The importance of taking stock at year-end
Tax requirement
Section 22 of the Income Tax Act requires that a taxpayer values the trading stock held at the end of the year of assessment. This value has to be calculated at cost price and any reduction of this value is subject to the discretion of the Commissioner.
Business requirement
The actual value of the trading stock is vital for any business, in order to calculate the profitability of the business. To trade profitably stock has to be marked-up at an applicable percentage and this percentage must be checked when stock is calculated and the gross profit is determined. A lower than expected gross profit percentage can be indicative of theft, excessive discounting, bad buying, etc.
Continuous stock records are by far the best way of controlling your business and that by ensuring regular monitoring and checking, the business can be profitable and properly managed.
Be careful
Make sure that cut-off procedures are properly considered. In other words, stock should only be counted if the corresponding liability is included in the creditors balance at year-end, and vice versa. Similarly stock should not be counted if the sale has already been reflected at year-end, and vice versa.
Proper control of stock is essential to ensure a profitable business.
