BOOK KEEPING FORM ONE – STOCK

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.

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.

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.

The Inventory Ledger Account therefore would appear as follows:

The inventory adjustments in respect of opening and closing inventory appear in the Cost of Goods Sold as follows:

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.