Year-End Inventory Procedures

Welcome back. In our previous lesson, we established a solid framework for finalizing period-end adjustments, covering accruals, prepayments, and an introduction to provisions. These steps are crucial for ensuring all transactions are recorded in the correct period.

Today, we will apply and extend these concepts to one of the most significant assets on a company's balance sheet: inventory. This lesson is dedicated to mastering year-end inventory procedures. You will learn how to perform a physical inventory count, reconcile it with your accounting records, and record the necessary adjustments for both quantity and value.

This process is a cornerstone of the annual closing cycle. It directly impacts the accuracy of key figures like Cost of Goods Sold on the Income Statement and the value of Current Assets on the Balance Sheet, ensuring the financial statements present a true and fair view (image fidèle) of the company's position.

1. The Foundation: The Physical Inventory Count (Inventaire Physique)

The starting point for all year-end inventory procedures is the physical count. Moroccan law (specifically the Code de Commerce) mandates that every business conduct a physical inventory count at least once a year.

Purpose: The goal is to physically count every item in stock to determine the exact quantities on hand at the closing date (e.g., December 31st). This physical count is then compared against the company's accounting records (the inventaire permanent or perpetual inventory system).

The process of comparing the physical count to the accounting records is called inventory reconciliation. Discrepancies are common and can arise from various issues like unrecorded sales, supplier errors, damage, or theft.

To understand the standard professional approach to this task, please review the following guide.

As you've read, the reconciliation process aims to identify and investigate discrepancies. Once the investigation is complete, the accountant must make adjusting entries to ensure the accounting records reflect the physical reality. These adjustments fall into two categories: adjustments for quantity and adjustments for value.

2. Adjusting for Quantity: La Régularisation des Stocks

In the Moroccan accounting system, the value of inventory shown on the balance sheet at the beginning of the year (Stock Initial) must be replaced by the value of inventory at the end of the year (Stock Final). This is done through a two-step journal entry process that uses a special "variation" account.

Based on the logic in the document above, the process is as follows:

Step 1: Annulment of the Initial Stock (Annulation du Stock Initial)
You start by removing the initial stock value from the balance sheet and moving it to a variation account. For merchandise, the entry is:

Step 2: Recording the Final Stock (Constatation du Stock Final)
Next, you record the new, physically counted stock value onto the balance sheet. This value comes from your year-end physical count.

Note: The account numbers change depending on the type of stock (e.g., 312 for raw materials and 6124 for their variation; 315 for finished goods and 713 for their variation).

Interpreting the Stock Variation Account

After these two entries, the Variation des stocks account (e.g., 6114) will have a balance. This balance is crucial for calculating the Cost of Goods Sold.

• Debit Balance: Stock Initial > Stock Final. This indicates déstockage (destocking). The company sold more than it purchased this period. The debit balance is added to purchases to calculate the total cost of goods sold.
• Credit Balance: Stock Final > Stock Initial. This indicates stockage (stocking). The company purchased more than it sold. The credit balance is subtracted from purchases, reducing the cost of goods sold.

To see this logic applied in practice, the following video walks through a corrected exercise.

Test your understanding!

Here is a common year-end inventory scenario for a Moroccan company.

Based on the information for "Matières premières" (Raw Materials):

1. The initial stock (stock initial) from the trial balance is 140,000 DH.
2. The final stock (stock final) from the physical count is 190,000 DH.

Task: Prepare the two year-end journal entries to adjust the raw materials stock. What is the final balance of the Variation des stocks de matières premières (Acct. 6124) account, and what does it signify?

Show answer

1. Annulment of Initial Stock:

Date	Account No.	Account Name	Debit	Credit
31/12/09	6124	Variation des stocks de M.P.	140,000
	3121	Matières premières		140,000

2. Recording of Final Stock:

Date	Account No.	Account Name	Debit	Credit
31/12/09	3121	Matières premières	190,000
	6124	Variation des stocks de M.P.		190,000

Balance and Significance:
The Variation des stocks account (6124) has a debit of 140,000 and a credit of 190,000.
The final balance is 50,000 DH Credit.

