Food-industry SME accounting 2026: inventory, losses, VAT and traceability

Quick answer. Food industry SME inventory (raw materials, work-in-progress, finished goods) must be valued at weighted-average cost (WAC) or first-in-first-out (FIFO) — never LIFO. Shelf-life losses and spoilage are recorded as depreciation or inventory adjustments. VAT depends on the product: 5.5% (shelf-stable foods), 10% (ready-to-consume items) or 20% (alcoholic beverages, sweetened chocolate, margarine). Upstream/downstream traceability is mandatory (EU Regulation 178/2002).

A food-industry SME — whether a bakery, cheese producer, canned goods manufacturer, brewery or food logistics operator — runs a business subject to precise accounting and tax regimes. Its balance sheet depends critically on correct inventory valuation: raw materials (flour, eggs, cheese cultures, spices), work-in-progress, and finished goods ready for sale.

In 2026, French accounting rules remain strict: LIFO (last-in-first-out) is prohibited in statutory accounts; inventory must be written down if net realizable value falls below acquisition cost; and upstream/downstream traceability is mandated by EU food-law directives. At the same time, food SMEs must navigate multiple VAT rates based on product type — a complexity that frequently triggers errors.

Recently, a dairy-processing company asked us to audit its inventory management: cheeses approaching their expiration date were not being written down, and VAT rates on different cheese products were inconsistent between aged cheddar and fresh cottage cheese. This oversight distorted their taxable income by over 5% across two fiscal years.

Legal framework#

The French Chart of Accounts (PCG, Article 214-22) and ANC Regulation 2014-03 require inventory to be valued at acquisition cost or production cost. Two methods are permitted:

1. WAC (Weighted Average Cost): the unit cost is recalculated after each inventory receipt. On sale, units are valued at the average cost.
2. FIFO (First-In-First-Out): units sold are valued at the cost of the oldest receipts. Ideal for perishables (oldest items exit first, matching shelf-life management).

Prohibited method: LIFO#

The LIFO (Last-In-First-Out) method is banned in French statutory accounts since 2002, and also forbidden under IFRS consolidation rules. Any SME inventory valued under LIFO is highly challengeable by tax authorities.

Comparison and impact#

During inflationary periods on raw material costs (grain, dairy cultures, refrigeration), WAC vs FIFO creates material profit variance:

Practical example: small bakery#

A bakery purchases flour:

• Lot A (January): 100 kg at EUR 4/kg = EUR 400;
• Lot B (March): 100 kg at EUR 4.50/kg = EUR 450;
• April usage: 80 kg of flour consumed.

Under WAC: average unit cost = (400 + 450) / 200 = EUR 4.25/kg. Ending inventory = 120 kg × EUR 4.25 = EUR 510.

Under FIFO: 80 kg sold comes from Lot A (leaving 20 kg from Lot A at EUR 4/kg = EUR 80). Ending inventory = 20 kg (Lot A) + 100 kg (Lot B) = 120 kg valued at (EUR 80 + EUR 450) = EUR 530.

Inventory difference: EUR 530 - EUR 510 = EUR 20. During inflation, FIFO tends to value ending inventory higher; WAC smooths the impact.

Principle: depreciation for obsolete stock and spoilage#

Inventory must be valued at the lower of acquisition cost or net realizable value (PCG 214-22). If a product is approaching expiration or has lost market value, a write-down is mandatory.

Assessing net realizable value#

For an expired yogurt or one near expiry:

• Net realizable value = probable selling price - estimated costs to realize (packaging, distributor commission, disposal costs, etc.)

If a yogurt cost EUR 1.20 to acquire but can only be sold at a markdown for EUR 0.30, its NRV = EUR 0.30. Write-down = EUR 1.20 - EUR 0.30 = EUR 0.90 per unit.

If a product is wholly unfit for consumption (contamination, damaged packaging), NRV = zero. Write-down = full acquisition cost.

Recording write-downs#

Two approaches:

1. Impairment (item still in stock): record an allowance charge (account 6817 "Allowances for impairment of current assets") against account 39 "Inventory impairment". The allowance is reversed (account 7817) when the item is sold or destroyed.

2. Definitive loss (destruction, breakage): the stock removal flows through inventory change (accounts 603/71); any previously recognised impairment is then reversed.

Critical detail: destructions for health/safety reasons must be documented (procedure notes, destruction certificate, proof of compliance) to justify the loss to tax authorities.

Applicable rate framework#

Food product VAT in France 2026 follows a three-rate system:

Critical distinctions#

Dark chocolate vs milk chocolate: dark chocolate (and household chocolate) remains at 5.5%. Milk chocolate, white chocolate and filled chocolates moves to 20%.

Bakery items: all breads and pastries (baguette, croissant, soufflé) are 5.5% when sold for take-away. A pastry consumed on-site with meal service (e.g., café pastry with coffee) may be 10% (restaurant service) if sold as part of a combined meal.

All cheese types: 5.5% — including fresh cheese, yogurt, and fresh dairy products.

Juices and non-alcoholic drinks: 5.5% for bottled fruit juice (later consumption); 10% for juice consumed immediately at a café/restaurant.

Water and non-alcoholic drinks: 5.5% for bottled water and soft drinks (later consumption), 10% for immediate consumption. Only alcoholic drinks are at 20%.

VAT split across multiple rates — common scenario#

A dairy SME producing fresh cheese (5.5%), yogurt (5.5%), and cultured cream (5.5%) must allocate its annual revenue by rate in its VAT return. Milk purchased for these three products is apportioned proportionally by end use.

