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Inventory management, control and tax & accounting purposes

Posted on 01/11/2012 by Koji Takahashi

Case 12

<Question>
We started to import sport wears from a Turkish factory and sell it in Japan.
We would like to know how to take care of the regular inventory for daily management, accounting and tax purposes.

<Answer>
1.    Daily control

Establishing a perpetual inventory system (with an inventory ledger) is very important for keeping track of receiving and dispatching, balances, inventory aging, etc.Using a computer system makes it easier to prepare the inventory ledger though, if the quantity of inventory is not material preparing the inventory ledger with a manual or using an excel sheet is good enough.
When the inventory ledger is prepared, the following information is necessary for appropriate inventory management.

  • Quantity and amount of beginning balance
  •  Quantity and amount of loading
  • Year, month and day of purchase of loading
  • Quantity and amount of unloading
  • Year, month and day of purchase of unloadingQuantity and amount of balance
  • Location

The inventory ledger should be prepared item by item and be followed up in a timely manner to grasp the necessary information at any time. Also it is reconciled to other accounting records regularly such as the general ledger.

2.    Physical count of inventory

Implementing a physical count of inventory is very important to fix the closing balance for accounting and tax purposes.  As a result of the physical count of inventory, validity and efficiency of daily inventory control would be clear. If book-to-physical variances are larger than expected or relatively large, the daily inventory control procedures should be reconsidered.  The reasons for book-to-physical variances vary though, they should be settled in a timely manner and reflected in the inventory control.

  • Careless mistakes maintaining the inventory ledger
  • Physical count mistake
  • Inefficient inventory control
  •  theft, captive consumption

If the accuracy of the inventory is not reliable, physical inventory counts should be performed regularly such as on a monthly or quarterly basis. Additionally, there are several methodologies for doing inventory though, accountants offer support by preparing the physical inventory count manual.

3.    Inventory aging

If the inventory ledger meets the above requirement, the inventory in excess of certain periods such as over 6 months, 1 year, etc since its purchase can easily be accounted for. Basically, inventory sells according to trends, especially fashion- related items and inventory prone to obsolescence, therefore, understanding inventory aging is very important. Over a certain period inventory should be sold as soon as possible, and having a good comprehension of the inventory aging makes it possible to plan a business strategy for the selling time and price of such inventory. It depends on the inventory however, if it is over 1 year, considering a revaluation of the inventory is necessary to forecast the appropriate profit in the future.
Addtionally, if it is difficult to control inventory aging by the ledger, garsping inventory turnover period is available.

4.    Accounting policy (Tax purpose)

The assignment of the cost of inventories is to be done by using either the first-in first-out (inventory items on hand at the end of the period are assigned the cost of those items most recently purchased) or weighted average cost formula (inventory items on hand at the end of the period are assigned the weighted average of the cost of those items on hand at the beginning of the period and those produced or purchased during the period), etc. The inventory asset account when items are purchased is calculated by multiplying the quantity of the item by the current cost. When starting a business in Japan, the “Notice of Adoption of Accounting Method”  application form is filed to the tax authority and the inventory policy is decided at the time. If the inventory policy is not declared to the tax authority, the last cost method would be applied automatically. The inventory asset account when items are purchased is calculated by multiplying the quantity of the item by the current cost.
Additionally, the cost of inventories is the aggregation of costs of purchase (e.g. purchase price, import duties, transportation and handling costs) net of trade discounts and rebates.
If obsolete inventories are disposed, obtaining some certification, a record, or a sample of the disposal is very important to prove the loss of disposed obsolete inventories for tax purposes.

5.    Taxes

When inventories are imported, the consumption tax and the duty tax are imposed to the inventories when they are collected at customs brokers. Regarding the consumption tax, please refer to our NEW section” Starting a business in Japan – Consumption tax  03/09/2012“.

 

By Certified Public Accountant (CPA) & Tax Accountant, Koji Takahashi
Tokyo & Yokohama