The penalty for not conducting the annual inventory can be as high as 26,540 euros

Commercial companies, craftsmen, individuals engaged in freelance professions, and all other entrepreneurs, regardless of their legal form of organization, are required to conduct an annual inventory of assets and liabilities at the end of the business year to align accounting records with the actual state. ‘Inventory’ is the common term for this demanding task, which aims to identify potential irregularities and shortcomings in the management of assets and to determine the financial obligations of the entrepreneur.

The conduct of the inventory is regulated by two regulations: the Accounting Act and the General Tax Act. It must be conducted at the beginning of operations, at the end of the business year, in the case of status changes, on the day of bankruptcy opening, and in the case of liquidation proceedings. It should also be conducted in the event of changes in the prices of goods and tax rates. Exceptionally, when prices change, goods do not need to be listed if data on the value of goods in stock can be provided in the accounting records.

Penalties based on two grounds

The organization of the annual inventory depends on the size of the entrepreneur. For large and medium-sized entrepreneurs, several inventory committees may be formed for different parts of assets and liabilities or a single inventory committee. For small entrepreneurs with fewer employees, the same physical person is often a member of the company and a member of the management, sometimes even the only employee of that company, so a multi-member inventory committee cannot be formed. Regulations allow entrepreneurs to adapt since the management of the commercial company is responsible for conducting the annual inventory, and for craftsmen and freelance professions, it is the individual who performs the independent activity.

The Accounting Act and the General Tax Act impose high fines for entrepreneurs and responsible persons who do not conduct the annual inventory of assets and liabilities. According to the Accounting Act, the monetary fine ranges from 1,320 to 13,270 euros for legal entities and from 660 to 2,650 euros for responsible persons. According to the General Tax Act, the monetary fines for legal entities are higher, reaching up to 26,540 euros.

When and how it is conducted

Although it is an annual inventory, in reality, the inventory is almost never conducted on the last calendar day of the tax year. Assets and liabilities are usually listed before or after December 31, so based on the inventory data and transactions between December 31 and the date of the conducted inventory, data on the state as of the last day of the tax year is derived. Some entrepreneurs conduct inventory multiple times during the year, and those who use digital systems for tracking transactions often have daily updated data.

In the trade and hospitality sectors, where business activity is particularly intense in the last days of the calendar year, the inventory is usually conducted at the beginning of the following year, so that based on transaction data, the data is summarized as of December 31.

Commercial companies whose financial statements are subject to audit are required to inform the auditor about the conduct of the inventory. The auditor may be present during the inventory if they assess that the data from the inventory could affect the accuracy of the representation of assets and liabilities in the financial statements of the audited company.

The committee that conducted the inventory is obliged to submit a report in the form of minutes to the management of the commercial company, and the management decides on the compensation for shortages and the recording of surpluses if identified, the write-off of long-term and short-term assets that are no longer used, and the possible write-off of obligations. In this part, the determination of responsibility for the identified shortages of assets is particularly contentious if the identified shortage exceeds the tax-deductible amount.

Who is allowed to have shortages

Tax-deductible shortages resulting from damage, destruction, breakage, and similar circumstances arising during the conduct of business processes are defined in nineteen decisions of the Croatian Chamber of Commerce. The decisions relate to trade, hospitality, fish processing, the production of bakery products and pasta, the production of oil, sugar, animal feed, construction, the production and distribution of oil, tobacco, honey, poultry farming, and the production of eggs, wine and fruit juices, non-alcoholic beer, paints and varnishes, in mariculture, freshwater fish farming, and the production of cosmetic products.

The decisions of the Croatian Crafts Chamber specify tax-deductible losses in trade, hospitality, and on products made from grains and flour. Losses up to the amount prescribed by the decision applicable in a specific activity are not subject to taxation.

Shortages of goods above the allowed decisions are subject to taxation. If a worker or another responsible person is charged for the shortage, the entrepreneur charges VAT on the value of the shortage and claims the total amount with VAT from that person. If the person charged for the resulting shortage is not required to settle the debt, in tax terms, it is considered a salary in kind, therefore the commercial company is obliged to pay contributions and income tax.

However, if the authorized body of the entrepreneur decides that the responsible person will not be charged for the resulting shortage, VAT is charged on the value of the shortage, and the total amount only increases the tax base as a non-deductible expense for corporate income tax. This second option is fiscally cheaper and more common in practice.