Accounting for Stock
Chapter 8
Stock
Stock – goods purchased by a trading firm for the purpose of
resale at a profit.
Note - shelving, business vehicles and office equipment, would
not normally be considered as stock. (This is not to say that these
items will never be sold, but the intention behind their purchase
was use, not resale, so they are not stock.)
This potential for resale – at a profit – some time in the future
means that stock represents a future economic benefit, and
because the stock is under the control of the trading firm, stock
fits perfectly the definition of an asset. And given that the firm’s
intention would be to resell the stock within the next 12 months,
it means that stock is a current asset.
Stock
Stock is not only one of the most important assets
for a trading firm, but also one of the most
vulnerable. Stock is susceptible to damage, spoilage,
theft and even changes in tastes and fashions, each
of which can undermine its value.
Given its importance and vulnerability, it is vital that
the accounting system is able to provide accurate
information about stock.
The Stock Control
Account
All movements of stock are summarised in the Stock
Control account, with stock ‘in’ (primarily through
purchases) recorded on the debit side, and stock ‘out’
(mainly through sales) recorded on the credit side.
The Stock Control account thus shows a summary of total
cash and credit purchases on the debit side, with total
cash and credit sales (recorded at cost price) and any
stock withdrawals by the owner recorded on the credit
side. The balance of the Stock Control account represents
the total value of all stock on hand.
Exam tips
COMPLETE the account. This means to balance it, but it
does not need to be brought down for the new period.
Students who bring the balance down for the next period
would not be penalised.
PD’s have talked about this - and my understanding was
that the wording to be used is something like "preparing
the ledger account for the next period" which means then
to bring the balance down.
Some teachers tell their students to always bring it down it helps them to work out if it is a debit or credit balance.
Stock Cards
Although the Stock Control account in the General Ledger provides
an important summary of all movements of stock in and out of the
firm, this account alone will not provide sufficient information to
manage stock effectively. Most trading firms will carry a number of
different lines of stock – different items, different colours, different
sizes. It is vital that the owner has detailed information relating to
each line of stock, from basics such as its description, location in
the warehouse and supplier; to financial information such as the
cost price of each unit, the number of units purchased and sold, and
the number of units on hand at any point during the period.
Information relating to individual lines of stock – including details
of stock transactions – recorded in stock cards. A trading firm will
only ever have one Stock Control account in the General Ledger,
but could have a huge number of stock cards, with one stock card
for every different line of stock.
Stock Cards
Review Questions 8.3
All q’s.
My dog (just thought
you should know)!
Recording Transactions
in Stock Cards
Remember that GST does not affect the valuation of
stock (nor the revenue earned from its sale).
Where cost prices are constant (see p. 168)
Purchases: means stock is coming in to the business.
Sales: means stock is moving out of the business.
Remember the stock card shows the cost price. The
amount recorded in the OUT value column is the Cost
of Sales figure for this transaction.
Recording Transactions
in Stock Cards
Where cost prices are changing.
Frequently, the cost price charged by the supplier will
change during the Reporting period. That is, the items
on hand may have the exact same selling price and be
identical in the eyes of the customer, but may have
different cost prices. These differing cost prices must
be recorded in the stock cards.
See example: 7 were purchased for $60 each, while the
8 new pots were purchased for $70 each – they must
be listed separately in the Balance column of the stock
card.
Recording Transactions
in Stock Cards
Unless stock is marked or identified in some way, it is not
possible to identify whether the customer bought pots worth
$60 per unit or $70 per unit. For this reason we must assume
that the stock which was purchased first will be sold first. This is
known as the First-in, first-out (FIFO) assumption. In the
example provided, it means we will assume that the 7 pots
valued at $60 each will be sold first, with the remaining 3 pots
(to make up the 10 pots sold) assumed to be from the $70 batch.
FIFO must be applied to all transactions recorded in the OUT
column, including sales, drawings and stock losses, but it is an
assumption only; it may not match the actual flow of goods (i.e.
customers may buy the pots which were purchased more
recently, rather than those which were first in).
