Opening stock

From CEOpedia | Management online

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. Opening stock is always the closing stock of previous period. Closing stock of one year is opening stock of another, it means if valuation in one year is wrong it can cause another incorrect calculations in upcoming year (K.Ivens 2005, 50).

Stock adjustment

Closing stock rarely is valued at the last day of the financial year. Usually it takes earlier or later which means there should be made certain adjustments in order to correct figure for closing stock. In case or earlier closing stock valuation adjustments should correct the figure of closing stock and include all important and relevant transactions. The adjustment should include adding purchases (credit and cash), sales returns at cost price and lessening sales at cost price(sold during period between valuation and ending on financial year will not be on hand) and purchases returns (they have been returned so they must be included in closing stock) Stocks valued after the end of financial year also need adjustments. In this case to stock on hand we should add sales at cost price and purchases returns and lessen purchases and sales returns (cost price)(F. Thompson-Hosein 2000, 149).

When we calculate the gross profit for the period it is obligatory to create allowance for the closing stock. This calculation will match the sales revenue earned with cost of goods sold and not the cost of goods purchased during that period. It requires checking the quantity of stock that we have on hand at the end of accounting period and put valuation on it (J.R. Dyson 2007, 79).

There are 4 methods of valuing closing stock (J.R. Dyson 2007, 295):

  1. Unit cost. It's simply cost of purchasing stock that are easily identifiable. In any case when we can identify cost of materials used in production we can use this method of valuing.
  2. FIFO, First-in, first-out. This method adopts only the first price of purchased goods. This method's advantage is logicality and the fact that value of closing stock is closer to current economic value.
  3. Standard cost. This method consist of estimating price of goods in future.
  4. Average cost AVCO. This method calculates the average value of stock at every stage and it helps to obtain value of goods and value of remaining balance sheet. The average cost of stock is calculated at the point of addition of new stock as well as the removal (B. Ryan 2004, 120).

Accounting methods(B.K. Banerjee 2010, 810):

  1. Separate books - each departament can have their own book that will keep accounting records analitycally although this method is expensive.
  2. Columnar form. Method generally usd by smaller companies. Each departament keeps record of purchases, sales and stock and also expenses. Full-fledged double entry is not followed in this method. In this technique loss & protif account as well as a trading one is openened in columnar form and marked for each departament.

Company's accounting policy determine which one will be used. Accounting policy also states how policy had been selected (R. Narayanaswamy 2017, 35). Choosing accounting method also depends of company's experience to decide which method works better for them and is better portraying their financial position of the company. Method can be changed any time although it needs involvement of company's auditors, their concurrence and disclosure (D. Ordelheide 2016, 3123).

Closing stock in final balance

Gross profit is calculated based on closing stock figure. It is also a current asset and any situation of incorrect calculation can cause net and gross profit to be incorrect on the balance sheet. When closing stock is incorrectly valued and is understated cost of goods can be overstated and the gross profit can be overstated. Closing stock is the second category of the credit side of trading account. Closing stock is also the name for good that were not sold during fixed period. Since it can be valued before or after the end of financial year it is not shown in the trial balance. Valuation of closing stock cause problems such as market price or cost price. However stock is always valued at market or cost price whichever less (V.K. Goyal 2006, 137).

Stock deduction

At the beginning you must get to know if you are entitled to further deduction. It can turns out that you have to add back some trading stock value as income. This procedure helps to prevent from owners purchasing large amounts of stock to claim early deduction. Second calculation requires deducting the cost of goods sold from receipts. It can be determined by the value of opening and closing stock. Opening stock value is the same as the closing stock from previous tax year. If closing stock value exceed the value of opening stock it means that excess will be added to your assessable income. If the value of closing stock is lower than value of opening stock it means you can claim an additional tax deduction. Lost or destroyed stocks does not apply for additional deduction and will not be part of closing stock. Spare parts kept for repair are not classed as trading stock (L. Tyler 2007, 40).

Examples of Opening stock

  • Raw materials: This is the inventory of items used to manufacture a product, such as metals, plastics, lumber, and other components.
  • Finished goods: This is the inventory of finished products ready for sale. Examples include packaged items, furniture, tools, and clothing.
  • Supplies: This is the inventory of non-consumable supplies and small equipment used in the production process, such as fasteners, labels, and packaging materials.
  • Work in progress: This is the inventory of partially completed products that are in the process of being manufactured.
  • Obsolete stock: This is the inventory of products that are no longer marketable due to age, design changes, or other factors.

Advantages of Opening stock

Opening stock is the value of goods available for sale in the beginning of an accounting period. The following are the advantages of opening stock:

  • It provides a clear picture of the beginning inventory and allows for better tracking of the inventory levels throughout the accounting period.
  • It enables the business to identify slow-moving or obsolete stock and take necessary corrective action.
  • It helps in determining the cost of goods sold and gross profit for the period.
  • It helps in controlling the stock levels and reducing the cost of inventory.
  • It helps in evaluating the performance of the business and planning future inventory purchases.

Limitations of Opening stock

Opening stock is the value of goods available for sale in the beginning of an accounting period and it has the following limitations:

  • It may not accurately reflect the real value of the goods because the prices of goods may have fluctuated since the time of purchase.
  • It may not be completely reliable because it is based on the records of the previous accounting period and may not be up-to-date.
  • It may not be accurate due to errors in the bookkeeping and accounting processes.
  • It may not be reflective of the current economic situation in the market.
  • It may suffer from theft or misappropriation of goods, leading to under-valuation of the opening stock.

Other approaches related to Opening stock

Opening stock is the value of goods available for sale in the beginning of an accounting period. Other approaches related to opening stock include:

  • Inventory Valuation: This approach involves calculating the cost of goods that are available for sale in the beginning of the accounting period. This can be done by looking at purchase invoices and other records that have been kept.
  • Adjustment for Losses and Wastage: Losses and wastage are taken into account when calculating the opening stock. This could be due to natural depreciation of the goods, theft or damage.
  • Revaluation of Stock: This involves re-evaluating the opening stock to adjust for any changes in market prices. The difference between the revalued amount and the original cost is then added to or deducted from the stock balance.

In conclusion, opening stock is the value of goods that are available for sale in the beginning of an accounting period. Other approaches related to opening stock include inventory valuation, adjustment for losses and wastage, and revaluation of stock.

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Author: Jolanta Jańczy