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Closing Stock, Opening Stock :: Recording Journal Entries

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... From Page 11

Recording the Value of Closing Stock

 
 
The valuation of closing stock and recording of the value of closing stock in the books are two different aspects.

After ascertaining the value of the closing stock, it is to be brought into the books of accounts.

The basic purpose of accounting is derivation of information and the more information we need the more the accounting heads we need to maintain.

For each additional piece of information that we intend to derive from the books of accounts, we create and use an additional ledger account.

Thus, to derive the information relating to Closing Stock we maintain a real account by name "Closing Stock a/c".

The "Closing Stock a/c" gives the information relating to the value of the stock (as an asset) unsold at the end of the accounting period.

• Recording

The value of closing stock is not available ready hand in the books of accounts. It is specifically ascertained at the end of the accounting period by physical verification of stock and its valuation at cost or market price whichever is lower.

Thus, by recording the journal entry for Closing Stock, we are in effect bringing the value of Closing Stock into books.

» Debit : Closing Stock a/c

Accounts representing assets are real accounts and show a debit balance. Since by recording the journal entry for bringing the value of closing stock into books, we are creating an asset by name "Closing Stock a/c" we debit that account.

[Closing Stock a/c – Real a/c – Debit what comes in.]

» Credit :

There are three possible variations in the account to be credited for recording the value of closing stock.
  1. Trading a/c
  2. Goods Consumed a/c
  3. Purchases a/c

The ledger account to be credited is dependent on which account is used to reflect the value of cost of goods sold as well as the time of recording the entry.

Recording Closing Stock » Crediting Trading a/c

 
 

Total value of goods = Opening Stock + Purchases + Direct Expenses.

Particulars Amount Amount
Opening Stock
(+) a) Purchases (Cost Value)
     b) Direct Expenses
Total Value of Goods
(−) a) Closing Stock (Value)
     b) Stock Unused for Trading
Cost of Goods Sold

2,48,000
  54,000

  36,000
  14,000
20,000

3,02,000
3,22,000

  50,000
2,72,000

» Direct Incomes/Expenses transferred to Trading a/c

At the end of the accounting period, the balances (amounts) in all the ledger accounts which represent expenses which go into the value of goods/stock (direct expenses), are closed by transfer to the "Trading a/c".

This would result in the "Trading a/c" being debited with the total value of goods/stock. Show/Hide

DrTrading a/cCr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Opening Stock
To Purchases
To Direct Expenses
20,000
2,48,000
54,000
   
  3,22,000   3,22,000

» Revealing/Reflecting Cost of Goods Sold

To reflect/reveal the cost of goods sold, the value of closing stock is to be deducted from the total value of goods.

Thus the value of closing stock has to be credited to the "Trading a/c" which has the total value of goods/stock existing in it as a debit balance. Show/Hide

DrTrading a/cCr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Opening Stock
To Purchases
To Direct Expenses
20,000
2,48,000
54,000
By Cost of Goods Sold c/d
By Closing Stock
2,86,000
36,000
  3,22,000   3,22,000
To Cost of Goods Sold b/d 2,86,000    

• Journal/Ledger

The Journal entry for recording the value of closing stock in such a case would be

Journal in the books of M/s ___ for the period from ____ to ____
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
31st Dec Dr
36,000
36,000
[For recording the value of Closing Stock in the books.]

DrClosing Stock a/cCr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Trading a/c
36,000
By Bal c/d
36,000
  36,000   36,000

DrTrading a/cCr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Opening Stock
To Purchases
To Direct Expenses
To Gross Profit
20,000
2,48,000
54,000
94,000
By Sales
By Closing Stock
3,80,000
36,000
  4,16,000   4,16,000

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Recording Closing Stock » Crediting Goods Consumed a/c

 
 
Where the organisation intends to specifically identify the cost of goods consumed, a separate ledger account by name "Goods Consumed a/c" may be created and used for that purpose.

» Direct Expenses transferred to Goods Consumed a/c

At the end of the accounting period, the balances (amounts) in all the ledger accounts which represent expenses which go into the value of goods/stock (direct expenses), are closed by transfer to the "Goods Consumed a/c".

