Physical inventory valuation - how to properly prepare it?

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Each taxpayer making settlements on general principles or with a flat tax is obliged to prepare a physical inventory (or inventory). The individual assets included in the physical inventory are valued according to different principles. Therefore, before making a physical inventory, it is worth finding out how it is valued by a physical inventory.

Physical inventory - introduction

Each taxpayer keeping the KPiR is obliged to prepare and enter a physical inventory in the book. There is no information about making a physical inventory of the tax office - there is no such necessity. A physical inventory should be made and entered:

  • at the end of each tax year,

  • on January 1 (exception: it is not necessary if the census is similar to the one at the end of the tax year),

  • on the day of commencement of operations during the tax year,

  • on the day of changing the partner,

  • as at the date of change in the proportion of shareholders' shares,

  • on the day of liquidation of the activity,

  • as at the date of losing the right to pay the flat-rate tax during the tax year.

The obligation to prepare a physical inventory results directly from § 24 of the Regulation of the Minister of Finance on keeping the tax book of revenues and expenses.

A model of a physical inventory with a discussion can be found in the article: Sheet of a physical inventory - a model with an overview. An entry in the KPiR should also be added when the physical inventory is drawn up during the year and when its preparation was ordered by the head of the tax office.

Physical inventory valuation - by when should it be performed?

Pursuant to § 26 sec. 7 of the regulation on the keeping of the tax book of revenues and expenditures, the taxpayer is obliged to make the valuation at the latest within 14 days from the date of completion of the physical inventory. Taxpayers paying with a lump sum on recorded revenues do not have such an obligation.

Physical inventory valuation - price definitions

Before performing the physical inventory valuation, one should become familiar with the definitions of terms used in determining the valuation method for given components.

  • purchase price

It is the price that the buyer pays for the purchased assets less VAT, which is deductible in accordance with separate regulations. If the goods were purchased under import, the purchase price must be increased by the due duty, excise duty and additional customs duties. These values ​​should be reduced by rebates, discounts or other similar reductions.

  • purchase price

It is the purchase price increased by the incidental costs related to the purchase of goods and assets until they are deposited in the warehouse at their purchase prices, in particular the costs of transport, loading and unloading and insurance on the way.

  • manufacturing cost

The cost of production includes all costs related directly and indirectly to the processing of materials, the provision of services or the acquisition (extraction) of minerals, excluding the costs of selling finished products and services.

  • market price

It is a price used in the trade of things or rights of the same type and species, taking into account, in particular, their condition and degree of wear. An active VAT payer evaluates the goods in the net amount. On the other hand, the taxpayer is exempt from VAT in gross amounts.

What does the physical inventory valuation look like?

Physical inventory valuation is performed for:

  • materials and commercial goods:
    - according to the purchase or acquisition price (choosing one of them is voluntary)
    - at market prices on the date of the inventory, if they are lower than the purchase or acquisition prices (mandatory method when the market price is lower than the purchase or acquisition price),

  • semi-finished products (semi-finished products), finished products and gaps of own production:
    - valued at manufacturing cost;

  • utility waste (which has lost its original value in use in the course of operations):
    - according to the value resulting from the estimation taking into account their suitability for further use.

In order to determine the value of individual components of the physical inventory, i.e. materials and commercial goods according to their purchase prices, the percentage ratio of purchase side costs (column 11) should be determined in relation to the total purchase value of commercial goods and recorded materials (in column 10). The indicator can be determined by the formula:

purchase side costs x 100 / purchase costs for commercial goods and materials

The indicator calculated using the above formula should be multiplied by the unit purchase price and the value of materials / goods included in the inventory should be determined. The inventory should also include goods owned by the taxpayer, located outside the establishment on the inventory date, as well as foreign goods in his possession. The latter are not subject to valuation, it is enough to enter them quantitatively in the list with an indication of whose property they are.

Physical inventory valuation - special cases

There are also specific rules for the other assets included in the inventory, but these are much less frequent. Such cases include:

  • an asset received as a gift or inheritance - valuation is made at the value corresponding to the purchase price of the same or a similar asset;
  • foreign exchange value (in exchange offices) unsold as at the date of the census - the valuation is made according to the purchase prices on the date of the census, and on the day ending the tax year - according to the purchase prices, but in the amount not higher than the average exchange rate announced by the National Bank of Poland on the day ending the tax year, and for pledged items - at their market value;
  • work in progress (for service and construction activities) - the valuation is made according to the manufacturing costs, however, it cannot be a value lower than the costs of direct materials used for work in progress;
  • livestock production - valuations are made according to market prices on the date of the census, taking into account the species, group and weight of animals.

In the case of the valuation of damaged or overdue assets or those that have already gone out of fashion - or other valuations of goods at an amount lower than the purchase or acquisition price or production costs, the unit purchase price (acquisition) or cost of production should also be shown for individual items.

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Physical inventory valuation - tax consequences

When preparing the physical inventory, it should be remembered that its measurement has a direct impact on the amounts shown in the KPiR summary and on income tax:

  • annual - in the case of the final and initial inventory,

  • calculated as part of the advance payment - in the case of an inventory drawn up during the year.

As a result of the correct physical inventory, an inventory difference may arise, which - depending on whether the final (or interim) inventory is higher or lower than the initial inventory - has an impact on taxable income:

  • final inventory <initial inventory - income is reduced by the inventory difference,

  • final inventory> initial inventory - the income is increased by the inventory difference.

Summing up, the valuation of the physical inventory is obligatory for taxpayers keeping the KPiR. It depends on the possessed ingredients which are the subject of the inventory. In some cases, the valuation of an ingredient is voluntary. Valuation of physical inventory has an impact on income tax.