Inventory of assets - Accounting procedure for the proper conduct of economic activities

Publication date: 28 August 2023

In the article below you will find out what an asset inventory is, what the purpose of this accounting exercise is, which entities have to go through this process and when they have to do it. You will also discover the correct procedure for applying the inventory of assets depending on the method chosen for carrying it out, as well as some useful tips for going through this operation satisfactorily.

Contents:

1. What is a general inventory of assets - definition, purposes, when is it carried out?

1.1. Purposes of asset inventory

1.2. When it is necessary to take an inventory of assets

1.3. Entities that have to carry out asset inventories

2. Carrying out the inventory of assets properly

2.1. Modes of inventorying assets

2.2. Operational procedure for the annual inventory of assets

3. Tips for a correct inventory of assets

1. What is a general inventory of assets - definition, purposes, when is it carried out?

Economic entities holding various goods and assets, as well as debts to partners and the state should know precisely what the real situation is in relation to them. An optimal way to generate accurate information that can be used for various purposes is to apply the asset inventory process. The procedure must be carried out at least once during a financial year, according to the legislation of the Romanian state, by a series of economic entities, which are specified in the economic documents and regulations, made by the decision-makers of the Romanian state.

In order to define the activity of asset inventorying, the meaning of the words composing the phrase should first be known. Assets consist of the goods and assets an economic organisation owns, including all buildings, equipment, financial assets, physical money or money in accounts, various debts and stocks already realised. Inventory is the process by which the totality of assets is appropriately identified and at the same time, an up-to-date valuation is made of them at a given time.

1.1. Purposes of the inventory of assets

• The inventory of assets is an accounting approach with multiple advantages, both for the economic entity that generates it and for state institutions with an economic control role. In general, asset inventories fulfil five specific purposes:

• The most important purpose is to accurately identify the true situation of a company at a given point in time, in relation to the assets it owns and the debts it owes. This purpose plays a decisive role in choosing a business strategy that corresponds to the economic realities at a given time. Decision-makers will know how to allocate resources, where to focus and which risk areas to avoid.
• Asset mapping is also a legal obligation. Through this process, the state tax authorities establish the correct obligations that the economic entity owes to the Romanian state. In this respect, the Accounting Act No 82 of 1991 and Order No 2861 of 2009 of the Ministry of Public Affairs establish the periodicity of the procedure and the information to be submitted annually or on request in this regard.

• By taking an inventory of assets, it is possible to identify situations of fraud or theft of company assets. In this way, losses and the persons responsible can be identified and the necessary measures can be taken to deal with unwanted situations.
• Asset mapping provides accurate information about the true value of a company. Only by doing this can you find out exactly whether the business is successful, whether it is growing compared to the previous financial year, or whether there are problems that need to be tackled in the right way.
• The asset inventory provides information about the risks to which the business is exposed. The process succeeds in highlighting sensitive areas and provides the opportunity to address them correctly.

1.2. When is it necessary to take stock of assets

The economic legislation also includes a section on the periods of time during which economic entities must go through an inventory process. Thus, an annual inventory of assets and liabilities is provided for, as a rule at the end of the financial year.

In certain cases, usually when the economic activity is very complex, there is the possibility of an inventory preceding this deadline, but it is compulsory that its results be used to draw up the annual financial statement. In addition to this clarification, the legislation provides other circumstances in which an inventory is compulsory:

• at the start of an economic activity;
• at the request of the inspection bodies;
• when two or more economic entities merge;
• when an economic activity ceases;
• when management is reorganised;
• in cases of force majeure.

1.3. Entities required to carry out an inventory of assets

The Accounting Act clearly specifies which entities are obliged to carry out an inventory of assets at least once a year. These include private companies, public institutions, autonomous regencies, corporate companies and legal entities with and without a property purpose.

It is also compulsory for sub-units without legal personality in Romania or abroad, operating in the country. Those entities organised on the basis of the Civil Code, such as voluntary pension funds and privately managed pension funds, should not be forgotten either.

2. Conducting the inventory of the heritage properly

The correctness of the inventory of assets is based on legislative obligations, but also on the need to obtain accurate information that will help decision-makers in the correct approach to business strategy.

