i am trying to figure out if my accounting treatment of stock from opening to closing is correct. I am deducting negative GIT and outstanding PO's. Am i right to reduce the GP by debiting the P&L by the difference of opening and closing stock?
I can t seem to get my hear around why i am reducing the GP!! I have reduced the stock value, by selling stock during the month, but the stock left is an asset. So should that not be a credit?? I have the following figures as an example, any pointers will be greatly appreciated!
Stock is merely a period end adjustment to your figures.
If we take a simple example
Say you buy goods for £1 each and you buy 10
Say you sell goods for £2 each and you sell 6
Your sales will be £12 (£2 x 6). And your purchases are £10 (£1 x 10)
So before adjusting for stock your profit is £2 (£12 sales less £10 purchases)
But that cant be right as you are making £1 on each sale and you have sold 6 so your profit should be £6.
This is where the stock adjustment comes in.
Dr Stock (BS) £4 Cr Stock (P&L) £4
So your cost of sales is now £6 (£10 purchases less £4 stock) so your profit is now
£12 - £6 (cost of sales) = £6.
You are also carrying forward £4 work of stock to the next period.
Say you buy another 10 items for £1 and this time you sell 11 in the period. Which you can do as you have a total of 14 items (4 brought forward plus 10 bought in period).
This time your profit before adjusting for stock is £22 sales - £10 purchase = £12 (which cant be right as you have sold 11 for a profit of £1 each so profit should be £11). Off course stock is still to be adjusted
First need to journal out your opening stock
Dr Stock (P&L) £4 Cr Stock (BS) £4
Then need to journal in closing stock. You started with 4 items you bought 10 and sold 11 so you should be left with 3.
Dr Stock (BS) £3 Cr Stock (P&L) £3.
Your accounts will now look like
Sales £22
Less Cost of Sales
Opening Stock £4
Add Purchases £10
Less Closing Stock £3 £11
Gross Profit £11
Which is right as you have sold 11 items making £1 on each. You also have a stock of £3 in the balance sheet.
Thank you Mark for your comprehensive reply. The way you have explained this makes sense.
But what happens if you have a range of products you are buying and selling. So your stock is a mixture of different products and at different cost. So would i take my valuation of stock at that period in total and take off outstanding purchase orders and stock which has been invoiced but not delivered (negative GIT) and also take off my stock at the begining of period to get a net figure which will be posted to the P&L.
In my case here stock has reduced ie it was 39k now valued at 20k taking into account the negative GIT and PO's outstanding therefore am i right to debit the P&L by 19K?
