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Financial Accounting

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Financial Accounting (Mgt-101)
VU
Lesson-15
STOCK
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
(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
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Raw Material Stock
Other Costs Accounts
Work in Process Account
Finished Goods Account
Cost of Goods Sold Account
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 (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
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Credit:
Sales Account
Return of purchased material
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 supplies us 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 whose 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
Answer following questions.
1. What is the cost of goods sold?
2. What is the value of closing stock?
3. What amount is 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)
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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
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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
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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
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Financial Accounting (Mgt-101)
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Q1 ­ What is the 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
Q2 ­ What is the 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
Q3 ­ What amount is payable to ABC Co.?
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)
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 labour Rs. 180,000 out of which Rs. 150,000 used on production.
Other production costs Rs. 50,000
O/S
100,000
Raw Material Account
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Purch.
200,000
WIP
215,000
Labour Account
C/S
85,000
Cost
180,000
Charge
150,000
Total
300,000
Total
300,000
Total
180,000
Total
180,000
Work in Process Account
Other Costs Account
O/B
90,000
Paid
50,000
Charge
50,000
Raw M
215,000
Labour
150,000
F/G
410,000
O/H
50,000
C/B
95,000
Total
505,000
Total
505,000
Total
50,000
Total
50,000
Cost of goods sold
Finished Goods Stock Account
F/G
420000
O/S
150,000
COS
420,000
WIP
410,000
C/S
140,000
Total
560,000
Total
460,000
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.
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SOLUTION
First, we will pass journal entries
Particulars
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
Stock Account
10,000
Cash Account
10,000
Goods purchased for cash
Particulars
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
Stock Account
20,000
Ali Brothers.
20,000
Goods purchased from Ali Brothers.
Particulars
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
Cost of goods sold
15,000
Stock Account
15,000
Goods sold whose cost was Rs. 15,000
Particulars
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
Ali Brothers.
4,000
Stock Account
4,000
Goods returned to Ali Brothers.
Particulars
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
Cost of goods sold
5,000
Stock Account
5,000
Goods sold whose cost was Rs. 5,000
Particulars
Amount(Dr.)
Amount(Cr.)
Rs.
Rs.
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Ali Brothers. Account
10,000
Cash Account
10,000
Paid to Ali Brothers.
PAYABLE TO ALI BROTHERS
Ali Brothers Account
Date
Particulars
Code
Amount  Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
Goods returned
4,000
Purchased goods
20,000
Paid cash
10,000
BALANCE
6,000
Total
20,000
Total
20,000
COST OF GOODS SOLD
Cost of goods sold Account
Date
Particulars
Code  Amount  Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
Goods sold
15,000
Goods sold
5,000
BALANCE
20,000
Total
20,000
Total
20,000
VALUE OF CLOSING STOCK
Stock Account
Date
Particulars
Code
Amount  Date
Particulars
Code
Amount
#
Rs. (Dr.)
#
Rs. (Cr.)
Purchased
10,000
Goods sold
15,000
goods for cash
Returned  to
Ali
4,000
Purchased
20,000
Brothers
goods from Ali
Goods sold
5,000
Brothers.
BALANCE
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
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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 labour Rs. 180,000 out of which Rs. 150,000 used on production.
o  Other production costs Rs. 50,000
SOLUTION
Labour Account
Raw Material Stock Account
Debit
Credit
Debit
Credit
O/S
100,000
Cost
180,000Charged
150,000
Purchases
200,000 WIP
215,000
C/S
85,000
300,000 Total
180,000Total
180,000
Total
300,000 Total
Other Costs Account
Debit
Credit
Paid
50,000 Charge
50,000
Total
50,000 Total
50,000
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Work in Process Account
Debit
Credit
O/B
90,000
Raw M
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 the 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
Labour 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 are charged to work in
process OR WIP account through the following entry:
Debit:
Work in process OR WIP Account
Credit:
Labour Cost Account
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Other costs of Rs. 50,000 is 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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Table of Contents:
  1. Introduction to Financial Accounting
  2. Basic Concepts of Business: capital, profit, budget
  3. Cash Accounting and Accrual Accounting
  4. Business entity, Single and double entry book-keeping, Debit and Credit
  5. Rules of Debit and Credit for Assets, Liabilities, Income and Expenses
  6. flow of transactions, books of accounts, General Ledger balance
  7. Cash book and bank book, Accounting Period, Trial Balance and its limitations
  8. Profit & Loss account from trial balance, Receipt & Payment, Income & Expenditure and Profit & Loss account
  9. Assets and Liabilities, Balance Sheet from trial balance
  10. Sample Transactions of a Company
  11. Sample Accounts of a Company
  12. THE ACCOUNTING EQUATION
  13. types of vouchers, Carrying forward the balance of an account
  14. ILLUSTRATIONS: Ccarrying Forward of Balances
  15. Opening Stock, Closing Stock
  16. COST OF GOODS SOLD STATEMENT
  17. DEPRECIATION
  18. GROUPINGS OF FIXED ASSETS
  19. CAPITAL WORK IN PROGRESS 1
  20. CAPITAL WORK IN PROGRESS 2
  21. REVALUATION OF FIXED ASSETS
  22. Banking transactions, Bank reconciliation statements
  23. RECAP
  24. Accounting Examples with Solutions
  25. RECORDING OF PROVISION FOR BAD DEBTS
  26. SUBSIDIARY BOOKS
  27. A PERSON IS BOTH DEBTOR AND CREDITOR
  28. RECTIFICATION OF ERROR
  29. STANDARD FORMAT OF PROFIT & LOSS ACCOUNT
  30. STANDARD FORMAT OF BALANCE SHEET
  31. DIFFERENT BUSINESS ENTITIES: Commercial, Non-commercial organizations
  32. SOLE PROPRIETORSHIP
  33. Financial Statements Of Manufacturing Concern
  34. Financial Statements of Partnership firms
  35. INTEREST ON CAPITAL AND DRAWINGS
  36. DISADVANTAGES OF A PARTNERSHIP FIRM
  37. SHARE CAPITAL
  38. STATEMENT OF CHANGES IN EQUITY
  39. Financial Statements of Limited Companies
  40. Financial Statements of Limited Companies
  41. CASH FLOW STATEMENT 1
  42. CASH FLOW STATEMENT 2
  43. FINANCIAL STATEMENTS OF LISTED, QUOTED COMPANIES
  44. FINANCIAL STATEMENTS OF LISTED COMPANIES
  45. FINANCIAL STATEMENTS OF LISTED COMPANIES