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FINANCIAL ACCOUNTING (LECTURE # 15) STOCK Stock is termed as “the value of goods available to the business that are ready for sale”. For accounting purposes, stock is of two types: • Opening stock • Closing stock Opening stock is the value of goods available for sale in the beginning of an accounting period. Closing stock is the value of goods unsold at the end of the accounting period. Journal Entries (Trading Concern) Journal entries for those goods which are bought for resale purposes are as follows: Purchase of goods: Debit: Credit:

Stock/Material Account Cash/Bank/Creditor

Consumption of goods Debit: Credit:

Cost of goods sold Stock

Payment in case of credit purchase Debit: Credit:

Creditors Account Cash/Bank

Types of stock (Manufacturing Concern) •

In case of manufacturer there are at least two types of Stock Accounts: o Raw Material Stock Account o Finished Goods Stock Account

Raw material Raw material is the basic part of an item, which is processed to make a complete item Finished goods Finished goods contain the items that are ready for sale, but could not be sold in that accounting period. Work in process In manufacturing concern, raw material is put in a process to convert it into finished goods. At the end of accounting period, some part of raw material remains under process. i-e. it is neither in shape of raw material nor in shape of finished goods. Such items are taken in stock as work in process.


FINANCIAL ACCOUNTING (LECTURE # 15) Flow of costs In manufacturing concern, Raw material stock is put into process. For accounting purposes, all value of stock and other manufacturing costs are charged to work in process account. When the process is completed and the goods are prepared, all the value of work in process is charged to finished goods account. The business sells finished goods for the whole accounting year. At the end of the year, goods that are unsold are deducted from cost of goods sold account. Journal Entries (Manufacturing Concern) Purchase of raw material Debit: Credit:

Stock/Material Account Cash/Bank/Creditor

Other direct costs incurred Debit: Credit:

Relevant cost/Expense Head Cash/Bank/Payables

Raw material issued and other costs allocated to production of units Debit: Credit:

Work in process Stock Material Account

Debit: Credit:

Work in process Relevant Expense Head Account

When production is completed Debit: Credit:

Finished Goods Stock Account Work in process account

When goods are sold Debit: Credit:

Cost of Goods Sold Account Finished Goods Stock Account

Return of purchased material There are two options for recording purchase material return • Option 1 Debit: Credit:

Goods Return Account Stock Material Account AND


FINANCIAL ACCOUNTING (LECTURE # 15) Debit: Credit:

Cash/Bank Account Goods Return Account OR If our supplier supplies us some other material in exchange of material returned. Then: Debit Credit:

Raw Material Stock Account Goods Return Account

In the first case above, cash is received in return of goods. In the second case, defective goods are exchanged with quality goods. That is why, we debited our stock account. Both entries are correct for return of purchased items. Option 2 Debit: Credit:

Cash/Creditor Account Stock Account

Following illustration will help you understand these entries. ILLUSTRATION # 1 Record the following transactions • Purchased goods for cash Rs, 10,000 • Purchased goods from Ali Brothers. worth of Rs. 20,000 • Sold goods having cost of Rs.15,000 • Returned goods to Ali Brothers. worth of Rs. 4,000 • Sold goods having cost of Rs. 5,000 • Paid to Ali Brothers. Rs. 10,000. Also ascertain • Cost of goods sold. • Value of closing stock. • Payable to Ali Brothers. SOLUTION First, we will pass journal entries Particulars Stock Account Cash Account Goods purchased for cash

Amount(Dr.) Rs.

Amount(Cr.) Rs.

10,000 10,000


FINANCIAL ACCOUNTING (LECTURE # 15) Particulars

Amount(Dr.) Rs.

Amount(Cr.) Rs.

20,000

Stock Account

20,000

Ali Brothers. Goods purchased from Ali Brothers. Particulars Cost of goods sold

Amount(Dr.) Rs.

Amount(Cr.) Rs.

15,000

Stock Account

15,000

Goods sold whose cost was Rs. 15,000 Particulars

Amount(Dr.) Rs.

Amount(Cr.) Rs.

4,000

Ali Brothers.