This would result in the "Goods Consumed a/c" being debited with the total value of goods/stock. Show/Hide

DrGoods Consumed a/cCr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Opening Stock
To Purchases
To Direct Expenses
20,000
2,48,000
54,000
   
  3,22,000   3,22,000

» Revealing/Reflecting Cost of Goods Sold

To reflect/reveal the cost of goods sold, the value of closing stock is to be deducted from the total value of goods.

Thus the value of closing stock has to be credited to the "Goods Consumed a/c" which has the total value of goods/stock existing in it as a debit balance. Show/Hide

DrGoods Consumed a/cCr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Opening Stock
To Purchases
To Direct Expenses
20,000
2,48,000
54,000
By Trading a/c (?)
By Closing Stock
2,86,000
36,000
  3,22,000   3,22,000
The amount transferred to the Trading account represents the Cost of Goods Sold

• Journal/Ledger

The Journal entry for recording the value of closing stock in the books would be

Journal in the books of M/s ___ for the period from ____ to ____
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
31st Dec Dr
36,000
36,000
[For recording the value of Closing Stock in the books.]

DrGoods Consumed a/cCr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Opening Stock
To Purchases
To Direct Expenses
20,000
2,48,000
54,000
By Trading a/c (?)
By Closing Stock
2,86,000
36,000
  3,22,000   3,22,000

The balance in the "Goods Consumed a/c" represents the cost of goods sold and is transferred to the "Trading a/c" to ascertain the Gross Profit.

DrTrading a/cCr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Goods Consumed
To Gross Profit
2,86,000
94,000
By Sales 3,80,000
  3,80,000   3,80,000

Balance in Goods Consumed a/c not representing Cost of Goods Sold

 
 
The balancing figure in the "Goods Consumed a/c" transferred to the "Trading a/c" does not represent cost of goods sold, in the following cases

• Direct Expenses Transferred to Trading a/c

Where the direct expenses have been transferred to the Trading a/c instead of the Goods Consumed a/c, the balancing figure in Goods Consumed a/c does not represent cost of goods sold.

DrGoods Consumed a/cCr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Opening Stock
To Purchases
20,000
2,48,000
By Trading a/c (?)
By Closing Stock
2,32,000
36,000
  2,68,000   2,68,000

Cost of Goods Sold implies the total value of goods sold which includes both cost of the goods (represented by purchases a/c balance) and direct expenses related to the goods.

Since Direct Expenses have not been debited to Goods Consumed a/c, the balancing figure represents the value of goods sold excluding direct expenses thereon.

DrTrading a/cCr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Direct Expenses
To Goods Consumed
To Gross Profit
54,000
2,32,000
94,000
By Sales 3,80,000
  3,80,000   3,80,000

» Recording Closing Stock

Valuation of closing stock is independent of the accounting treatment. Closing Stock can be credited to either the Trading a/c or the Goods Consumed a/c.

The only precaution to be taken would be in interpreting the balancing figure value. It should not be considered as Cost of Goods Sold.

However, in such cases, it would be more appropriate to record the value of closing stock through the Trading a/c where the value includes both cost and direct expenses.

• Exception

Recording Closing Stock through Goods Consumed a/c would be rational if its value does not include any part of the direct expenses incurred during the current period which have been debited to the Trading a/c.

• Opening Stock transferred to Trading a/c

Where the balance in "Opening Stock a/c" has been transferred to the Trading a/c instead of the Goods Consumed a/c, the balancing figure in Goods Consumed a/c may not represent Cost of Goods Sold.

DrGoods Consumed a/cCr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Purchases
To Direct Expenses
2,48,000
54,000
By Trading a/c (?)
By Closing Stock
2,66,000
36,000
  3,12,000   3,12,000

The balance in the Goods Consumed a/c transferred to the Trading a/c represents the value of goods that have been purchased and sold away during the current period.

This does not include the value of opening stock that might also have been sold away. Thus this balance, cannot be called "cost of goods sold" though it represents value.

DrTrading a/cCr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Opening Stock
To Goods Consumed
To Gross Profit
20,000
2,66,000
94,000
By Sales 3,80,000
  3,80,000   3,80,000

» Recording Closing Stock

Valuation of closing stock is independent of the accounting treatment. Closing Stock can be credited to either the Trading a/c or the Goods Consumed a/c.

The only precaution to be taken would be in interpreting the balancing figure value. It should not be considered as Cost of Goods Sold.

However, in such cases, it would be more appropriate to record the value of closing stock through the Trading a/c where the total value is debited ultimately.

