I'm currently in the process of taking my level 3 manual bookkeeping, and I've got a bit stuck on how to deal with damaged stock.
For example say I'm doing the books for a club who sell t-shirts to members for £15 each, and the cost to the club is £10 per shirt. Now a case of 25 shirts has got some water damage, and therefore the club decides to sell the damaged shirts for £5 each.
Q: What effect does this have on the value of the closing stock?
The original value for the stock was 25 * 10 = £250 As the sale price is now below the original cost price do I use the new sales price for the stock value? e.g. 25 * 5 = £125
The other question is, do I need to add any entries into the accounts to show that basicly £125 has been written off the value of the stock?
Thanks
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You've got a lot of choices in your life. If getting out of bed in the morning is a chore and you're not smiling on a regular basis, try another choice.
You are correct, stock is valued at the lower of (a) cost and (b) net realisable value. As the selling price is now lower than cost, that is what you should use.
Re your second question, not sure about the taught way of dealing with it, but from a 'real life' perspective, I would not as it your cost of sales will automatically increase by £125.
The whole problem was that it has been taught, but I can see what you mean with the increase of the cost of sale.
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You've got a lot of choices in your life. If getting out of bed in the morning is a chore and you're not smiling on a regular basis, try another choice.
....not sure about the taught way of dealing with it, but from a 'real life' perspective, I would not as it your cost of sales will automatically increase by £125.
Hi Nick
Just curious, as to how you would write down the decrease in stock value.
It would just fall through into the cost of sales. In the example, original stock was £250 and water damaged stock was £125. If this was the only stock, then those would be the figures I would use. If there were no sales in the period, op stock = £250, clos stock = £125, so cost of sales = £125, and therefore gross profit = -£125.
I've seen it shown as an overhead so that the margin doesn't get compromised, so dr overhead, cr cos, but I personally think it should be shown as a reduction in margin.
