The preparation of the annual audited financial statements includes, among other things, a complete inventory (in Hebrew Sefirat Mlai) of commodity stocks. In addition to the fact that inventory reconciliation is a mandatory requirement of the tax authorities, it is also a very important business planning tool.
What is inventory reconciliation?
Stock-taking is physical counting and verification of goods and raw materials at points of sale or in warehouses. The frequency of the inventory counts depends on the line of business of the company, the goods and services that the business sells, and the size of the business. Some people prefer to count once or twice a year, others prefer more frequent, quarterly or monthly counts. Take a shoe store for example. A professional accountant will recommend making an inventory at least quarterly – before change of season and purchase of a new range of products. And if the business sells refrigerators, then an annual inventory count will be sufficient.
What are tax authority requirements to inventory taking
The count must be prepared as of the date of financial reporting, that is, December 31st. At the same time, the law allows the actual inventory taking in the period from December 21 to January 10, that is, within 10 days before and 10 days after the New Year day. If the time difference between the actual date of the reconciliation and the date of the financial reports is more than ten days, appropriate adjustments must be made between December 31 and the actual date of the census. This fact requires sending a special notification to the tax authorities.
All goods and raw materials that are in the possession and ownership of the enterprise are subject to inventory, including those that at the time of the count are on consignment with a third party.
The carryovers are counted in groups. To do this, it is necessary to prepare in advance lists with a detailed description of these groups. The lists of goods should include everything that is owned by the business at the end of the reporting period: the final product manufactured by the business, raw materials, auxiliary materials. When it comes to production, the lists should include finished, separately unfinished goods, defective products, raw materials.
As regards goods whose value is zero due to rejection or wear and tear, you need to draw up a separate inventory list. In Hebrew, this inventory is called “mlai met" or “dead" stock.
Goods that are on the territory of an enterprise, but which are not owned by it, for example, a reserved and paid order, are recorded separately and are not included in the list of left-over stock at the end of the year.
Inventory lists should be numbered sequentially with the date and location of the count. Each page of the report must be signed by the counting employee and must include his full name. The title page displays all inventory data sorted by product groups and categories.
The commodity is recorded in the report under its exact name or modification, with the quantity, the cost per unit, and the total cost – the quantity multiplied by the cost per unit – indicated. The cost is calculated on the basis of the cost price excluding VAT and includes all costs for the purchase of goods or raw materials, their production or reduction to its current state and location, that is, all costs for manufacture, import, transportation, etc. Account is taken of the expenses directly related to the goods, which could not be avoided or without which the goods could not be produced.
Lists of leftover goods at the end of the year are an integral part of the accounting system of the enterprise and these documents, like all other accounting documents, must be kept for 7 years from the end of the tax year to which they relate, or within 6 years from the date of filing a report for this tax year. We shall be guided by the term which comes at a later date.
You should also compile a list of all debtors and creditors of the business, count the cash and bank checks from customers as on December 31st of the ending financial year.
5 “non-tax" reasons for regular inventory taking in every business
Differences between the actual inventory stocks and what the inventory taking shows allow to detect many different problems and to implement processes that will ensure better control and management over the inventory stock. This, in turn, will lead to increased profits in the future.
Regardless of whether you own a large or small business, regular inventory taking increases your income. And here’s how:
Identifying theft or other causes of inventory decrement. Theft is part of the reality in the retail business. It is perhaps impossible to completely stop theft, but regular inventory counts make it possible to understand whether the security system needs to be strengthened, and the count itself can deter employees from breaking the law.
Achieving business goals. Any drawback that is found during inventory taking is a minus in the financial results of your business. It’s better to spot these gaps ahead of time than at the end of the fiscal year, when you have little or no time to adjust your end-of-year financial results.
Identify trends and anti-trends. It is important to know which goods sell well and which have low sales. Calculation of the balances will clearly demonstrate the sales situation. If it turns out that a large stock of one product has been formed, which has been on the shelf for some time, then you can have time to adjust the plan for its sales, arrange a promotional action, reduce the price or move it to a prominent place.
Or to identify a product that sells well and to have time to obtain its additional supplies (to manufacture more) while there is demand for it.
Plan purchases ahead. As mentioned above, inventory taking can serve as an incentive to increase procurement of popular items. And also to identify shortage of something. For example, the owner of a shoe store is convinced that he has an adequate supply of a best-selling model in all sizes. But then an inventory reveals that part of this stock was damaged during storage or was stolen altogether.
Review of sales strategy and pricing. Residual analysis is a great way to analyze sales, profits, items flying off the shelves and those stuck on the shelves. It provides ideal information for making strategic decisions and finding new business opportunities. The more unsold items you have on the counter at the end of the year, the lower the self-cost of sales and, as a result, the higher your gross and net income and taxes paid on it.
By carrying out regular inventory reconciliation, the entrepreneur obtains precise data on the structure of his warehouse stock, which means he receives information for improving the business and gets new ideas for increasing the profit.