Difference between Stock at Start and Stock at Close
Distinguish between stock at start and stock at close
Stock is the value of the goods that you have on hand to sell to your customers. If you sell services rather than goods, you won’t have any stock.
Stock might include raw materials that you buy to make your goods, half-finished goods (known as ‘work in progress’), and finished goods.
You must include the value of stock in your accounts at ‘the lower of cost and net realizable value’. That means that if you’re going to sell off your stock more cheaply than you bought it, perhaps if it’s gone out of fashion and you just want to get it off your hands, you have to show it
in your accounts at the amount you’re going to sell it for.
in your accounts at the amount you’re going to sell it for.
Stock example:
Mary
makes cushions to sell. Her stock figure will include raw materials
such as fabric, cushion pads and zips; half-finished cushions; and
completed cushions.
makes cushions to sell. Her stock figure will include raw materials
such as fabric, cushion pads and zips; half-finished cushions; and
completed cushions.
Mary
bought a large roll of Christmas fabric and did not sell all of it as
cushions. In January she decides to sell off the remainder at a
knock-down price, less than she paid for it, to a quilter. She must
change the value of that fabric in her accounts from the amount she paid
for it, to the amount she expects to get for it.
bought a large roll of Christmas fabric and did not sell all of it as
cushions. In January she decides to sell off the remainder at a
knock-down price, less than she paid for it, to a quilter. She must
change the value of that fabric in her accounts from the amount she paid
for it, to the amount she expects to get for it.
Treatment of Stocks in the Books of the Business with Particular Reference to the Final Accounts
Identify the treatment of stocks in the books of the business with particular reference to the final accounts
Accounting for Inventory
Opening inventory is brought forward from the previous period’s ledger account and charged to the income statement as follows:
| Debit | Income Statement |
| Credit | Inventory |
Closing inventory at the period end is recorded as follows:
| Debit | Inventory |
| Credit | Income Statement |
The Inventory Ledger Account therefore would appear as follows:
| Inventory Account | |||
| Debit | $ | Credit | $ |
| Balance b/f | 100 | Income Statement | 100 |
| Income Statement | 200 | Balance c/d | 200 |
| 300 | 300 | ||
The inventory adjustments in respect of opening and closing inventory appear in the Cost of Goods Sold as follows:
| Opening Inventory | 100 |
| Add: Purchases | 500 |
| Less: Closing Inventory | (200) |
| Cost of Goods Sold | 400 |
Note that the cost of goods sold is not simply the cost of purchases during
the period. This is the application of the Matching Concept which
requires expenses to be recognized against periods from which associated
revenue from the expense is expected to be earned.
Therefore, as closing inventory is not consumed at any given accounting period end, it
must not be part of expense which is why it is deducted from the cost
of sale.
Similarly, as opening inventory is consumed in the current
accounting period, it must therefore be added to the cost of goods sold.
