Carriage inwards/valuation of inventory

BesarB

Can somebody weigh in on this please. IAS2 specifies what represents cost when valuing inventory that is all costs incurred in bringing inventory to its present location and condition. So if we buy 2 items costing £10 each and delivery cost being £1 then the accounting treatment of this transaction should be debit purchases £21/credit cash account £21. Then if we sell one item for £15 our trading account would be Sales £15 minus cost of sales £10.50(cost+delivery)= Gross profit of £4.50 and our closing inventory being valued at £10.50. What I don't get is why is there a carriage inwards account, according to IAS2 there should not be as it takes away the delivery cost from inventory value hence the inventory does not include the delivery cost. Please help!!!

CeeJaySix

You're missing an entry.

Purchase:
Dr purchases £20, dr carriage in £1 (all in cost of sales), cr cash £21 (assume cash purchase).

Dr stock on the balance sheet £21, cr closing stock in the P&L £21.

At this point your cost of sales is zero, as the stock entry cancels the purchase/carriage in cost. You haven't sold anything, so this is correct. You have an asset on the balance sheet of £21 stock.

Then process the sale:
Dr bank, cr sales £15.
Dr closing stock (P&L), cr stock (BS) £10.50.

Your cost of sales now shows £10.50, made up of:
Purchases £20
Carriage in £1
Closing stock £(10.50)

This gives you your profit figure.

In a manual stock system all stock entries for a period are likely to be combined in one adjustment rather than doing it for every purchase or sale (ie. your stock values in the accounting system aren't 'live'); just the purchase and sale would be recorded (which is what you have done in your post).

BesarB

CeeJaySix! Thank you so much!!