In order to do this properly, it is important to choose the right inventory method for the specific situation, to follow the operational procedure laid down in the accounting regulations and to seek the advice of specialists in order to make the most of all the advantages that the procedure can offer.

2.1. Ways of inventorying heritage

The choice of the right way of inventorying the heritage must first of all take into account the size of the organisation to be inventoried. In the case of a small entity, the manual inventory procedure can be applied by visual inspection. The inventory committee will carry out a visual inspection of all property and assets held and will use specific procedures to identify the money held and existing debts.

If the company being inventoried is a complex company with a very rich and diversified asset base, a different method of inventorying should be chosen, i.e. using specialised asset management software. These work best in conjunction with automated inventory systems, such as those that capture the transfer of assets based on barcode identification or RFID tags. The automated version has the advantage of being much faster and less prone to mistakes.

Secondly, the choice of the useful inventory option will take into account the existence or lack of staff with a thorough knowledge of the procedure and experience in the field. If they do not exist and the inventory is carried out by inexperienced people, there is a real possibility of error, which can result in significant losses, either due to legislative non-compliance or incorrect data.

In this situation, a very useful solution is to outsource the service to a specialised accounting firm with highly experienced employees who have the latest methods and tools at their disposal, which can significantly help to ensure the accuracy and speed of the process.

2.2. Operational procedure for the annual inventory of assets

The operational procedure of the annual inventory of assets must go through several steps in order to obtain at the end a guarantee of the correctness of the approach and the existence of useful information that can be used successfully in the business strategy. Experts recommend the following steps:

• The first stage is preparing for the inventory. At this stage, an inventory committee is formed or the service is outsourced to an accounting firm. The type of inventory is also determined at this stage, which may be total or partial for a given area (goods, funds or debts). The administrators must ensure that the committee has access to the accounting documents for the current financial year and provide everything necessary for the proper conduct of the exercise.
• The second stage is the actual inventory. During this period, assets will be identified, either by visual inspection or by other methods, and a valuation will be made based on the accounting records or by other methods that provide current information.

• The third stage is reserved for recording the results by entering them in the heritage inventory monograph. This is where the differences identified in the plus or minus side should be highlighted and the reasons for them determined. At the same time, steps will be taken to make adjustments between the book and the actual stock if discrepancies arise.

3. Tips for making an accurate heritage inventory

Economic entities that are obliged to inventory their assets must apply the procedure properly, otherwise they may obtain incorrect information that affects their economic success and, in addition, may receive heavy penalties from the Romanian state's economic control institutions. Accounting specialists can offer some advice that must be followed for the satisfactory completion of the procedure, advice that is all the more valuable if the inventory is carried out at least once a year.

• Experience has shown that the best way to obtain an accurate inventory is for it to be carried out by qualified personnel who have been through the procedure several times before and have obtained positive results each time. Accountancy consultancy is irreplaceable in this respect, as specialists have expertise in the field and have encountered various circumstances in the course of their work which they have dealt with correctly.
• Company administrators should keep accurate documentation throughout the financial year, accurately capturing the inflow and outflow of assets, so that when the time comes to draw up an inventory, the process is quick and easy. Such documents should be in a standard, easy-to-consult format.

• Inventory should be carefully planned for timing. Very busy periods should be avoided, when it would be more difficult to do so.
• When documents relevant to the inventory are generated, they should be carefully stored in a specially arranged space so that they can be made available to the inventory committee.
• The manager or decision-makers should provide the inventory committee, either internally or externally, with all the conditions necessary to carry out the inventory efficiently. In this respect, it is important both to provide a space in which they can carry out their work easily and to make available the information needed to draw relevant conclusions.

• If the internal inventory option is chosen, it would be good if the process is also checked by an external auditor at the end to avoid situations where insiders are not perfectly objective or even have an interest in hiding some information to avoid discovering possible fraud or theft.
• A rather difficult operation is related to stocktaking. In order to facilitate this, they must be kept in an organised way so that their level and the type of goods can be easily identified.

In conclusion, economic entities that are required to carry out asset inventories should take this approach seriously, as this will ensure legislative compliance and, at the same time, provide them with very useful information to help them achieve financial success.

*This material has been prepared for information purposes only and is not intended to provide tax, legal or accounting advice. We recommend that you consult with your tax, legal and accounting team before making any decisions on the topics mentioned in this article.