A bakery selling take-away bread (5.5%) and hot sandwiches delivered to restaurant clients (10%, restaurant service) must justify, invoice by invoice, which rate was applied.

Upstream/downstream traceability (EU Regulation 178/2002)#

All food-chain operators (producers, processors, distributors) must establish traceability systems covering:

1. Upstream: identify the source of each raw material (supplier, lot code, purchase date);
2. Downstream: identify all customers receiving each production lot (distributor, restaurant, reseller).

If a safety issue emerges (contamination detected), traceability must enable rapid identification of the source and all affected customers.

HACCP and mandatory record-keeping#

The Food Safety Plan (Plan de Maîtrise Sanitaire, PMS) — based on HACCP (Hazard Analysis and Critical Control Points) — is mandatory. It requires documentation of:

• Critical control points (refrigeration temperature, storage duration);
• Cleaning and sanitation procedures;
• Quality controls (contamination testing, microbiological analysis);
• Batch traceability records.

Accounting implications: audit trails and justification#

Inventory losses due to contamination (health rejection) or expiry must be substantiated by:

• Destruction report or disposal certificate (food waste);
• Batch log (production dates, expiry dates, stock movement ledgers);
• Non-conformance report (if quality issue was identified).

Without these records, tax authorities may disallow the tax deduction for inventory loss.

Micro-enterprise in food manufacturing#

A self-employed micro-entrepreneur in food production:

• Cash-basis accounting: no formal ending inventory on the balance sheet (simplified). Inventory variation is declared per actual figures if material.
• VAT: threshold registration at EUR 37,500 net (services) or EUR 85,000 net (goods). Depending on the NAF code (e.g., 1089Z "Manufacture of other food products"), may fall under services or goods classification.
• Social contributions: micro-social on cash revenue, at a rate that depends on the activity (sale of goods or services).
• Write-downs: micro-entrepreneurs are exempt from formal accrual-basis stock accounting; no required write-down schedule, but actual losses are documented to justify variance in reported income.

LLC / SAS in food manufacturing (real regime)#

• Mandatory inventory valuation (WAC or FIFO); write-downs at year-end.
• Inventory variation: the difference between beginning inventory + purchases - ending inventory; reduces taxable profit.
• Input VAT recovery: VAT paid on raw materials and packaging is recoverable if VAT-registered.
• Taxable profit: reduced by inventory variation (ending inventory as a cost deduction); justified losses are deductible.

EIRL (entrepreneur with separate business assets)#

• Real-regime accounting mandatory if turnover exceeds self-employed threshold;
• Inventory valued by WAC/FIFO, write-downs required;
• Personal liability of owner (no separate business patrimony) if fraud or serious non-compliance is found during tax audit.

Error 1 — Failing to write down nearing-expiry inventory#

Carrying fresh cream at full acquisition value (EUR 1.50) when it has 2 days to expiry but zero marketable value distorts the balance sheet. Tax authorities accept write-downs, but demand proof (internal records, markdown procedures).

Error 2 — Switching valuation methods year-to-year#

Changing from WAC to FIFO between fiscal years requires justification and accounting restatement. Without justified reason, tax authorities can demand retrospective consistency.

Error 3 — No documentation of destructions#

Inventory loss without a destruction certificate or health incident report can be rejected as a tax deduction. Traceability must be formal and auditable.

Error 4 — Applying incorrect VAT rate#

Confusing take-away bread (5.5%) with bread served in a restaurant meal (10%, restaurant service); dark chocolate (5.5%) with milk chocolate (20%). Common error, expensive in tax adjustment.

Error 5 — Ignoring batch and shelf-life tracking#

An inventory system (ERP) without batch codes and expiry-date tracking prevents justification of inventory rotation and regulatory compliance. HACCP and traceability demand formal lot history.

Accounting for a food-industry SME appears straightforward on the surface — buy, transform, sell. In practice, it combines three interdependent challenges:

1. Inventory management. Every perishable food item declines in value as time passes. The balance sheet reflects this reality only when write-downs occur regularly. A product within days of expiry is worthless, not worth its purchase price. Many SMEs overlook this principle, inflate ending inventory, and later discover that next year's revenues are overstated (because the old inventory finally goes out as spoilage). Tax authorities scrutinize this drift carefully.

2. VAT rate tracking. Transforming raw materials into finished products opens the door to multiple rates. An SME producing fresh cheese (5.5%) and cultured cream (5.5%) is consistent. But a dairy expanding into sweetened dairy-based beverages (20%, possibly) or specialty aged cheeses (may require different rate verification) must verify each product against official guidance. Non-compliance triggers VAT adjustments with penalties.

3. Traceability. It is not merely a distant sanitary obligation — it is an accounting anchor. In case of contamination or product recall, the absence of batch journals compromises loss justification. And formal compliance audits directly examine HACCP alignment.

At Hayot Expertise, we have supported several food SMEs in deploying integrated inventory systems (Pennylane, Dext, Qonto) that automatically record weighted-average cost, shelf-life dates, VAT variants, and stock movements. Initial setup effort is substantial, but error reduction reaches 90% and tax audits become more straightforward.

Hayot Expertise recommendation. From the outset of your food-industry SME, enforce strict accounting architecture: (1) a dedicated chart-of-accounts structure for inventory (raw materials, work-in-progress, finished goods) with sub-accounts by VAT rate family; (2) inventory software that records lot codes, shelf-life dates, valuation method (WAC vs FIFO), and all receipts/issues; (3) a year-end inventory close calendar integrating anticipated write-downs for products nearing expiry; (4) formal upstream/downstream traceability documentation and an annually audited HACCP plan. These investments avoid tax adjustments, customer disputes, and operational losses from poor stock management.