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  • FRA: Stock: Opening and Closing and the Trial Balance

    Hello everyone

    What figure is normally entered into a trial balance, the "opening stock" value or the "closing stock" value?

    To me, the logical thing would be to enter the "closing stock" value into the trial balance when preparing year end final accounts, because the "closing stock" figure would reflect the value of stock for the year end.

    However, according to a book I'm reading the "opening stock" figure is entered into the trial balance and the "closing stock" figure is entered as small print outside of the trial balance at the bottom of the trial balance page. Does anyone know why this is?
    Regards

    Reader

  • #2
    Up
    Regards

    Reader

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    • #3
      Also, why is "closing stock" a Credit in the profit and loss account? I understand why it is a Debit in the balance sheet (it's a current asset), but can't quite get my head around why it's a credit in the PNL.
      Regards

      Reader

      Comment


      • #4
        Also, why is "closing stock" included in adjustments of the extended trial balance (ETB)?

        And before figures for purchases, sales, wages etc are posted into the PNL A/c of the extended trial balance (ETB), do they have to be written off in the nominals first? E.g. Debit Sales A/c and then Credit Sales in PNL A/c in the ETB?
        Regards

        Reader

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        • #5
          Stock
          What is stock? = Stock is Purchases.
          Therefore stock value is reflected in the Goods Purchased account.
          .
          What is closing Stock?
          Closing stock is UNSOLD goods purchased during the year.
          .
          Do we need a closing stock account?

          No, because the closing stock figures are already included in the total of Goods Purchased account. We do not need the double counting of Purchases.

          The closing stock is part of purchases and therefore do not need to appear on the TB. A note needs to be made so that a true cost of goods sold can be ascertained.

          This will be reflected as a CREDIT balance in Profit and Loss account in order to reduce the DEBIT balance of purchases
          .
          What is Opening Stock?
          Opening stock is Last year’s UNSOLD goods.
          .
          Do we need an opening stock account?

          Yes, because the opening stock figures are NOT included in any other accounts. Therefore at year end, we need to Debit Closing Stock account (changed to Opening Stock account at the start of new Accounting Year) and Credit Goods Purchased account.

          If we do not transfer closing stock out of Goods purchased a/c, we are not applying the accruals concept. (over stating the value of goods sold)

          The opening Stock (last year’s unsold purchases) will appear on the opening trial balance on the debit side and will be classified as current assets.
          .
          Extended TB
          In order to ascertain the correct amount of purchases sold and an adjustment figure has to be entered on the CREDIT side in the adjustment column of extended TB. The Double entry for this treat the unsold stock as company’s asset – DEBIT balance

          DEBIT the Closing Stock BS (Asset) appear in Balance Sheet
          CREDIT Closing Stock P&L – Reduce purchases in P&L a/c

          I hope this helps you undestand the closing stock

          Comment


          • #6
            Thanks a lot sdv- you're a legend. The point you made about opening stock and purchases got to the heart of the problem I was having.

            Two things I don't understand:

            1) The credit entry in the PNL A/c for Closing Stock? Why would an accountant want to reduce debit balances/purchases? Although I completely agree that closing stock should be a debit entry into the balance sheet (because that is a current asset).

            2) The accruals concept has been mentioned, but I think that the prepayment concept should have been mentioned instead because the purchases had been paid for and the paid for closing stock needs to be put into the next financial next (the accruals concept is to do with items that haven't been paid for yet).
            Regards

            Reader

            Comment


            • #7
              Originally posted by reader View Post
              1) The credit entry in the PNL A/c for Closing Stock? Why would an accountant want to reduce debit balances/purchases? Although I completely agree that closing stock should be a debit entry into the balance sheet (because that is a current asset).

              2) The accruals concept has been mentioned, but I think that the prepayment concept should have been mentioned instead because the purchases had been paid for and the paid for closing stock needs to be put into the next financial next (the accruals concept is to do with items that haven't been paid for yet).
              It's because you're working out the cost of goods sold. Which is:

              goods in stock at the start of the year
              plus goods purchased during the year
              less goods in stock at the end of the year

              equals cost of goods sold during the year. "What an accountant wants" is to work out how much an item is that doesn't necessarily actually appear on its own anywhere in the accounts.

              Also, prepayments and accruals are both examples of the matching concept being put into practice.

              Comment


              • #8
                Thanks bookworm- I get it now; the credit entry in the PNL for closing stock is the accountant's way of calculating the net revenue on purchases sold (i.e. opening + purchases - closing = net revenue). Great explanation.

                The only thing I don't understand is why closing stock is entered into the adjustments columns of the ETB; why isn't the DR entry into the balance sheet and CR entry into the PNL enough? Why does there have to be adjustments entries as well?
                Regards

                Reader

                Comment


                • #9
                  Originally posted by reader View Post

                  1) The credit entry in the PNL A/c for Closing Stock? Why would an accountant want to reduce debit balances/purchases? Although I completely agree that closing stock should be a debit entry into the balance sheet (because that is a current asset).