This credit balance signifies stockage. The company increased its stock of raw materials by 50,000 DH during the year. This amount will be deducted from the purchases of raw materials to calculate the total cost of materials consumed.

3. Adjusting for Value: La Provision pour Dépréciation des Stocks

After adjusting for quantity, you must address value. The principle of prudence (principe de prudence) requires that assets not be overstated. If the market value of your inventory has fallen below its original cost, you must recognize this probable loss. This is done by creating a provision for depreciation.

You were introduced to provisions in the last lesson. Here, we apply the concept specifically to inventory.

When is a provision needed?
A provision is recorded when the inventory's current market value (valeur actuelle or probable selling price) is lower than its recorded cost (valeur d'origine or acquisition/production cost). This can happen due to:

• Obsolescence (e.g., outdated electronics).
• Damage or deterioration.
• A significant drop in market prices.

The accounting treatment in Morocco is very specific.

As the resource demonstrates, the process involves:

1. Comparison: At year-end, compare the cost of inventory items with their current market value.
2. Calculation: Provision = Cost - Market Value (only if Cost > Market Value).
3. Recording the Adjustment:
   • If a new provision is needed or an existing one must increase (Dotation):
     • Debit 6196 - Dotations d'exploitation aux provisions pour dépréciation de l'actif circulant. (This is an expense).
     • Credit 3911 - Provisions pour dépréciation des marchandises (or other 39XX accounts). (This is a contra-asset account that reduces the inventory's book value).
   • If a provision is no longer needed or must be decreased (Reprise):
     • Debit 3911 - Provisions pour dépréciation des marchandises.
     • Credit 7196 - Reprises sur provisions pour dépréciation de l'actif circulant. (This is an income item).

This adjustment ensures that inventory is reported on the balance sheet at the lower of cost or market value, providing a more prudent and realistic view of the company's assets.

Year-End Inventory Checklist

To structure your work during a closing period, here is a professional checklist summarizing the key procedures:

• Plan the physical count: Schedule the date, assign count teams, and prepare count sheets.
• Ensure proper cut-off: Freeze all inventory movements during the count. Ensure goods received before year-end are included and goods shipped are excluded.
• Conduct the physical count: Count and document all inventory items.
• Reconcile physical vs. book: Compare count sheets to the perpetual inventory records. Investigate significant discrepancies.
• Record Quantity Adjustments (Régularisation):
  • Pass the journal entry to annul the initial stock.
  • Pass the journal entry to record the final stock based on the physical count.
• Perform Value Assessment:
  • For each material inventory item, compare its cost to its current net realizable value.
  • Identify all items where value is less than cost.
• Record Value Adjustments (Provision):
  • Calculate the required provision amount for the current year.
  • Compare it to any existing provision from the prior year.
  • Record the necessary dotation (increase) or reprise (decrease) to the provision account.
• Final Review: Confirm that the final inventory value on the trial balance reflects the physically counted stock, valued at the lower of cost or market.

Conclusion

You have now learned the complete, professional process for handling inventory at year-end. This involves more than just counting; it requires a disciplined reconciliation and two distinct types of accounting adjustments: the régularisation to correct quantities and the provision to reflect true economic value. Mastering these procedures is non-negotiable for producing reliable financial statements.

Key Takeaways:

• Year-end inventory procedures begin with a physical inventory count (inventaire physique).
• Inventory reconciliation is the process of comparing the physical count to accounting records and investigating differences.
• Quantity adjustments in Morocco are done via a two-step process: annulling the initial stock and recording the final stock, using a Variation des stocks account.
• Value adjustments are made through provisions for depreciation when an inventory's market value falls below its cost, in adherence to the principle of prudence.
• The final inventory value on the balance sheet should be the lower of cost or market value.

Preview of the Next Lesson:
We will continue our work on adjusting asset values by turning our attention from current assets to non-current assets. In the next lesson, we will focus on how to review and finalize the annual depreciation (amortissement) schedule for all fixed assets (immobilisations).