Continuous inventory - what is it and what rules does it have?
- Knowledge base
Inventory of company assets is an obligation of the vast majority of entrepreneurs. We are talking primarily about those who keep tax accounts in the income and expense ledger. The Accounting Law precisely indicates the dates when the inventory should be carried out. It can be started up to three months before the end of the fiscal year, and completed fifteen days after the beginning of the year. However, there are specific types of inventory that allow you to go beyond the deadlines established by the law. It is about such types of activities and, above all, items of commerce, which are stored in guarded warehouses and their volume is large. We are talking about hundreds or thousands of units. If the condition of a guarded place is met, the goods specified in the regulations can be subject to inventory even once every four years. Let's remember, in this particular case, all regulations governing the principles and types of physical inventories work to the mutual benefit of the entrepreneur and the legislator. The former gets up-to-date information on the state of the company, and the latter gets the assurance that the records are kept correctly.
Definition of perpetual inventory
Continuous inventory is a special type of physical inventory, which is determined by the nature of the business. Such a solution is used in companies that produce or trade in large quantities of products expressed, for example, in tons. Then it is difficult to estimate the precise amount by counting everything once a year. Hence the introduction of the institution of perpetual inventory. That is, to correct the inventories basically on an ongoing basis. In such a variant, it is possible to take an inventory on low inventories. This avoids a multi-day count at the very end of the fiscal year. This type of physical inventory allows you to control your inventory on an ongoing basis. Of course, perpetual inventory vs. periodic inventory, are two different handling strategies, used depending on the nature of the business.
Continuous inventory and regulations
Continuous inventory is not mentioned in the Accounting Act, its functioning in the Polish economic system is conditioned by the recommendations of the Position of the Accounting Standards Committee of 2016. According to these provisions, continuous inventory requires the establishment of a confidential inventory schedule. The rules also indicate the need to inventory the company's assets at least once every two years. It is also incumbent on the entrepreneur to account for any differences discovered through the physical inventory on an ongoing basis. The data needs to be updated for each day of the inventory. A perpetual inventory of fixed assets may sound like it is a complicated process, but carrying it out greatly improves inventory control. This is especially important in the event of a possible audit by the Internal Revenue Service or other institutions. An entrepreneur conducting acontinuous inventory has up-to-date data on the company's assets almost every day.
Principles of perpetual inventory
There are three rules explicitly detailed in the Accounting Standards Committee's Position, which must be fulfilled in order to properly conduct physical inventory as a perpetual inventory. The instructions for this issue are relatively simple, but require attention to avoid making a mistake that may constitute a fiscal offense.
- Current account
It is necessary to carry out a continuous inventory of assets so that it is possible to determine the state on any day of the inventory. This is a prerequisite and, in fact, the whole point of conducting the so-called perpetual inventory. It is in the nature of an inventory that produces results immediately.
- Internal regulations
The company should put in place internal regulations for conducting a perpetualinventory. These should detail the schedule and scope of work. On the one hand, this will streamline the work, but on the other hand, it requires very careful preparation for conducting the inventory.
- Clear division
According to the recommendations, it is a good idea to divide the assets to be inventoried into so-called census fields, i.e. smaller units, the summation of which and the ongoing updating of the status will give an overall picture. This reduces the time for conducting effective census activities. The values obtained in the individual fields are entered in the overall final report and form a common whole, which is then applied to the ledger sheets.
Keeping the above inventory continuous is a great convenience for the company's accounting department. However, an entrepreneur should know what an annual inventory is as well. No matter what - a physical inventory is a time-consuming process that requires accuracy. Nowadays, there are companies on the market that provide inventory services, which have the necessary experience and knowledge. This allows them to carry out the inventory quickly and efficiently, and the report created gives the entrepreneur peace of mind and confidence that the activities are carried out fairly. A clear report is also a great convenience for accounting, which enters the data into the income and expense ledger. This document, in turn, is the basis for calculating taxes. It is worthwhile in this case to guard against errors, since they can be interpreted by the Tax Office as an offense, which, of course, has its consequences.