                  2) The accruals concept has been mentioned, but I think that the prepayment concept should have been mentioned instead because the purchases had been paid for and the paid for closing stock needs to be put into the next financial next (the accruals concept is to do with items that haven't been paid for yet).
                  Don’t confuse Accruals with Accruals concept.
                  .
                  Accruals are expense incurred but not yet paid for.
                  .
                  Accruals concept is the foundation of the accounts/ accounting systems as we know it. Without it the accounts can not be prepared to the required/expected accounting standards.
                  .
                  The Accruals concept basically says that “all income and expenses must match the accounting period to which it relates to,”
                  .
                  Some of the adjustments required to the accounts/expenses under Accruals concepts are;

                  Depreciation
                  Accruals – expense incurred but not yet paid for
                  Prepayment – Expenses paid for in the current accounting period but related to the next accounting period.
                  Stock – purchases bought in this accounting period but sold in the next accounting period.
                  .
                  .
                  The double entry of closing the purchase a/c is
                  .
                  Debit P&L and
                  Credit Purchases.
                  .
                  This will transfer ALL the purchases to P&L. By applying the accruals concept; we should only charge the actual amount of purchases sold. Therefore we need to reduce the purchases in the P&L account. This is achieved by
                  .
                  Credit P&L
                  Debit Closing Stock (unsold purchases)

                  Comment


                  • #10
                    Thanks sdv- another great explanation; I can't wait until I have your level of knowledge.
                    Regards

                    Reader

                    Comment


                    • #11
                      Closing and stock adjustements in ETB

                      I am really struggling getting my head round this, so any help would be appreciated. i am currently doing a unit 5 assignment where i have to produce an ETB for 30/6/05. the figure for stock at 1/7/04 is £11927 and i have been told stock at close of business was valued ay £13,551
                      Purchases figure is £82,350

                      any help would be great as ive been told briefly that closing stock has to be adjusted in the adjustemsn column of the ETB but i am unsure of how to.

                      sorry for sounding dumb, im probably missing sth really simple

                      thanks

                      Comment


                      • #12
                        It goes in the adjustment columns on both debit and credit side. From there it goes to the Profit and Loss account as a credit and to the Balance Sheet as a debit.

                        The reason being is that you use the opening stock in the profit and loss account and deduct the closing balance of the cost of sales figures. In the balance sheet however it is an current asset and therefore on the debit side.

                        Hope that helps.
                        Rinske
                        Daydreaming

                        An entirely underestimated force of production

                        Comment


                        • #13
                          Hi Rinkse, i do understand that it goes in the adjustments column in both the Dr and Cr side, but what i was unsure of was what figure is supposed to go in the adjustments column?

                          if in my assignment i have been told stock at close of business was valued at £13,551, thwen would that be the closing stock figure to go on both sides of the adjustment columns or is it sth else?

                          sorry its just sth that someone told me today that is confusing me, as we had both been working on the same assignment, but my friend told me she had adjusted her closing stock figure

                          thanks in advance

                          Comment


                          • #14
                            Originally posted by yorkshirelass View Post
                            Hi Rinkse, i do understand that it goes in the adjustments column in both the Dr and Cr side, but what i was unsure of was what figure is supposed to go in the adjustments column?

                            if in my assignment i have been told stock at close of business was valued at £13,551, thwen would that be the closing stock figure to go on both sides of the adjustment columns or is it sth else?

                            sorry its just sth that someone told me today that is confusing me, as we had both been working on the same assignment, but my friend told me she had adjusted her closing stock figure

                            thanks in advance

                            Hi yorkshirelass,

                            Yes, your closing stock would be valued at the close of business. As soon as you see the words "close of business" you must think "Closing Stock". The 13551 would be in your stock account at the end of the period on your P&L it will sit there as a DEBIT there until you transfer it to the Balance Sheet.

                            You need to transfer this "CLOSING BALANCE" or "CLOSING STOCK" from this period to the next. If you DO NOT transfer it, it will become an expense of the current period, which will not be correct. To transfer it you need to do the following.

                            You need to take it out of the stock account on the P&L and put it in the Closing stock account on the Balance sheet. You do this by CREDITING the stock account on the P&L and DEBITING the closing stock account on the Balance sheet.

                            What you are saying is that the closing stock is not an expense of this period but is an expense of the next period. It then sits on the balance sheet, then it is transferred back to the P&L at the start of the new period on 1st July 2005 when you get that far.

                            DO NOT get confused between the Stock EXPENSED or INCURRED for a particular period and any payment that was made to puchase the stock in cash or by way of the bank etc.


                            Have you got any further questions regarding this?
                            Last edited by RichardK; 20-01-10, 20:25.
                            AAT Full Member

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                            • #15
                              yes that does make sense, what i really needed clarifaction on was, the figure for closing stock that i need to put in the adjustments for closing stock. would it be £13,551 as thats what i was told the stock was valued at close of business, so i would CR closing stock p&l
                              and DR Closing stock Balance Sheet with that figure.

                              is that correct or am i totally missing sth here?

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