Goods that were purchased
for £2,000 are sold on 3 May for £3,712. The asset of stock has been reduced and
must therefore be credited with £2,000. The sale value of £3,712 is irrelevant for
the stock account, though of course the necessary bookkeeping entries must be made
elsewhere. The £2,000 must be debited to the profit and loss account, or trading
account, which will reflect a profit of £1 ,712 on the sale. The entry to the profit
and loss account may be confusing but it is explained in Chapter 7.
3 May Profit and Loss
5 May Stock Account 2,000
Sale of stock on credit
Goods that were purchased
for £4,000 are sold on credit to Litman Ltd on 5 May for £8,199. The asset of stock
has been reduced and must therefore be credited with £4,000. The sale value of £8,199
is irrelevant for the stock account, though of course the necessary bookkeeping
entries must be made elsewhere. The £4,000 must be debited to the profit and loss
account or trading account, which will reflect a profit of £4,199 on the sale. The
entry for the profit and loss account may be confusing but, again, it is explained
in Chapter 7.
5 May Profit and Loss
Profit and Loss Account
5 May Stock Account 4,000
The above is an outline
of the bookkeeping entries but, other than in a very small and simple business,
it is likely to get complicated. As stated earlier, there may well be many different
accounts to record separately different categories of goods bought in for resale,
and perhaps for different types of raw material, different categories of work in
progress and different categories of manufactured goods. The sum of all these accounts
will (or at least should) equal the total value of the stock held by the business.
In the dark ages, before
computers and when top football players earned not much more than the people who
paid to watch them, it was usual for manual stock cards or bin cards to be maintained,
and it is just possible that you will come across them, though it is much more likely
that a computerised system will do the same job, perhaps using different accounts
in the nominal ledger and perhaps maintained outside the nominal ledger. Whatever
the system it will book stock in and out and keep a running total of what is held.
As well as needed for bookkeeping purposes this is needed for re-ordering and management
A modem computerised
system is likely to be integrated into procedures geared for automatic re-ordering,
payment of suppliers, raising sales invoices to customers and providing information
to facilitate management control. Even the most modem system depends on the input
of data and the sources of the data are likely to include:
This is notification
from a supplier that goods will be delivered in response to an order. It may be
used as confirmation that an order has been processed.
This usually accompanies
goods when they are delivered. It may be used to update the records or as the trigger
for a goods received note made out by the receiving business. It may well have a
part in the process of approving suppliers’ invoices for payment, and auditors are
likely to consider it important.
Stores requisition note
This is, as its name
suggests, a request to issue goods from stock. It should, of course, be authorised
in accordance with an agreed procedure.
Millions of words, to
say nothing of accounting standards, have been written about the correct ways in
which stock should be valued. It is a very big subject and this chapter only has
room for just one of the principles.
The first and most important
principle is that stock should be held in the books at the lower of cost or net
realisable value. This is almost universally accepted practice, though businesses
in trouble may be tempted to cheat. This means that even if stock has genuinely
increased in value, the increase should not be reflected in the accounts. The reason
is hopefully obvious, namely it might never be sold. There is probably an empty
shop somewhere near you where, sadly, the owner has had to close down and sell off
the stock below cost price. It happens to large businesses too.
On the other hand, if
the realisable value of an individual item or category of stock has fallen below
the price that was paid for it, its value in the accounts should be reduced. This
can happen for a number of reasons, changing fashion being an obvious example. Obsolescence
is another possibility. Not all that many years ago a typical desktop calculator
cost fifty times as much as today’s models. Furthermore, it was fifty times the
size and had only a fraction of the calculating capacity. It was a mistake to hold
such stock for long without writing it down. I know because I was Financial Controller
of a company that sold them.
It may also be necessary
to write down the value of stock for other reasons. These can include theft, damage,
loss, shrinkage and evaporation. A decision to write down the value of stock should
be recorded in detail in a journal entry. The following is an example of such a
journal with the consequent bookkeeping postings: