Year-end physical stock count: how to organise it right

Quick answer. A physical stock count means counting and valuing all your inventory at year-end. Article L123-12 of the French Commercial Code requires it at least once every twelve months. You then value the stock at acquisition cost, using weighted average cost (WAC) or first-in first-out (FIFO), and post the stock variation entry.

Stock is not just a logistics line: it is an asset that flows straight into your taxable result. A reference counted twice inflates profit; a forgotten reference understates it. The stock variation adjusts the income statement to the euro, which makes it one of the most sensitive items at year-end.

The obligation is legal and precise. Article L123-12 of the Commercial Code requires you to verify, by inventory and at least once every twelve months, the existence and value of the company's assets and liabilities. The physical count is therefore not a comfort option: it is a condition for the true and fair view of the annual accounts.

In our bookkeeping and accounts review work, a poorly prepared count is one of the first causes of delay at year-end. A clean, dated and documented count avoids last-minute corrections and secures the tax return.

A reliable count rests on a repeatable method. Here is the sequence we recommend to the owners we support.

1. Plan the date and the team. Set the count as close to year-end as possible, ideally the last day of the period. Form pairs (one counter, one checker) and appoint an inventory lead.
2. Freeze movements. Suspend goods-in and goods-out during the count, or precisely record in-transit flows for later adjustment. Moving stock distorts everything.
3. Record every reference. Go area by area, noting quantities, references and condition on pre-numbered count sheets. Separate sellable stock from damaged stock.
4. Identify third-party stock. Goods on consignment, sale-or-return or held by a subcontractor still belong to you and must appear in the count.
5. Value under your method. Apply acquisition or production cost, using WAC or FIFO (see below).
6. Reconcile to book stock. Compare the physical count to the theoretical figure from your system and explain every gap.

This discipline mirrors that of businesses that run a fast monthly close: the more regular the tracking, the more the annual count becomes a simple confirmation.

French accounting standards allow two methods for interchangeable (fungible) goods: weighted average cost (WAC) and first-in first-out (FIFO). The choice shapes your reported margin and the value of closing stock.

The LIFO method (last-in, first-out) is prohibited in France, in both accounting and tax law. It would artificially understate stock during inflation: never use it, even if a foreign software offers it.

One structuring rule: consistency of methods. You apply the same method to stocks of similar nature and use, and you do not switch methods between years without justification. Retail outlets and e-commerce sites juggling several warehouses must be especially careful here.

Under periodic inventory (the case for most small and mid-sized businesses), stock is only adjusted at year-end. The logic is simple: reverse the opening stock, record the closing stock, and the difference corrects the result.

The entry has two steps: reversing the opening stock (debit account 603x, credit the stock account), then recording the closing stock (debit the stock account, credit account 603x). For finished goods produced, the variation flows through account 71355, which is income. The technical detail of this entry is covered in our dedicated article on the stock variation accounting entry: here we stay focused on organising the count and the valuation.

Gaps between physical and book stock must be justified beyond a tolerance threshold you define (often 1 to 2% of value). Breakage, theft, unexplained shrinkage, data-entry error: every material gap calls for a written explanation, which also serves in the event of a tax audit.

Valuation does not stop at entry cost. French standards (PCG, article 214-22) require you to compare entry cost to current value at year-end. If current value is lower, you recognise an impairment. Tax law converges: CGI article 38-3 provides that stocks are valued at cost price, or at the market price at year-end if it is lower.

In practice, unsellable, obsolete or damaged stock, or stock whose market price has fallen, must be brought back to its real value. The impairment is booked to the credit of account 39 against a debit to account 6817. It reduces your result, but it reflects economic reality and protects the integrity of the balance sheet.

A useful point when preparing the taxable result before year-end: a justified, documented impairment is deductible, but a flat-rate or unsupported impairment is frequently reinstated during an audit.

E-commerce and multiple warehouses. If you store stock with a logistics provider or across several warehouses, the count must consolidate every location, including in-transit stock. Reconciling with the provider's statements is essential.

Production and work in progress. Goods under manufacture are valued at their production cost based on stage of completion. They appear in stock even when unfinished, which means quantifying the labour and overheads already incurred.

Seasonal businesses. For a year-end after peak season, stock may be very low; after restocking, very high. The count date therefore strongly affects the reported result, without changing the real activity.

The underestimated risk. Many owners take care over counting but neglect the valuation of dormant stock. Physically present but unsellable stock remains a fictitious asset until it is impaired. It is the most frequent gap raised during accounts review.

What the tax authority looks at. During an audit, the inspector checks the consistency between the declared margin and the stock variation, the existence of dated and signed count sheets, and the justification of impairments. An undocumented count weakens the whole accounting.

Trade-off. Should you run a rolling count during the year or a single year-end count? A single count is enough for a simple activity. A rolling count (by zones, throughout the year) becomes relevant as soon as the number of references makes the year-end count unmanageable.

Recently, the owner of a distribution SME approached us after two years in which gross margin swung sharply with no commercial explanation. Reviewing the counts, we found the cause: count sheets entered in a rush, with no consistency between the WAC applied by the software and an implicit FIFO used on certain product families. Closing stock was approximate each time, and so was the margin.

Our reading is simple: the count is not an administrative chore, it is a management act. Well-counted, well-valued stock tells you the truth about your margin, your working capital needs and your tax exposure. It is also what makes a balance sheet readable to a banker or a buyer.

As a chartered accountant registered with the Ordre and a statutory auditor, we pay particular attention to the traceability of the count, because it is one of the first points a statutory auditor tests. A written procedure, numbered sheets and consistent valuation are worth more than a brilliant but indefensible count.

Hayot Expertise tip. Prepare your count two weeks before year-end, not on the day itself. Write a short procedure (who counts, where, how), freeze movements, and have your valuation method validated in advance. An anticipated count means a calm close and a result you can defend before the tax authority.