Stock and Inventory Basics

For most product businesses, the stocktake is the job that keeps slipping. The shelves are right there, the software shows a stock number, and counting boxes on a Sunday feels like busywork. But the stock figure is not a formality — it sits inside your profit calculation, which means it sits inside your tax return. If the count is wrong, both are wrong.

The logic is simple once you see it. What you spent on stock this year is not automatically an expense. Only the stock you actually sold counts against this year's income; the rest is an asset sitting on the shelf. The stocktake is how the books find out which is which.

Why the closing stock figure moves your profit

Your cost of sales is worked out from opening stock, plus purchases, minus closing stock. That means the closing count feeds directly into taxable profit: a higher closing stock figure treats more of your purchases as an asset rather than an expense, so profit rises; a lower figure does the opposite. An honest, documented count protects you in both directions. You do not want to pay tax on stock that no longer exists, and you do not want an understated figure you cannot support if the ATO asks how you arrived at it.

The simplified trading stock rules

Smaller businesses may not need a formal stocktake every year. Broadly, if you are eligible for the small business concessions and you reasonably estimate that the difference between the value of your opening and closing stock is no more than a set amount (currently $5,000 — check the current ATO figure and your eligibility), you can choose not to do a formal count and carry the same stock value forward. Treat it as a convenience, not a free pass: the estimate has to be reasonable, and if stock levels have clearly moved, counting is the safer path. Confirm with your accountant before relying on it.

Shrinkage, damage and stock you use yourself

• Damaged and obsolete stock. Write it down or write it off when you identify it, and keep a note of what was scrapped and why — that note is your evidence.
• Theft and unexplained shrinkage. This only surfaces when a physical count is compared to what the system says. No count, no visibility.
• Stock taken for private use. Goods you take home still need to be accounted for. The ATO publishes benchmark amounts for some industries, such as food businesses, and expects own-use stock to be recorded rather than quietly disappearing.

Old stock is a cash graveyard

Every carton that has sat untouched for a year is cash you already spent, parked where it cannot pay wages or suppliers. Because slow stock does not show up as an expense, the profit and loss looks fine while the bank account tightens. A regular look at what is not moving — and a willingness to discount it, clear it or write it off — is as much a cash flow habit as a bookkeeping one.

What we commonly see go wrong

• No stocktake at all, with the closing figure rolled forward or guessed each year, so reported profit drifts away from reality.
• Stock purchases expensed in full when paid, making margins swing wildly between months and overstating expenses in stock-up periods.
• Damaged or missing stock never written off, so the balance sheet carries value that no longer exists.
• Owner drawings of stock never recorded, which understates sales-adjacent income and misstates stock on hand.

A worked example

As an illustration: a giftware retailer expenses every stock purchase as it is paid and has never done a proper count. In a strong year she stocks up heavily before Christmas, and the accounts show a weak profit because the purchases all hit at once. The following year looks unusually profitable for the opposite reason. Once opening and closing stock are counted and brought into the calculation, the two years even out — and the pile of unsold novelty stock the count uncovers explains where the cash went.

When to get help

If you cannot say what your stock on hand is worth, if margins jump around in ways you cannot explain, or if the stock figure in the accounts has been rolled forward for years, it is worth getting the position rebuilt once, properly. We see this often, and the count itself is usually the easy part — it is the habits around it that need setting up.

Do I have to do a stocktake every year?

Generally, businesses with trading stock account for opening and closing stock each year. Eligible small businesses may use the simplified trading stock rules and skip a formal count if the estimated movement in stock value is within a set amount (currently $5,000 — check the current ATO figure and your eligibility with your accountant).

How do I value my stock for tax purposes?

The ATO generally allows stock to be valued at cost, market selling value or replacement value, and the choice can be made item by item each year. The right choice depends on your situation, so it is worth confirming with your accountant rather than defaulting to one method.

What about stock I take home for my own use?

It still needs to be recorded. The ATO publishes benchmark amounts for own-use stock in some industries, such as cafés and butchers, and expects goods taken for private use to be accounted for rather than left out of the books.