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:
- Opening Stock: The value of products available for sale at the start of an accounting period is referred to as opening stock.
- 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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