FRA: Stock: Opening and Closing and the Trial Balance

reader

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?

reader

Up

reader

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.

reader

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?

sdv

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

reader

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).

Bookworm55

reader wrote: »

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.

reader

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?

sdv

reader wrote: »

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)

reader

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

yorkshirelass

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

Rinske

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

yorkshirelass

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

RichardK

yorkshirelass wrote: »

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?

yorkshirelass

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?

RichardK

yorkshirelass wrote: »

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?

Yes,
If you are told that the figure for closing stock is £13551 then you need to CR the adjustments column with that figure so that it lines up with the "Closing stock P&L" account on the extended trial balance and DR the adjustments column in the correct line which lines up with the "Closing stock Balance sheet" account on the extended trial balance like this............



................ADJUSTMENTS COLUMN
.........................DR.........CR
Closing stock P&L...........13551
Closing Stock B/S 13551


I have had to put the dots in for spacing

IMPORTANT: THEN COPY THESE NUMBERS ACROSS TO THE P&L AND B/S SECTIONS OF THE ETB (Extended trial balance). PUT CR TO THE CR AND DR TO THE DR WHEN YOU COPY IT TO THE THE P&L AND B/S PARTS OF THE ETB.

In this way you are still taking out stock from the P&L and transferring it to the balance sheet. In your case you are working from a trial balance, Which means the adjustments column is allows you to keep track of the numbers as you transfer them between BS and P&L. The bottom of the adjustments coloumn MUST balance.

Normally the adjustments coloumn is only used to TRANSFER the figures between the BS and P&L because some things on the P&L belong to the next accounting period and not this one.

Does this clarify things?

Rinske

Sorry, I misunderstood your question in that case.

If they say that the closing stock is valued at 13,551, then that would be the closing stock. Purchases should not change the value. There might be some information in the rest of the assignment where it says it needs adjusting, but I can't judge that.

It might be something on the lines of some of it had to be sold at scrap value or has to be scrapped, because it went off or is damaged. In that case the closing stock value might have to be adjusted.

Hope that helps!

yorkshirelass

Hi thank you

that has cleared things up for me, and as far as i am aware i was doing it right in the first place, but i got myself in a state and doubted myself, so thanks for the help.

one more question if you dont mind, its been a long time since i have done any work on journals, but the example in my question is sth i have not come across and i cant seem to find any examples in my workbooks

this is the info i have been given, in my ledger balances i have been given a balance of £5144 for carriage costs, then in the notes it says

a) Of the carriage costs, £2211 represents carriage inwards and £2933 represents carriage outwards

Then i am told that i have to prepare a journal to corect the arror in a) above

i have no idea where to start on this, so any help??

RichardK

yorkshirelass wrote: »

Hi thank you

that has cleared things up for me, and as far as i am aware i was doing it right in the first place, but i got myself in a state and doubted myself, so thanks for the help.

one more question if you dont mind, its been a long time since i have done any work on journals, but the example in my question is sth i have not come across and i cant seem to find any examples in my workbooks

this is the info i have been given, in my ledger balances i have been given a balance of £5144 for carriage costs, then in the notes it says

a) Of the carriage costs, £2211 represents carriage inwards and £2933 represents carriage outwards

Then i am told that i have to prepare a journal to corect the arror in a) above

i have no idea where to start on this, so any help??

Hi,
I am busy working now but I will give you a detailed answer later taday if there is no one else in the forum to help you.

However, think about this............

Draw 2 T accounts, 1 for Carriage In and the other for Carriage Out and put the correct figures in these two accounts 2211 and 2933.

The clue here is this is HOW YOU WANT THE TWO ACCOUNTS TO LOOK when you have finished your journal entries. You need to put entries in the journal to get the expense out of the carriage account and into these two accounts.

I presume the the 5144 is in a general account called Carriage.

Let me know how you get on.

Regards
Richard

Rinske

Usually carriage inwards is part of the cost of sales (direct materials for manufacturing etc) and you might need to journal out the £ 2,211 from carriage to the purchases accounts. It should be given in the assignment where it should go instead and the best advice I can give is to check where what is supposed to go!

If you draw up the T accounts for carriage and purchases (or where it has to go) and put the total carriage in it as opening balance, you should then make a contra booking (on the other side) for the 2,211 and because it is double entry, you will then have to book it into the purchases (or where ever it needs to go in the end) on the opposite side again.

So if carriage is a debit entry, you will contra it out by putting it on the credit side, then put it debit in the purchases.

If you made this then to write up the journal, all you need to do is put those two entries in the journal format.

yorkshirelass

im not really sure, been ages since i did any thing on journals, but a shot in the dark

DR Carriage inwards £2211
DR Carriage Outwards £2933
CR Carriage £5144
dont think thats right though, as that seems to simple?

RichardK

yorkshirelass wrote: »

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?

Hi yes, that is correct.

You need to CR the P&L so that you are in effect taking the stock out of the p&l and DR the balance sheet so that it stays there until the next period.

The way to visualise this is to put a piece of transparent plastic sheet over the adjustments column, and then write the closing stock figures on it in black felt pen. Then shift the plastic sheet right so that the credit figure lines up with the P&L and the shift the sheet again so that the Debit fiure lines up with the Balance sheet.

This method will help your understanding of the transfer beween P&L and Balance sheet.


The adjustments column just keeps track of any adustments you make. It is just a reminder of what to do and the advantage is that it needs to balance. If it doesent you will have an error in the adjustments column.

I hope this helps.

Rinske

yorkshirelass wrote: »

im not really sure, been ages since i did any thing on journals, but a shot in the dark

DR Carriage inwards £2211
DR Carriage Outwards £2933
CR Carriage £5144
dont think thats right though, as that seems to simple?

If it was indeed carriage outwards and inwards that seems correct to me.