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How to account for stored production?

How to account for stored production?

by | 28-10-22 | Current Operation

The determination of inventory is a fundamental element in accounting for the preparation of annual accounts. From a tax point of view, a stock is a set of goods held by the company which will be used in the production process to make a profit. 
Sometimes, the manager is forced to carry out the annual inventory himself.   
The Commercial Code obliges every trader to make an inventory of his company at least once a year(C. com. art. L 123-12) which must be communicated to the tax department during a tax audit.  

The criteria of the stock

Inventory is defined in article 38 III of the French Tax Code as an asset that is identifiable and gives rise to future economic benefits, and its cost must be measured with sufficient reliability.  

A distinction must be made between stocks proper (goods, raw materials, consumables, intermediate products, finished products, packaging), work in progress and, finally, residual products (waste).  

For example, in a business enterprise, inventories consist of goods purchased but not sold at the end of the fiscal year.  

Please note that inventories should not be confused with fixed assets, which will be used on a permanent basis in the production process.  

Inventory valuation

After having carried out the physical inventory of the stocks, it is advisable to calculate their book value.

Article 38-3 of the CGI provides that “inventories are valued at cost price or at the rate on the day of the closing of the fiscal year, if this rate is lower than the cost price”.

For raw materials and goods: 

Raw material inventories are valued at purchase price plus incidental costs such as transport or insurance (ancillary costs), i.e. actual cost (price excluding VAT + ancillary costs).

Work in progress and finished goods are valued at production cost, which is the sum of the acquisition cost of raw materials and direct and indirect expenses.

However, it is sometimes difficult to evaluate their real cost with accuracy, so it is possible to use an approximate evaluation method by applying the weighted average cost method, or the FIFO (first in, first out) method. This avoids the need for an item-by-item inventory.

Example of inventory valuation with the weighted costing and the Peps method.  

  • This means a stock of goods of 1,500 units at the end of the year.
  • Rotation period: 5 months.
  • Purchases in the last five months :
    • 2,000 units acquired during the year (November) at €150 = €300,000;
    • 1,500 units acquired during the year (December) at €120 = €180,000.

 1. Valuation at weighted average cost

  • Average unit cost: (300 000 + 180 000) / 3 500 = 137 €.
  • Inventory value at closing: 137 × 1 500 = 205 500€s.

   2. Peps method

  • The price of the most recent purchase is taken as a reference, i.e. the most recent one, which corresponds most to the market price.
  • 1,500 × 120 = €180,000 (in this case, this method reduces the result by €25,500).

    The evaluation of the depreciation of the stock

    In the event of a depreciation of the inventory, the cost price principle is set aside. The valuation is made at the probable selling price, i.e. the market price (in the absence of a market price, the inventory will be valued by reference to the price of the finished products – EC 20 Dec. 2009, n°304516).  

    There are several factors that can cause a loss of value of the stock, it can be due to a deterioration of the goods, a collapse of the prices (as regards raw materials), a change of the consumption habits or a technological evolution.  

    It is important to evaluate the stock as accurately as possible, because this will fictitiously lead to a reduction in the corresponding income, i.e. a tax advantage. However, during a tax audit, the auditing officer will ensure that the stock is correctly valued.  


    If you have any doubts regarding the valuation and accounting of your inventory, do not hesitate to contact AlterTax Avocats.  

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