What is Stock in Accounting

What is Stock in Accounting

What is Stock in Accounting?

Stock Definition:

The quantity of unsold commodities held by the organization is referred to as stock.

Or

The definition of stock in accounting is “the quantity of ready-to-sell items available to the company.”

Types of Stock

Stock is classified into two classes for accounting purposes:

  1. Opening Stock: The value of products available for sale at the start of an accounting period is referred to as opening stock.
  1. Closing Stock: The value of products unsold after the accounting period is referred to as closing stock.

Stock in Trading Company

Stock in a trading company is defined as products acquired for resale but not sold during the accounting period. A trading concern is an organization that acquires products for resale.

Stock in a Manufacturing Company

Stock in a manufacturing company (an entity that turns raw materials into finished products by putting them through a process) consists of:

  • The raw material.
  • The work is in progress.
  • Finished products.

Raw Material: 

The raw material is the basic component of an object that is processed to create a finished thing.

Work in Process: 

In a manufacturing company, raw materials are placed through a process to be converted into completed items. Some raw material is still being processed towards the end of the year. It is not in the form of raw material or a finished product. These goods are kept in stock as work in progress.

Finished Products: 

Items that are ready for sale but could not be sold after the accounting period are classified as finished goods.

Recording of Stock Account

  • The value of the goods purchased is debited from the stock account.
  • The Purchase Price of the Goods Sold / Issued for Production is credited to the stock account.
  • The cost/purchase value of unsold products is shown in the Stock Account.

Journal Entries to Record Stock

Stock entries in a manufacturing firm are as follows:

For the Purchase of Stock:

Debit: Stock Account

Credit: Cash/Supplier /Creditors Account

When stock is acquired, the stock account receives the benefit, so it is debited, and the cash or supplier account gives the benefit, so it is credited.

For other Direct Costs Incurred:

Debit: Relevant cost or  Expense Head

Credit: Cash, Bank or Payables

Raw materials are issued, and additional charges are allotted to the unit of production.

Debit: Work in process

Credit: Stock Material Account

Debit: Work in process

Credit: Relevant Expense Head Account

When the Production is Finished:

Debit: Finished Goods Stock Account

Credit: Work in process account

Cost of Sale Entry:

Debit: Cost of Goods Sold Account

Credit: Finished Goods Stock Account

Entry for Sale of Goods:

Debit: Cash or Account receivable Account

Credit: Sales Account

Purchase Material Return:

There are two methods for recording purchase material returns.

Option 1

Debit: Goods Return Account

Credit: Stock Material Account

AND

Debit: Cash/Bank Account

Credit: Goods Return Account

OR

If our suppliers utilize another material in exchange for the material returned. Then:

Debit: Raw Material Stock Account

Credit: Goods Return Account

In the first example discussed above, cash is received in exchange for items. In the second situation, faulty items are swapped for excellent goods. As a result, we debited our stock account. For the return of bought products, both entries are correct.

Option 2

Debit: Cash/creditor Account

Credit: Stock Account

Payment to Creditors:

Debit:  Supplier / Creditors account

Credit: Cash account

For Goods Consumption:

Debit: Cost of goods sold

Credit: Stock Account

Stock entries in Trading concern firms are as follows:

For the Purchase of Goods:

Debit: Stock/Material Account

Credit: Cash/Bank/Creditor

For Goods Consumption:

Debit: Cost of goods sold

Credit: Stock

For Credit Purchase Payments:

Debit: Creditors Account

Credit: Cash/Bank

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