• Exception

Recording Closing Stock through Goods Consumed a/c would be rational closing stock includes only that stock which has been purchased during the current accounting period.

This would be the case where the quantity of closing stock is less than the quantity purchased during the current period and stock is being used up on FIFO basis.

Recording Closing Stock » Crediting Purchases a/c

 
 
Where the following conditions exist, we can credit "Purchases a/c" with the value of closing stock.
  • Closing stock is physically relatable to the stock that has been purchased during the current period.
    [This would be the case where FIFO method is adopted for physical usage of stock]
  • There are no direct expenses in relation to the stock purchased during the current period
    (Or)
    The value of closing stock does not include the direct expenses incurred during the current period

• Journal/Ledger

The Journal entry for recording the value of closing stock in the books would be

Journal in the books of M/s ___ for the period from ____ to ____
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
31st Dec Dr
36,000
36,000
[For recording the value of Closing Stock in the books.]

DrPurchases a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
1st-31st To Cash/Bank/Crs 2,48,000 31/12/05
31/12/05
By Closing Stock
By Trading a/c

36,000
2,12,000
      2,48,000       2,48,000
               

DrTrading a/cCr
Particulars Amount
(in Rs)
Particulars Amount
(in Rs)
To Opening Stock
To Purchases
To Direct Expenses
To Gross Profit
20,000
2,12,000
54,000
94,000
By Sales 3,80,000
  3,80,000   3,80,000

• Conventional use

Technically we can credit the value of closing stock to Purchases a/c only when the above conditions are satisfied.

The use of "Trading a/c" or "Goods Consumed a/c" for crediting the value of closing stock, is possible only if the journal entry for brining the value of closing stock into books is being recorded at the time of preparation of final accounts.

Where we are recording the value of closing stock in the accounting books before the preparation of final accounts, it is a convention that we credit "Purchases a/c" (on account of the absence of "Trading a/c" or "Goods Consumed a/c" for use).

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Closing Stock a/c : Opening Stock a/c

 
 
The "Closing Stock a/c" and the end of an accounting period and the "Opening Stock a/c" at the beginning of the subsequent accounting period represent the same account.

• At the End of an Accounting Period

The closing balances in all the ledger accounts are carried forward to the subsequent accounting periods.

Every ledger posting should have a journal support.

The journal entry that supports the carry forward of balances in ledger accounts is called the "Closing Entry".

» Closing Entry

The journal entry for closing the books of accounts during an accounting period

Journal in the books of M/s ___ for the period from ____ to ____
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
31st Dec Dr
Dr
Dr
Dr








48,000
63,000
54,000
1,00,000




36,000
42,000
1,26,000
61,000
[For the balances in the ledger accounts carried forward to the next accounting period.]

» Closing Balance Sheet

The closing Balance Sheet is a statement of balances that are carried forward to the subsequent accounting periods.
Balance Sheet of M/s ______ as on the Last Day
Liabilities Amount Assets Amount
Capital
Profit & Loss Appropriation
Creditors
Bank Loan
1,00,000
54,000
48,000
63,000
Cash
Closing Stock
Debtors
Furniture
42,000
36,000
1,26,000
61,000
  2,65,000   2,65,000

• At the beginning of the Subsequent Accounting Period

The opening balances in all the ledger accounts are brought forward from the previous accounting periods. Every ledger posting should have a journal support and the journal entry that supports the brining forward of balances in ledger accounts is called the "Opening Entry".

» Opening Balance Sheet

The opening balance sheet of an accounting period and the closing balance sheet of the previous period are the same. This is something that is not specifically prepared.
Balance Sheet of M/s ______ as on the First Day
Liabilities Amount Assets Amount
Capital
Profit & Loss Appropriation
Creditors
Bank Loan
1,00,000
54,000
48,000
63,000
Cash
Closing Stock
Debtors
Furniture
42,000
36,000
1,26,000
61,000
  2,65,000   2,65,000

» Opening Entry

The opening entry is based on the opening balance sheet.

Journal in the books of M/s ___ for the period from ____ to ____
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
31st Dec Dr
Dr
Dr
Dr








42,000
36,000
1,26,000
61,000




1,00,000
54,000
63,000
48,000
[For the opening balances in the various ledger accounts brought forward into the books of accounts from the previous accounting period.]