You!
Review Questions 8.4.
Q’s 1, 3.
Stock Cards & Journals
Earlier, we noted that the price on the source
document will be the selling price, because the cost
price of the stock is not revealed to the customer. But
when cash sales are recorded in the Cash Receipts
Journal, and credit sales are recorded in the Sales
Journal, we must identify both the selling price and
the cost price. This makes the stock cards a vital
source of information when transactions are
recorded in the journals, because it is the stock cards
that will determine the cost price of each sale.
Stock Cards & Journals
See example pp. 171, 172.
The Physical Stocktake
Because the stock cards are updated after every transaction, they
provide a continuous (or perpetual) record of stock on hand. That
is, at any stage, the number of units shown in the Balance column
should reflect the actual quantity of stock on hand in the shop,
showroom or warehouse. However, just because the stock card
says there should be a certain number of items on hand does not
mean this will be the case. Therefore, the number of units on hand
should be checked periodically by conducting a physical stocktake.
A stocktake involves a physical count of the number of units of
each line of stock on hand. This count can then be compared
against the balances in the stock cards to not only check their
accuracy, but also detect any stock losses or gains.
If the stocktake and stock cards differ, assume the stocktake is
correct.
Stock Losses
Losses may occur for a number of reasons:
Theft
damage/breakages
undersupply from a supplier – a supplier has delivered
less stock than has been charged for
oversupply to a customer – stock to customers has
been supplied in excess of what they have been
charged for.
Recording a Stock Loss
A stock loss means that there is less stock available for
sale than is currently shown in the stock card and Stock
Control account, so the quantity missing (or lost) must be
recorded in the OUT column of the stock card, and as a
credit in the Stock Control account. In addition, the stock
loss itself is an expense – an outflow of an economic
benefit in the form of a decrease in assets (stock on hand),
leading to a decrease in owner’s equity – and this must
also be shown in the ledger.
See Figures 8.2 & 8.3. Note the reliance on Memo. Note
the Stock Loss expense account.
Stock Gains
Stock gains may be due to:
oversupply from a supplier – a supplier has sent us
stock for which we have not been charged
undersupply to a customer – we have charged a
customer for stock which we have not delivered (and
the customer has not realised!).
Stock gain is a good reminder that revenue does not
need to be cash; in this case stock is the asset that has
increased, with no effect on cash whatsoever.
Recording a Stock Gain
The quantity gained must be recorded in the IN
column of the stock card, and as a debit in the Stock
Control account. In addition, the stock gain itself is a
revenue item – an inflow of an economic benefit in
the form of an increase in assets (stock on hand),
leading to an increase in owner’s equity, and this
must also be shown in the ledger.
You!
Copy Stock & Information Flows p. 180, 181.
Reporting for Stock
Balance Sheet
Relevance says there is not much point identifying the
quantity of every line of stock in the Balance Sheet.
The only item that must be reported here is Stock
Control (current asset).
Reporting for Stock
Income Statement
Sales of stock will be the main source of revenue for a
trading firm.
It is important to note that Sales Revenue must be reported
separately to Other Revenues, such as Discount Revenue,
which do not relate directly to stock.
Note Cost of Sales may be only one of a number of expenses
related to stock.
The term Cost of Goods Sold (COGS) is used to describe all
costs incurred in getting goods into a condition and location
ready for sale. Note expenses such as Customs Duty and
Freight for example.
Reporting for Stock
Income Statement (cont.)
Gross Profit is the difference between Sales Revenue
and COGS. It is important for it to have its own heading
as owners need to judge the adequacy of mark ups.
Adjusted Gross Profit is used to notify of stock gain or
loss.
Benefits of
Perpetual System
Perpetual means continuous.
A continuous system of recording allows an owner to
know if stock needs to be reordered at any time (not
just the end of a period).
Fast and slow moving stock can be more easily
identified.
You!
Read ‘Where Have We Been?’