Accounting Semi-Senior at RSM Poland
The time to close and prepare financial statements for the year 2016 is approaching. In order to fairly present the value of assets at the end of the financial year, you must make an inventory at certain times and frequencies as defined in Art. 26 of the Accounting Act.
Methods of inventorying assets and liabilities
The aim of inventorying balances and transactions is to verify the status of settlements in the books on a specific day. The inventory is carried out by:
- sending to contractors balance confirmations in written form to obtain a confirmation of compliance from them. The Accounting Act does not prohibit the sending of balance confirmations electronically. We send to the contractor a summary covering all the components of the amount due, including possible accrued interest agreed upon the conclusion of the contract. In the event of non-compliance, any differences should be clarified. Otherwise, they can be recognised and written off as doubtful or disputed receivables. Please note that the limitation period is interrupted by balance confirmation accepted and signed only by the person authorized to represent the entity;
- verification of the data in the books against the relevant documents. This method can be used, among other things, in relation to the following settlements:
- disputed and doubtful receivables
- statutory settlements, e.g. social security contributions, payments made to the State Fund for the Rehabilitation of the Disabled (PFRON), settlements on account of CIT, VAT, PIT,
- settlements on account of salaries and other settlements with employees.
Please remember not to confirm unverified balances.
The inventory of receivables must start not earlier than 3 months before the end of the financial year and end by the 15th day of the next financial year. A lack of response to a request for balance confirmation does not mean its acceptance.
As a rule the creditor requests for confirmation of balances. However, if the creditor does not send the request, to ensure a reliable inventory it is advisable to request the creditor for confirmation of our obligations. The verification may prove that our obligation has been paid, set off or cancelled, and the fact had not been recorded in the books due to an error.
On the last day of the financial year, you should also get a confirmation of the amount of funds available in bank accounts (to obtain confirmation from the bank about the account's balance, e.g. by 31.12.) and on hand (cash inventory protocol).
Inventory of fixed assets
It is equally important to make an inventory of fixed assets. Typically, it is performed on the last day of the financial year. According to the Accounting Act, however, some simplifications may occur. They consist in the ability to carry out an inventory of fixed assets as well as machinery and equipment that are subject to investment not less frequently than once every four years on any day of the financial year in the form of a physical inventory.
The reasons for any differences in inventory are identified by the inventory committee in the inventory report. The identification and the method of their settlement should be included in the inventory differences verification report approved by the manager of the entity. These documents are the basis for the settlement of inventory differences in the accounting books. The differences found during the inventory can be:
In the case of disclosure of an asset its initial value must be determined before it is introduced into the accounting records.
Inventory of intangible assets
And what about intangible assets? Intangible assets include patents, licenses, trademarks, and above all computer programs. They are intangible, meaning they cannot be in any way counted or measured, so carrying out a physical inventory is impossible for them. The only correct and valid method of inventory of intangible assets is therefore the balance verification method.
What should you pay attention to when inventorying stocks?
You also should not forget about inventory of stocks. According to the Accounting Act, the inventory of assets and liabilities (including stocks) is generally performed on the last day of each financial year. This obligation arises from Art. 26(1) of the Accounting Act. However, the timing and frequency of inventory are considered to be met if the inventory of the assets listed in Art. 26(3) subparagraph 1 of the Accounting Act begins no earlier than three months before the end of the financial year, and ends by the 15th day of the following year. Inventory of stock is carried out in the form of a physical inventory. The execution of physical inventory can be outsourced. Please be aware that the manager of the entity is always responsible for the execution and the course of the inventory. The manager is obliged to appoint the inventory committee and its chairman.
Stocks owned by the entity located outside its premises are inventoried on the basis of sheets confirming the conduct of physical inventory received from contractors or confirmations stating the quantity of these stocks disclosed in the accounting books of the entity. The rules for obtaining confirmations are analogous to those used in the inventory of receivables. In the absence of information from the contractor, an inventory of these stocks is carried out by comparing the data in the accounting records and the relevant documents in terms of value.
While third-party stocks owned by other entities, for example, non-received supplies, goods taken on consignment, sold, but non-received goods or finished products, third-party returnable packaging held by the entity are also subject to physical inventory, but the inventory includes only the determination of their quantity. The results of the inventory are communicated to the owner of the stocks.
The Accounting Act allows entities to conduct an inventory of goods (materials) once every 2 years, but this applies only to goods (materials):
- located within guarded storehouses,
- included in quantity and value records.
The above conditions must be met.
Inventory as a guarantee of reliability of financial statements
Entities are required to honesty and fairly present their economic and financial condition as well as financial performance. This principle implies the obligation to conduct inventory, because the data presented in the financial statement are reliable only if the accounting data have been verified with the facts. Only the confirmation of the quantity of individual assets and clarification of any inventory differences allow considering that the accounting records are correct and the data contained in the financial statement fairly reflect the facts.