At Quantus we believe that the year-end stocktake is one of the most underestimated tasks in running a business. For retailers, wholesalers, manufacturers, hospitality businesses and many others, stock is often one of the largest figures on the balance sheet. Yet the count is frequently rushed, carried out by tired staff at the end of a busy period or estimated from memory. An inaccurate stock figure can distort your profit, lead to paying the wrong amount of tax and raise questions if Revenue ever reviews your accounts.
Why Stock Has a Direct Effect on Your Profit
Your closing stock figure feeds directly into the calculation of your cost of sales, and therefore your profit. In simple terms, the cost of goods you have sold during the year is your opening stock, plus purchases, minus your closing stock.
This means every euro of error in your closing stock changes your profit by the same amount. Overstate your stock and your profit looks higher than it really is, which means you pay more tax than necessary. Understate it and your profit appears lower, which may reduce your tax bill this year but can create problems later, as the error carries into the following year’s accounts.
The Tax Angle
Because stock directly affects taxable profit, it is an area Revenue pays close attention to. During audits and compliance reviews, Revenue often examines stock records and compares gross margins against previous years and against what would be expected for similar businesses. An unusually low margin can suggest that stock has been understated or sales have not been fully recorded.
Accurate, well-documented stock counts help demonstrate that your figures are reliable. If your margins change significantly from one year to the next, having clear records explaining why, such as price changes, waste or write-downs, can save considerable time and concern during a review.
How Stock Should Be Valued
Counting stock is only half the task. Each item must also be valued correctly. Under the accounting standards used by most Irish SMEs, stock is valued at the lower of cost and net realisable value. Cost generally includes the purchase price along with costs such as import duties and delivery charges needed to bring the stock to its current location. For manufacturers, it can also include an appropriate share of production labour and overheads.
Net realisable value is the amount you expect to receive when the stock is sold, less any costs of selling it. Where this is lower than cost, the stock should be written down. Whichever method you use to determine cost, it should be applied consistently from year to year.
Slow-Moving, Damaged and Obsolete Stock
The stocktake is the ideal opportunity to identify items that have not sold, are damaged or have gone out of date. Seasonal goods, discontinued lines, perishable products and items superseded by newer models may be worth far less than you paid for them.
Writing these items down to a realistic value gives a truer picture of your business and ensures you are not paying tax on profits that do not really exist. Make a note of the condition of stock during the count, as this provides the evidence needed to support any write-down.
Getting the Cut-Off Right
Stock movements around the year end can easily cause errors. Goods delivered just before the year end should be included in stock, and the matching purchase invoice should be recorded in the same period. Goods sold and despatched before the year end should be excluded, with the sale recorded.
Pay attention to stock held at other locations, such as warehouses, other branches or with customers on a sale or return basis, as well as goods in transit. Equally, goods you are holding on behalf of customers who have already paid for them should not be counted as your stock.
Goods Taken for Personal Use and Work in Progress
If you take stock from the business for personal use, this should be recorded correctly, as it can have both income tax and VAT consequences. For businesses providing services or carrying out longer projects, such as construction or professional services, work in progress at the year end should also be considered, as it can have a similar effect on profit.
How to Carry Out an Effective Count
Plan the count in advance and choose a time when stock movements can be paused. Organise stock so it is easy to count, use count sheets or scanning technology, and work in pairs so one person counts while another records. Count everything once, mark areas as completed and record the condition of items as you go.
Once the count is complete, compare the results with your stock records and investigate any significant differences. Keep the original count sheets, as they form an important part of your records.
Better Information, Better Decisions
An accurate stocktake does more than support your tax return. It reveals which products sell well and which do not, highlights waste or losses and helps you make better buying decisions for the year ahead. Lenders, investors and potential buyers will also place greater reliance on accounts supported by a careful stock count.
At Quantus, we help businesses plan their year-end stocktake, value stock correctly and produce accounts that give a true picture of their performance.
If you would like to discuss your business, contact us on or email Barry@quantusadvisory.ie or visit quantusadvisory.ie.
Disclaimer: This article is based on publicly available information and is intended for general guidance only. While every effort has been made to ensure accuracy at the time of publication, details may change and errors may occur. This content does not constitute financial, legal or professional advice. Readers should seek appropriate professional guidance before making decisions. Neither the publisher nor the authors accept liability for any loss arising from reliance on this material.
