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RECORDING OF STOCK (Continued)

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 to Record Stock

In Case of Trading Concern:

Journal entries for those goods which are bought for resale purposes are as follows:

Purchase of goods:
Debit: Stock/Material Account
Credit: Cash/Bank/Creditor

Consumption of goods
Debit: Cost of goods sold
Credit: Stock

Payment in case of credit purchase
Debit: Creditors Account
Credit: Cash/Bank

In Case of 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.

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

For Manufacturing Concern

Purchase of raw material

Debit: Stock/Material Account
Credit: Cash/Bank/Creditors

Other direct costs incurred

Debit: Relevant cost/Expense Head
Credit: Cash/Bank/Payables

Raw material issued and other costs allocated to production of units

Debit: Work in process
Credit: Stock Material Account

Debit: Work in process
Credit: Relevant Expense Head Account

When production is completed

Debit: Finished Goods Stock Account
Credit: Work in process account

Entry for Cost of sale

Debit: Cost of Goods Sold Account
Credit: Finished Goods Stock Account

Entry for sale of goods

Debit: Cash/Account receivable Account
Credit: Sales Account

Return of material purchased

There are two options for recording purchase material return

• Option 1
  Debit: Goods Return Account
  Credit: Stock Material Account
  AND
  Debit: Cash/Bank Account
  Credit: Goods Return Account
  OR
  If our supplier suppliers use some other material in exchange of material returned. Then:

Debit Raw Material Stock Account
Credit: 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: Cash/Creditor Account
  Credit: Stock Account

Example 1
Record the following transactions:

1. Purchased goods for cash Rs. 10,000
2. Purchased goods on credit from ABC Co. Rs. 25,000
3. Sold goods which cost was Rs. 20,000
4. Returned goods to ABC Co. that originally cost Rs. 5,000
5. Paid to ABC Co. Rs. 15,000 through cheque
6. Sold goods whose cost was Rs. 5,000

Required:

1. Cost of goods sold
2. Value of closing stock
3. Amount payable to ABC Co.

1 – Purchased goods for cash Rs. 10,000

Cash Account Code --
Date	No.	Narration	Dr. Rs.	Cr. Rs.	Bal. Dr/(Cr)
	1	Purchased goods for cash		10,000	(10,000)

 

Stock Account Code --
Date	No.	Narration	Dr. Rs.	Cr. Rs.	Bal. Dr/(Cr)
	1	Purchased goods for cash	10,000		10,000

2 – Purchased goods on credit from ABC Co. Rs. 25,000

ABC Co. Code --
Date	No.	Narration	Dr. Rs.	Cr. Rs.	Bal. Dr/(Cr)
	2	Purchased goods from ABC		25,000	(25,000)

 

Stock Account Code --
Date	No.	Narration	Dr. Rs.	Cr. Rs.	Bal. Dr/(Cr)
	1	Purchased goods for cash	10,000		(10,000)
	2	Purchased goods from ABC	25,000		35,000

3 – Sold goods whose cost was Rs. 20,000

Cost of Goods Sold Code --
Date	No.	Narration	Dr. Rs.	Cr. Rs.	Bal. Dr/(Cr)
	3	Goods sold	20,000		20,000

 

Stock Account Code --
Date	No.	Narration	Dr. Rs.	Cr. Rs.	Bal. Dr/(Cr)
	1	Purchased goods for cash	10,000		10,000
	2	Purchased goods from ABC	25,000		35,000
	3	Goods sold		20,000	15,000

4 – Returned goods to ABC Co. cost Rs. 5,000

ABC Co. Code --
Date	No.	Narration	Dr. Rs.	Cr. Rs.	Bal. Dr/(Cr)
	2	Purchased goods from ABC		25,000	(25,000)
	4	Returned goods to ABC	5,000		(20,000)

 

Stock Account Code --
Date	No.	Narration	Dr. Rs.	Cr. Rs.	Bal. Dr/(Cr)
	1	Purchased goods for cash	10,000		10,000
	2	Purchased goods from ABC	25,000		35,000
	3	Goods sold		20,000	15,000
	4	Returned goods to ABC		5,000	10,000

5 – Paid to ABC Co. Rs. 15,000 through cheque

ABC Co. Code --
Date	No.	Narration	Dr. Rs.	Cr. Rs.	Bal. Dr/(Cr)
	2	Purchased goods from ABC		25,000	(25,000)
	4	Returned goods to ABC	5,000		(20,000)
	5	Paid to ABC	15,000		(5,000)

 

Bank Account Code --
Date	No.	Narration	Dr. Rs.	Cr. Rs.	Bal. Dr/(Cr)
	5	Paid to ABC		15,000

6 – Sold goods whose cost was Rs. 5,000

Cost of Goods Sold Code --
Date	No.	Narration	Dr. Rs.	Cr. Rs.	Bal. Dr/(Cr)
	3	Goods sold	20,000		20,000
	6	Goods sold	5,000		25,000

 

