Stock or inventory is the total of raw materials, work in progress (WIP), and finished goods that a business holds for the purpose of resale. The important point to remember here is that the goods are intended for resale.
Raw materials are items waiting to be used in the manufacturing process, work in progress are partially manufactured goods, and finished goods are those held for resale.
Beginning stock is the goods unsold at the start of the accounting period, and ending stock is the goods unsold at the end of the accounting period.
Stock or inventory is recorded in the balance sheet of the business at cost, or if lower market value, under the heading current assets, that means it is expected to be convertible into cash within a year. Cost in this context means the price paid plus the direct and indirect costs of bringing the item to its existing condition and location ready for sale.
How do you record Stock?
Bookkeeping and accounting is carried out using three separate accounts.
- The Sales account which records the reductions in stock at selling prices and is transferred to the income statement at the period end.
- The Purchases account which records the additions to stock at cost and is transferred to the income statement at the period end.
- The Stock Account in the balance sheet which maintains the beginning and ending balances.
The reason for the three accounts is that purchases (increases) are at cost, and sales (decreases) are at selling price (i.e. they include a profit). If both sales and purchases were recorded on one account the balance would be a meaningless figure including the profit element, and would not represent the true beginning and ending balance.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.