Opening & Closing inventory in SPL

DannyT90

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.

crispy

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).

DannyT90

So Closing Inventory is a credit in the P&L, so the double entry of debit SFP can take place?

crispy

Yep - At end of accounting period

Dr Closing Inventory (Balance Sheet)
Cr Closing Stock (P&L)

PeterC

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.

DannyT90

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.

PeterC

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

DannyT90

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?

PeterC

That certainly helps some people

MatthewS

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?

DannyT90

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.

MatthewS

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.

DannyT90

What book do you have?

PeterC

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.

MatthewS

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.

Clintm15

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.

Ghanbari

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.

CSan89

Which books as AAT don't produce their own?

Ghanbari

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.

joosian

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?

PeterC

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)

Clintm15

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.

hal978

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).

mcchoc

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)

Ash_Weston

sorry to reignite this but how do we put the closing inventory into the inventory account?