Where the Opening Entry is being recorded, the phrase "Closing Stock" is replaced by the phrase "Opening Stock".

Closing Stock » Adjustment during Final Accounting

 
 
The value of closing stock is ascertained through physical verification of the stock and its valuation at cost or market price whichever is lesser.

Thus recording the entries for brining in the value of closing stock into books may not be complete by the time trial balance is drawn up.

If the value of closing stock is not available (or is not recorded) by the time of making up the trial balance at the end of the accounting period, it would appear as a part of the transactions appended to the trial balance which are to be adjusted.

Adjustment is bringing in the effect of the transactions through mathematical operations of addition and subtraction. The adjustments to be made can be found out by ascertained the net effect of the journal entries to be recorded.

In adjusting the value of closing stock we consider the entry for recording the same to be the one where the Trading a/c or Purchases a/c is credited.

  • Where the closing stock is recorded by crediting its value to the Trading a/c
    Entry Effect
    Dr. Closing Stock a/c    
    Cr. Trading a/c
    1. (+) Show the Value of Closing Stock on the Assets side of the Balance Sheet
    2. (+) Show the Value of Closing Stock on the Credit side of Trading a/c
  • Where the closing stock is recorded by crediting its value to Purchases a/c
    Entry Effect
    Dr. Closing Stock a/c    
    Cr. Purchases a/c
    1. (+) Show the Value of Closing Stock on the Assets side of the Balance Sheet
    2. (−) Deduct the Value of Closing Stock from Purchases on the Debit side of Trading a/c
  • Where the closing stock is recorded by crediting Goods Consumed a/c
    Entry Effect
    Dr. Closing Stock a/c    
    Cr. Goods Consumed a/c
    1. (+) Show the Value of Closing Stock on the Assets side of the Balance Sheet
    2. (+) Show the Value of Closing Stock on the Credit side Goods Consumed a/c

    This assumption is generally avoided, where the value of closing stock has to be dealt with as an adjustment.

Closing Stock in Trial Balance » Interpretation

 
 
Where "Closing Stock a/c" is present in the Trial Balance, it is an indication of the Journal entry for recording the value of closing stock has already been recorded.

• Dealing with Closing Stock a/c

The "Closing Stock a/c" represents an asset and is thus a Real account.

Since an item appearing in the "Trial Balance" has to be dealt with only once based on its nature, the Closing Stock a/c appearing in the trial balance is shown on the assets side of the Balance Sheet.

The balance in all the real accounts is carried forward to the subsequent accounting periods. All such accounts whose balances are carried forward to the subsequent accounting periods are listed in the Balance Sheet as at the end of the accounting period. Thus all the real account balances are shown on the assets side of the balance sheet.

• What was the Journal Entry used?

The Journal entry used for recording the value can be identified/assumed depending on what ledger accounts are present in the Trial Balance

» Trading a/c appears in the Trial Balance

Trial Balance of M/s ___ " as on 30th June 2005
Particulars L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
Opening Stock a/c
Purchases a/c

Closing Stock a/c

Trading a/c








20,000
2,48,000

36,000



 




36,000

Total   xxx xxx
Where Closing Stock a/c and Trading a/c appear in Trial Balance
Dr. Closing Stock a/c    
Cr. Trading a/c
← The entry used for recording the value of closing stock.

» Trading a/c does not appear, but Purchases a/c appears in the Trial Balance

Trial Balance of M/s ___ " as on 30th June 2005
Particulars L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
Opening Stock a/c
Purchases a/c

Closing Stock a/c










20,000
2,12,000

36,000



 






Total   xxx xxx

Where Closing Stock a/c and Purchases a/c appear in Trial Balance
Dr. Closing Stock a/c    
Cr. Purchases a/c
← The entry used for recording the value of closing stock.

» Both Trading a/c and "Purchases a/c" do not appear in the Trial Balance

Trial Balance of M/s ___ " as on 30th June 2005
Particulars L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)

Goods Consumed

Closing Stock a/c











2,32,000

36,000



 






Total   xxx xxx

Where Purchases a/c and Trading a/c do not appear in the Trial Balance and
Where Closing Stock a/c and Goods Consumed a/c appear in Trial Balance
Dr. Closing Stock a/c    
Cr. Goods Consumed a/c
← The entry used for recording the value of closing stock.

Author Credit : The Edifier ... Continued Page 13

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