Opening & Closing inventory in SPL

DannyT90DannyT90 Surrey AAT Student, AATQB Posts: 160
Can anyone explain why opening inventory is a debit in P&L and closing is a credit.

Is it purely for the double entry of both accounts? I don't understand why opening inventory is an expense and closing is income.

Best Answer

Answers

  • crispycrispy Trusted Regular SouthamptonRegistered Posts: 452
    Hello,

    Opening Stock is a Dr and Closing a Cr in the P&L which is due to calculating your cost of sales. eg.

    Opening Inventory XX
    Add: Purchases xx
    Less: Closing Inventory (xx)
    = Cost of Sales

    The opening Inventory will be your closing inventory from the previous period (a Dr Balance)

    At the end the accounting period you would then Dr Closing Inventory (Balance Sheet) and Cr Closing Inventory (P&L).

    Ghanbari
  • DannyT90DannyT90 Surrey AAT Student, AATQB Posts: 160
    So Closing Inventory is a credit in the P&L, so the double entry of debit SFP can take place?
  • crispycrispy Trusted Regular SouthamptonRegistered Posts: 452
    Yep - At end of accounting period

    Dr Closing Inventory (Balance Sheet)
    Cr Closing Stock (P&L)
  • PeterCPeterC Registered, Tutor Posts: 146
    It might help to think what is happening in the Inventory account. The opening inventory value is in there, as a Dr balance (because it is an asset). This is no longer the correct value, so you need to Cr Inventory to remove it. Then you need to Dr Inventory with the value of the closing inventory.
    Clintm15
  • DannyT90DannyT90 Surrey AAT Student, AATQB Posts: 160
    That was my thinking but didn't realise why it was in the P&L account and not the SFP as an asset like you say.
  • PeterCPeterC Registered, Tutor Posts: 146
    The changes to inventory affect profit so the transactions I mentioned have their balancing entries in the P&L

    ie.
    Cr Inventory account with opening value (to remove it) and Dr P&L account
    Dr Inventory account with closing value and Cr P&L account
  • DannyT90DannyT90 Surrey AAT Student, AATQB Posts: 160
    Ok that makes sense. So really if in any doubt regarding the SPL, just go back to the original account and see what double entry has taken place?
  • MatthewSMatthewS Registered Posts: 4
    In don't understand this at all. My book says the closing inventory adjustment would be:
    Closing inventory - statement of financial position, debit
    Closing inventory - statement of profit or loss, credit.
    It's not clear to me what I'm Dr and Cr. What accounts does it refer to? Surely I'm not debiting the statement of financial position? I thought that was not an account so how can it be debited?
  • DannyT90DannyT90 Surrey AAT Student, AATQB Posts: 160
    The SFP is for assets, liabilities and capital. So assists are a debit and closing inventory is what the company owns, hence why it is a debit in the SFP.

    The other posts helped me to understand the fact closing inventory is a credit in the SPL because in the closing inventory account you debit the new amount and credit SPL, as it is a double entry account.

    Read the previous posts, they are very helpful.
  • MatthewSMatthewS Registered Posts: 4
    I have read the previous posts but to no avail I,m afraid. My book tells me to prepare a journal to account for a closing inventory adjustment:
    Closing inventory - sfp, debit
    Closing inventory - SPL, credit.
    My question is what accounts is it asking me to adjust?
    I understand that the closing inventory is an asset on the sfp and closing inventory's value being deducted from the years expenses in the SPL.
    If the SFP is only a list of balances, i.e. a list or sheet of credit and debit balances, then I fail to understand how it can be 'credited'.
    I'm beginning to think my book isn't explaining it properly. No where does is explain or introduce the concept of a closing inventory account.
  • DannyT90DannyT90 Surrey AAT Student, AATQB Posts: 160
    What book do you have?
  • PeterCPeterC Registered, Tutor Posts: 146
    Matthew is quite right. You can't debit the SFP.
    What they might be trying to convey is that once you have debited the closing inventory value to the ledger account "Inventory", then that value will appear in the SFP

    I suspect you might be reading about recording the transactions in an extended trial balance. For some reason (perhaps to make it seem more difficult than it really is), the line showing the debit of closing value to the inventory account is usually labelled "Closing inventory: financial position", or something like that.
    joosian
  • MatthewSMatthewS Registered Posts: 4
    Thank you PeterC, its beginning to make more sense now. My book is from Avado, where I'm reading the chapter Value Record and Inventory. I haven't got to reading about the extended trial balance yet; perhaps it'll make more sense then. As I say, I don't think it has explained the bit about accounting for closing inventory very well. It reads as if you're supposed to 'debit' the sfp, and 'credit' the SPL.
  • Clintm15Clintm15 Well-Known FarehamRegistered Posts: 247
    MatthewS said:

    Thank you PeterC, its beginning to make more sense now. My book is from Avado, where I'm reading the chapter Value Record and Inventory. I haven't got to reading about the extended trial balance yet; perhaps it'll make more sense then. As I say, I don't think it has explained the bit about accounting for closing inventory very well. It reads as if you're supposed to 'debit' the sfp, and 'credit' the SPL.

