Business trading is continuous activity, but accounting statements must be drawn up at a particular date. In preparing a balance sheet it is necessary to summarize the activity of a business so as to determine its assets and liabilities at a given moment. This includes establishing the quantities of stocks on hand, which can create problems.
- A business buys stocks continually during its trading operations and either sells the goods onwards to customers or incorporates them as raw materials in manufactured products. This constant moment of stocks makes it difficult to establish what exactly is held at any precise moment.
- In simple cases, when a business holds easily counted and relatively small amounts of stock, quantities of stock on hand at the balance sheet date can be determined by physically counting in a stock take.
- The continuous nature of trading activity may cause a problem in that stock movements will not necessarily cease during the time that the physical stock take is in progress. To close down the business while the count takes place, or to keep detailed records of stock movements during the course of the stock take.
- Closing down the business for a short period for a stock take is considerably easier than trying to keep detailed records of stock movements during a stock take.
- One obstacle is overcome once a business has established how much stock is on hand. But another of the problems noted in the introduction immediately raises its head.