a physical inventory of things - they have nothing to take inventory of. This can happen when an entrepreneur conducts a service business and does not use any supporting materials for it, and produces a type of intellectual value, such as consulting or work. A physical inventory in a service business then is also impossible to conduct - there is basically nothing to count. However, it should be remembered that a physical inventory of fixed assets and equipment can apply to service business - it is enough that the entrepreneur needs to carry out the service some kind of auxiliary materials, the purchase of which is required. In such a case, failure to conduct  aphysical inventory may result in a miscalculation of income tax, and therefore, further, also an error in the annual settlement.

When should a physical inventory be taken? Deadlines

There are several deadlines that must be met in the context of preparing a physical inventory by entrepreneurs who keep a tax ledger. This obligation is imposed on the company from the first day of business. And it is this very day that is the deadline for preparing the initial inventory. Even such companies that have no assets are not exempt from this obligation. Then, such zero physical inventory must also be included in the income and expense ledger as the first item.

The inventory issue is similar in the context of closing a business. The difference is that the entrepreneur has 14 days from the last day of operation of the company to conduct the inventory and another 7 days to provide the information to the Head of the Tax Office. A physical inventory at the closing of a business customarily tends to be modest. Entrepreneurs often sell off assets at lower prices before taking it.

Entrepreneurs in the manufacturing and trading industries are bound by the deadlines for updating the tax ledger under the Accounting Law. This obligation must be fulfilled every year. Year-end physicalinventory  fiscalyear-end physicalinventory is a good practice, but entrepreneurs can start the inventory as early as October, and it can end as early as fifteen days after the start of the new year.

What are the penalties for failing to take a physical inventory?

Failure to update the income and expense ledger with aphysical inventory can have far-reaching consequences. In the first place, the wrong income tax rate will be calculated. At the initiation of verification activities by the Head of the Tax Office, it will turn out that the company has paid too little vat tax, for example. The case then requires at least an explanation. Failure to attach a physical inventory is also simply a tax offence. Committing it is punishable by a fine from as much as PLN 175 to as much as PLN 3,500, but entrepreneurs who notoriously mislead the "Treasury" can be considered repeat offenders, and then the consequences can be greater - escalating even into a criminal fiscal offense.

A physical inventory is the duty of every businessman who maintains an income and expense ledger. Failing to complete it or conducting the inventory in an unprofessional manner can result in far-reaching criminal and fiscal consequences. Sometimes it is worth putting this task in the hands of professional companies providing inventory services, so that you can prepare for the next fiscal year in peace.