4,000

Stock Account Goods returned to Ali Brothers. Particulars Cost of goods sold Stock Account Goods sold whose cost was Rs. 5,000

Amount(Dr.) Rs.

Amount(Cr.) Rs.

5,000 5,000


FINANCIAL ACCOUNTING (LECTURE # 15) Particulars

Amount(Dr.) Rs.

Amount(Cr.) Rs.

10,000

Ali Brothers. Account

10,000

Cash Account Paid to Ali Brothers. PAYABLE TO ALI BROTHERS Date

Particulars Goods returned Paid cash BALANCE Total

Ali Brothers Account Particulars Code Amount Date # Rs. (Dr.) 4,000 Purchased goods

Code Amount # Rs. (Cr.) 20,000

10,000 6,000 20,000

Total

20,000

COST OF GOODS SOLD Date

Particulars Goods sold Goods sold

Total

Cost of goods sold Account Particulars Code Amount Date # Rs. (Dr.) 15,000 5,000

20,000

Code Amount # Rs. (Cr.)

BALANCE

20,000

Total

20,000


FINANCIAL ACCOUNTING (LECTURE # 15) VALUE OF CLOSING STOCK

Date

Stock Account Code Amount Date # Rs. (Dr.) 10,000

Particulars Purchased goods for cash Purchased goods from Ali Brothers.

20,000

Total

30,000

Particulars

Code Amount # Rs. (Cr.) Goods sold 15,000 Returned to Ali 4,000 Brothers Goods sold 5,000 6,000 30,000

BALANCE Total

ILLUSTRATION # 2 •

Using the following data calculate the Cost of Goods Sold of XYZ Co. Stock levels Opening Rs. Closing Rs. Raw material 100,000 85,000 Work in process 90,000 95,000 Finished goods 150,000 140,000 o Purchase of raw material during the period Rs. 200,000 o Paid to labour Rs. 180,000 out of which Rs. 150,000 used on production. o Other production costs Rs. 50,000

SOLUTION Labour Account

Raw Material Stock Account Debit

Credit

O/S

100,000

Purchases

200,000 WIP

Cost

300,000 Total

50,000 Charge

50,000 Total

180,000Total

180,000

Debit

Credit 50,000 O/B

Credit 90,000

Raw M

215,000

Labor

150,000F/G

410,000

50,000C/B

95,000

505,000Total

505,000

O/H Total

150,000

Work in Process Account

Other Costs Account Paid

180,000Charged

85,000

300,000 Total

Debit

Credit

215,000

C/S Total

Debit

50,000 Total


FINANCIAL ACCOUNTING (LECTURE # 15) Finished Goods Stock Account Debit

Credit

O/S

150,000 COS

420,000

WIP

410,000 C/S

140,000

Total

560,000 Total

560,000

Cost of Goods Sold Account Debit F/G

Credit

420,000

In the Raw Material Account, the debit side contains: o Opening balance 100,000 o Purchases 200,000

On the credit side, closing balance of Rs. 85,000 is shown along with the balancing figure of Rs. 215,000 which is charged to work in process OR WIP account through the following entry: Debit: Credit:

Labour cost of Rs. 180,000 is given, out of which Rs. 150,000 is charged to production. (Remaining cost of Rs. 30,000 will be explained in some later stage). That means Rs. 150,000 are charged to work in process OR WIP account through the following entry: Debit: Credit:

Work in process OR WIP Account Labour Cost Account

Other costs of Rs. 50,000 is also charged to work in process OR WIP account through the following entry: Debit: Credit:

Work in process OR WIP Account Raw Material Account

Work in process OR WIP Account Other Costs Account

Work in process account has the opening balance of Rs. 90,000 and closing balance of Rs. 95,000. After charging all the above mentioned accounts to WIP. Balancing figure of work in process of Rs. 410,000 is charged to finished goods account through the following entry: Debit: Credit:

Finished Goods Account Work in process Account


FINANCIAL ACCOUNTING (LECTURE # 15) •

Finished goods account has the opening balance of Rs. 150,000 and closing balance of Rs. 140,000. After charging WIP account to Finished goods, the balancing figure of Rs. 420,000, is charged to cost of goods sold account through the following entry: Debit: Credit:

Cost OF Goods Sold Account Finished Goods Account


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