Extended Trial Balance- inventory adjustments.

shaunpoll
shaunpoll Registered Posts: 34
in AAT Level 3 (Level 6 in Scotland)
Can someone please explain in steps closing inventiry & opening inventory.

I have read that : opening inventory is a debit in the SPL, and a credit in the SOF. Closing inventory is a credit to the SPL & a debit to the SOFP. I don't understand this at all:-1:
Someone please help?

Comments

  • CeeJaySix
    CeeJaySix Registered Posts: 645
    Lets suppose you start the year with no stock.

    During the year you buy 5,000 of goods - dr cost of sales, cr bank.

    At the year-end you still have 1,000 in stock, but at the moment you have a 5,000 expense. This clearly isn't right as the SPL shows expenses relating to trade in the period - if you still have the stock, the expense will relate to the next period when it is sold.

    Therefore you debit inventories in the SOFP to show the asset of 1,000 stock at the year-end, and credit the SPL (closing stock, which is within cost of sales) to remove the part of the expense which does not relate to the current period.

    When closing down the ledgers at year-end, this credit to the SPL will become part of profit and taken to reserves. Thus you will have no stock entries in the SPL at the start of the new year, and an asset of 1,000. However (assuming you sell that stock in the new period), the expense of that stock must be recognised in the SPL. Therefore you debit opening stock in cost of sales, and credit stock in the SOFP. You now have all the expenses in the right place, and a nil stock balance in the SOFP to start again.

    Think of it like a prepayment of costs if it helps...

Categories

Privacy Policy