Stock Account Code --
Date	No.	Narration	Dr. Rs.	Cr. Rs.	Bal. Dr/(Cr)
	1	Purchased goods for cash	10,000		10,000
	2	Purchased goods from ABC	25,000		35,000
	3	Goods sold		20,000	15,000
	4	Returned goods to ABC		5,000	10,000
	6	Goods sold		5,000	5,000

Cost of Goods Sold

Cost of Goods Sold Code --
Date	No.	Narration	Dr. Rs.	Cr. Rs.	Bal. Dr/(Cr)
	3	Goods sold	20,000		20,000
	6	Goods sold	5,000		25,000

Value of Closing Stock

Stock Account Code --
Date	No.	Narration	Dr. Rs.	Cr. Rs.	Bal. Dr/(Cr)
	1	Purchased goods for cash	10,000		10,000
	2	Purchased goods from ABC	25,000		35,000
	3	Goods sold		20,000	15,000
	4	Returned goods to ABC		5,000	10,000
	6	Goods sold		5,000	5,000

Amount Payable to ABC Co.

ABC Co. Code --
Date	No.	Narration	Dr. Rs.	Cr. Rs.	Bal. Dr/(Cr)
	1	Purchased goods from ABC		25,000	(25,000)
	2	Returned goods to ABC	5,000		(20,000)
	3	Paid to ABC	15,000		(5,000)

Example 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
� Purchase of raw material during the period Rs. 200,000
� Paid to labor Rs. 180,000 out of which Rs. 150,000 used on production.
� Other production costs Rs. 50,000

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	Amount(Dr.) Rs.	Amount(Cr.) Rs.
Stock Account Cash Account Goods purchased for cash	10,000	10,000

 

Particulars	Amount(Dr.) Rs.	Amount(Cr.) Rs.
Stock Account Ali Brothers. Goods purchased from Ali Brothers.	20,000	20,000

 

Particulars	Amount(Dr.) Rs.	Amount(Cr.) Rs.
Cost of goods sold Stock Account Goods sold whose cost was Rs. 15,000	15,000	15,000

 

Particulars	Amount(Dr.) Rs.	Amount(Cr.) Rs.
Ali Brothers. Stock Account Goods returned to Ali Brothers.	4,000	4,000

 

Particulars	Amount(Dr.) Rs.	Amount(Cr.) Rs.
Cost of goods sold Stock Account Goods sold whose cost was Rs. 5,000	5,000	5,000

 

Particulars	Amount(Dr.) Rs.	Amount(Cr.) Rs.
Ali Brothers. Account Cash Account Paid to Ali Brothers.	10,000	10,000

Payable to Ali Brothers

Ali Brothers Account
Date	Particulars	Code #	Amount Rs. (Dr.)	Date	Particulars	Code #	Amount Rs. (Cr.)
	Goods returned Paid cash Balance		4,000 10,000 6,000		Purchased goods		20,000
	Total		20,000		Total		20,000

Cost of Goods Sold

Cost of goods sold Account
Date	Particulars	Code #	Amount Rs. (Dr.)	Date	Particulars	Code #	Amount Rs. (Cr.)
	Goods sold Goods sold		15,000 5,000		Balance		20,000
	Total		20,000		Total		20,000

Value of Closing Stock

Ali Brothers Account
Date	Particulars	Code #	Amount Rs. (Dr.)	Date	Particulars	Code #	Amount Rs. (Cr.)
	Purchased goods for cash Purchased goods from Ali Brothers.		10,000 20,000		Goods sold Returned to Ali Brothers Goods sold Balance		15,000 4,000 5,000 6,000
	Total		30,000		Total		30,000

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 labor Rs. 180,000 out of which Rs. 150,000 used on production.
o Other production costs Rs. 50,000

Solution

Raw Material Stock Account
Debit		Credit
O/S	100,000
Purchases	200,000	WIP	215,000
		C/S	85,000
Total	300,000	Total	300,000

 

Labor Account
Debit		Credit
Cost	180,000	Charged	150,000
Total	180,000	Total	180,000

 

Other Costs Account
Debit		Credit
Paid	50,000	Charge	50,000
Total	50,000	Total	50,000

 

Work in Process Account
Debit		Credit
O/B	90,000
Raw M	215,000	WIP	215,000
Labor	150,000	F/G	410,000
O/H	50,000	C/B	95,000
Total	505,000	Total	505,000

 

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		Credit
F/G	420,000

In 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: Work in process OR WIP Account
Credit: Raw Material Account

Labor 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 is charged to work in process OR WIP account through the following entry:

Debit: Work in process OR WIP Account
Credit: Labor Cost Account

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

Debit: Work in process OR WIP Account
Credit: 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: Finished Goods Account
Credit: Work in process Account

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: Cost of Goods Sold Account
Credit: Finished Goods Account

Related Content: MGT101 - VU Lectures, Handouts, PPT Slides, Assignments, Quizzes, Papers & Books of Financial Accounting

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