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MGT101 - Financial Accounting - I - Lecture Handout 15

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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

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