2.3Inventory entries (depreciation, provisions)
The essentials in 30 seconds
- Adjust to reality: at year-end, inventory entries (depreciation, provisions, stock, accruals) make accounts true.
- Depreciation ≠ provision: one spreads foreseeable wear, the other anticipates uncertain risk — both reduce profit.
- Two principles: prudence (don't overstate) and matching (each year its fair share).
Running case — Rachid and year-end closing with his accountant
Late December: Rachid's accountant doesn't just “print” the accounts: he counts stock on shelves, spreads the van's cost over its years of use, and sets aside the risk of a struggling customer. Rachid discovers these closing entries — and why his profit falls though he “spent nothing” this month.
Sequel to cases 2.1–2.2 — Rachid understands what adjusts his balance sheet and profit.
1. Adjusting the accounts to reality
At the end of the year, inventory entries (year-end close entries) are passed so that the accounts reflect reality: depreciation, provisions, inventory, adjustments.
2. Depreciation & provisions
Depreciation records the loss of value of a fixed asset that wears out: instead of charging the whole expense in the year of purchase, it is spread over the useful life (a €1,000 computer over 3 years ≈ €333/year).
A provision anticipates, by prudence, a likely but uncertain expense or loss (doubtful customer, litigation, inventory devaluation).
3. Two fundamental principles
You also adjust inventory (physical count) and accrue expenses and revenue to match them to the right year.
These entries embody prudence (not overstating assets or results) and accrual matching. Often handled with the chartered accountant.
🔎 Concrete example — 🔎 Concrete example — Depreciating rather than charging it all
Spreading over time.
Machine €30,000 used for 10 years:
→ ~€3,000/year as an expense (depreciation), not €30,000 in year 1.
Provision: doubtful customer → record the risk of non-payment in advance.Result: fair accounts (each year its fair share).
Reflex: depreciation = foreseeable wear; provision = uncertain risk.
Section vocabulary
- Inventory entries
- Closing entries adjusting accounts to reality (depreciation, provisions, inventory, accruals).
Simple example: Rachid's accountant counts stock and spreads the van before closing the accounts.
What it is not: the year's everyday entries (purchases, sales) — inventory adjusts them.
Reflex: at closing: what must be adjusted before judging?
- Depreciation
- Spreading an asset's loss of value over its useful life (instead of a one-off expense).
Simple example: A €1,000 computer over 3 years ≈ €333/year expense.
What it is not: anticipating uncertain risk — that is a provision.
Reflex: foreseeable, scheduled wear = depreciate.
- Provision
- Prudent recording of a probable but not yet certain expense or loss (bad debt, dispute, impairment).
Simple example: Rachid provides for the struggling customer's receivable.
What it is not: a certain, measured loss — record it, don't provide for it.
Reflex: probable but uncertain risk = provide.
- Prudence principle
- Rule against overstating assets or profit, and requiring anticipation of loss risks.
Simple example: Providing for the possible bad debt rather than showing inflated profit.
What it is not: anticipating hypothetical future gains — prudence forbids it.
Reflex: when in doubt: don't enrich yourself on paper.
- Matching principle
- Principle matching income and expenses to the year they truly belong to (accruals).
Simple example: December's invoice paid in January stays a December expense.
What it is not: counting as cash moves — cash is not profit.
Reflex: each expense and income: which year does it truly belong to?
In practice — In practice — Understanding the year-end entries
- Depreciation: spread the cost of a fixed asset over its useful life (an annual expense, not a one-off).
- Provision: record by prudence a likely but uncertain expense/loss (doubtful customer, litigation, devaluation).
- Inventory: adjust its value according to the physical count at year end.
- Adjustments: match expenses and revenue to the right year (invoices to receive, prepaid expenses).
Ready-to-say script — asking your accountant for provisions (30 s)
“For closing: this struggling customer — let's provide for the risk. The van — spread over its useful life. And check each invoice sits in the right year. I prefer prudent, true profit.”
Say it to your accountant before closing: wear, risks, matching — inventory's three words.
Copy-paste template — inventory checklist
ASSETS to depreciate (item + useful life): _______________
RISKS to provide for (customer, dispute, stock): _______________
INVENTORY — physical count done on: _______________
ACCRUALS (income/expenses to match): _______________
ACCOUNTING REVIEW scheduled on: _______________Small business / tight budget
Three questions to your accountant are enough: what to depreciate, what to provide for, what to match — the rest follows.
Algerian SME
Rachid counts physical inventory with his storekeeper in late December: the gap with book stock is adjusted before closing.
Large inventory
Count, value, write down unsold goods: wrong stock skews both balance sheet and profit.
Services
Few fixed assets but invoices straddling two years: accruals (income receivable) are the key point.
✓ Best practices
- Depreciate the fixed assets over their useful life.
- Provide for likely risks by prudence (non-payments, litigation).
- Match expenses and revenue to the right year (adjustments).
✗ Common pitfalls
- Charging a fixed asset entirely as an expense in the year of purchase.
- Confusing depreciation (foreseeable wear) and provision (uncertain risk).
- Forgetting to adjust (expenses/revenue in the wrong year).
Key takeaways
- Inventory entries (year-end) adjust the accounts to reality before preparing the financial statements.
- Depreciation spreads the loss of value of a fixed asset over its useful life.
- A provision anticipates, by prudence, a likely but uncertain expense/loss.
- They embody the principles of prudence and accrual matching, and affect both the result and the balance sheet.
48h Challenge — apply tomorrow
Fill in the inventory checklist above for your business: 1 item to depreciate, 1 risk to provide for, 1 matching item to check. Then send it to your accountant. 20 minutes is enough.
- I can tell depreciation from provision in one sentence.
- I can name prudence and matching with one example each.
- I have filled the inventory checklist and contacted my accountant.
Frequently asked questions
Why not charge the price of a machine as an expense right away at purchase?
Because it would be misleading about the real performance and contrary to accrual matching. A €30,000 machine that will serve for 10 years does not "cost" €30,000 in the single year of purchase: it provides service for 10 years. Charging it entirely in year 1 would crush that year's result (big loss) and inflate the results of the 9 following years. Depreciation spreads the cost over the useful life (~€3,000/year), reflecting wear and tear and making each year bear its fair share. Moreover, the machine is not a "lost" expense but an asset that appears on the assets side (with value), a value that decreases each year through depreciation. That is the difference between an expense (consumed, like electricity) and a fixed asset (a lasting investment, depreciated).
Are provision and depreciation the same thing?
No, two distinct mechanisms. Depreciation concerns a certain and scheduled loss of value: a fixed asset wears out predictably, so you spread its cost over its useful life (systematic and planned). A provision anticipates a likely but uncertain expense/loss, linked to a risk: a customer who might not pay (doubtful receivable), an ongoing lawsuit, a devalued inventory. It falls under the prudence principle (recording a possible risk in advance). Summary: depreciation = foreseeable wear of an asset; provision = likely but uncertain risk. Both reduce the result of the year (they are expenses) and give a prudent and faithful picture, but their nature differs.
Rachid fears a struggling customer won't pay its invoice. What to record?