How to Account for Inventory and Stocktake in Hong Kong

What the IRD expects. For businesses dealing in goods, section 51C records should include details of goods bought and sold (items, suppliers, customers, quantities and values), related invoices, a statement of trading stock held at the end of the accounting period, and the stocktake records that support it.

Practical steps

1. Record purchases at cost, including freight and import costs that bring the goods to their present location.
2. Track movements with a stock list or inventory module: receipts, sales, returns, write-offs.
3. Count stock at year end (and ideally periodically) using numbered count sheets signed by the counters. Your auditor will usually want to attend or review the count.
4. Value stock using a consistent cost formula, such as first-in-first-out or weighted average. HKAS 2 carries stock at the lower of cost and net realisable value (expected selling price less costs to sell; para 9), and HKFRS for Private Entities at the lower of cost and estimated selling price less costs to complete and sell (s.13.4), so damaged or slow items may need to be written down. Both allow first-in-first-out or weighted average; HKFRS for Private Entities does not permit last-in-first-out (s.13.18).
5. Reconcile the stock records to the ledger and investigate differences.

Keep count sheets and valuation workings for the seven-year retention period; they are the evidence behind the largest balance in many trading companies.