Accounting for Stocks (Summary)
- The quantity of stocks held at the year end is established by means of a physical count of stock in an annual stocktaking exercise, or by a continuous stock take.
- The value of these stocks is then calculated, taking the lower of cost and net realizable value for each separate item or group of stock items.
- In order to value the stocks, some rule of thumb must be adopted. The possibilities include FIFO, LIFO, and average costs. But in financial accounts FIFO or average cost should normally used.
- Net realizable value (NRV) is the selling price less all costs to completion and less selling costs.
- Cost comprises purchase costs and cost of conversion.
- The value of closing stocks is accounted for in the nominal ledger by debiting a stock account and crediting the trading account at the end of an accounting period. The stock will therefore always have a debit balances at the end of a period, and this balance will be shown in the balance sheet as a current asset for stocks.
- Opening stocks brought forward in the stock account are transferred to the trading account, and so at the end of the accounting year the balance on the stock account ceases to be the opening stock value brought forward, and becomes instead the closing stock value caught forward.
- The statutory regulations and accounting standards requires that the balance sheet should show subdivided as follows, Stocks
1. Raw materials and consumables.
2. Work in progress.
3. Finished goods and goods for resale.
4. Payments on account.