Valuing stock: why your purchases aren't a cost yet

Why buying stock isn't a cost yet

If you buy 10,000 euros of goods for resale and sell none of it in December, your profit hasn't fallen by 10,000 euros. You've converted money into an asset: the stock sits on your balance sheet. Only when you sell an item does its purchase price become a cost, the cost of goods sold. That feels illogical when you look at your bank account, but it ensures your profit reflects your actual margin rather than the moment you happened to buy.

For VAT it works differently: you simply reclaim the VAT on your purchase in the period you receive the invoice, even if the goods are still sitting unopened on the shelf. So VAT and profit determination follow a different rhythm here.

At what value do you put stock on the balance sheet?

The basic rule is: cost price, or the lower market value if that is lower on the balance sheet date. Cost price is what you paid for the item excluding VAT, plus the costs you had to incur to receive it, such as freight and import duties. If the market value has fallen below what you paid, for example because a model has been superseded, you may and must value at that lower amount. If you sell identical items bought at varying prices, use a consistent method, for example average purchase price or first in, first out. Don't switch methods every year.

The stock count on 31 December

Your stock on the balance sheet must match what's actually there. So count your stock around year-end and record that count on a count sheet: item, quantity, cost price per unit and the total, with the date. Keep that sheet with your annual accounts. It's one of the first documents an inspector asks for, and without a count your stock value is no more than an assumption. If you use a stock system, still do sample counts, because in practice systems almost always drift slightly from the shelf.

Obsolete and damaged stock

Stock you realistically won't sell at cost price doesn't have to stay on your balance sheet at that price. Think of seasonal items from two years ago, damaged goods or products you can only shift at a discount. Write those down to what they'll still fetch; that lowers your profit in the year the value fell. If you actually dispose of goods, record it with a short note and photos where possible. Without support, a large write-off is an invitation to questions.

What's sensible to do?

Schedule your stock count in the last days of December or the first of January, and do it properly: this is the moment that determines your profit. Also look critically at what has been sitting too long, because an inflated stock value makes your profit look higher than it is and so costs you tax on money you'll never see. If you're unsure about valuing a batch, send us your count sheet; we're happy to look at it during the year-end close.