Inventory is both a legal obligation and a key managerial practice aimed at determining the actual state of assets and liabilities and aligning accounting records with real data. According to the Accounting Act, entrepreneurs must list all assets and liabilities at the start of their business and conduct a subsequent inventory during the business year, at the latest by the end of the year, to make any necessary adjustments. While the annual inventory is sometimes seen as a mere formality, a properly conducted inventory is essential for accurate financial reporting and asset protection.
A successful inventory begins with thorough preparation. The entrepreneur appoints an inventory committee responsible for conducting the inventory independently of the personnel maintaining the records, ensuring objectivity. In larger companies, a detailed inventory plan establishes deadlines, procedures, and responsibilities in advance, whereas smaller companies typically rely on a single committee for the entire process. Before counting, assets must be clearly labeled and organized, inventories sorted by type and condition, and documentation checked, arranged, and prepared.
The inventory itself involves examining, counting, and measuring all tangible assets, including inventories, fixed assets, equipment, and minor items, while recording their condition, functionality, and usability. For inventories, quantities and condition are checked; for fixed assets, technical condition and operational functionality are assessed; and cash is reconciled with cash register reports. Intangible assets, such as software licenses, are verified through documentation. The inventory process also includes reviewing receivables and payables, which is particularly important under reduced liquidity, as the actual amounts of outstanding obligations and unpaid receivables must be confirmed and aligned with the books.
Once the counting is completed, actual assets and liabilities are compared with accounting records. Differences, either shortages or surpluses, are common and may result from breakage, malfunctions, expired stock, replacements, theft, or administrative errors. Shortages are generally recorded as company expenses unless a responsible individual is liable, while surpluses are recorded as income. Properly recording these differences is also crucial for tax purposes, as it affects profit and, consequently, tax obligations. Failing to report differences leads to a distorted financial picture, over- or undervalued assets, and incorrect tax calculations.
After adjustments are made, the inventory committee prepares a report listing the items, identified differences, and proposed reconciliations. The report is signed by the committee members and the responsible entrepreneur, and the necessary accounting entries are made, with financial statements adjusted as needed. Inventory is typically conducted at the end of the business year, and is mandatory in cases of structural changes, bankruptcy, liquidation, tax rate changes, or suspicion of incorrect accounting records.
Properly conducted inventory is not just a legal requirement but also a key tool for transparent and responsible business management. It enables the entrepreneur to know precisely what assets they have, where risks and irregularities exist, what needs to be written off or renewed, and whether assets are in use. This provides a reliable foundation for financial decision-making, increases business security, and strengthens the credibility of financial statements.
Sources:
Accounting Act. Retrieved from https://www.zakon.hr/z/118/zakon-o-racunovodstvu
Finacro. Time for Inventory: What Are Your Obligations. Retrieved from https://finacro.hr/dobro-je-znati/vrijeme-je-za-inventuru-koje-su-vase-obveze/
TEB. Why Managers Should Care About Inventory. Retrieved from https://www.teb.hr/novosti/2014/zasto-menadzere-treba-zanimati-inventura/