    It might be worth noting that the accounts that relate to the SPL are temporary accounts, therefore they are debited or credited to the SPL to clear the balances. The remaining accounts form the SFP. So when they say 'debit the SPF' they really mean one of the accounts that wasn't posted to SPL. I can see how that is horribly confusing.

    Most accountancy software lists the SPL accounts before the SPF accounts, so in my mind I just split the TB in half, rather than debiting and crediting to an imaginary SPL.
    AAT
    Level 2 - 2011
    Level 3 - 2012
    Level 4 - 2013

    ACCA
    F4 - Corporate Law - Dec 2015 (passed)
    F5 - Performance Management - Dec 2014 (passed)
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  • GhanbariGhanbari Registered Posts: 10
    edited January 2018
    The AAT book is just rubbish. It did not explained why. It just wrote that goes there, this goes there. Why?! That is important for learners.
  • CSan89CSan89 MAAT Posts: 206
    Which books as AAT don't produce their own?
    AAT Level 2&3 - 2016
    AAT Level 4 - 2017
    Personal Tax, Business Tax and External Auditing

    ACA/CTA -
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  • GhanbariGhanbari Registered Posts: 10
    edited February 2018
    Still I do not get the reason WHY?!!!
    it just need clear explanation. Without any other discussion about it. Answer to this question, JUST why I should put the bloody closing inventory in DR. and CR. WHY?
    Besides why opening inventory is DR. but CR is inventory account.
    Honestly, book from AAT is just RUBBISH.
  • joosianjoosian Registered Posts: 1
    So what happens to the extended trial balance sheet if you have an opening inventory account of say 20 and a closing inventory account of 50? What do we debit and what do we credit?
  • PeterCPeterC Registered, Tutor Posts: 146
    If you don't mind using opening inventory of £1,000 and closing inventory of £1,500, you can look at the example here: https://drive.google.com/file/d/1S8Tul2kDJnxIri6l69NHx8xru_TIn6iw/view
    (on the penultimate page)
  • Clintm15Clintm15 Well-Known FarehamRegistered Posts: 247
    joosian said:

    So what happens to the extended trial balance sheet if you have an opening inventory account of say 20 and a closing inventory account of 50? What do we debit and what do we credit?

    The balance on the inventory is sent to cost of sales along with purchases for the year, the closing inventory is then deducted from cost of sales.
    AAT
    Level 2 - 2011
    Level 3 - 2012
    Level 4 - 2013

    ACCA
    F4 - Corporate Law - Dec 2015 (passed)
    F5 - Performance Management - Dec 2014 (passed)
    F6 - Taxation - Dec 2013 (passed)
    F7 - Financial Reporting - Jun 2014 (passed)
    F8 - Audit & Assurance - Dec 2015 (passed)
    F9 - Financial Management - Jun 2015 (passed)
  • hal978hal978 LondonMAAT, AAT Licensed Accountant Posts: 166
    Ghanbari said:

    Still I do not get the reason WHY?!!!

    it just need clear explanation. Without any other discussion about it. Answer to this question, JUST why I should put the bloody closing inventory in DR. and CR. WHY?

    Besides why opening inventory is DR. but CR is inventory account.

    Honestly, book from AAT is just RUBBISH.

    Closing inventory goes on the Statement of Financial Position (debit because it is a current asset) and the SOPL (credit because it increases profit by reducing cost of sales).

    As crispy correctly pointed out:
    Cost of Sales = Opening inventory + Purchases - Closing inventory

    Anything that increases the Profit and Loss Account balance would be a credit (e.g. sales).
  • mcchocmcchoc East YorkshireRegistered, Tutor Posts: 39
    Think of it like this.

    A year ago we had some stuff = OPENING INVENTORY
    We bought some more = PURCHASES
    A Year Later, We Assume The Whole Lot Has Been Sold so becomes an EXPENSE ( P&L)

    Then we say - 'Just a minute - there's some left'

    We then value this closing stock which reduces the assumed expense (CR in P&L) as it hasn't gone missing after all and is still here --- and it becomes the new year's opening stock (DR on Balance Sheet)

    mergen
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