Stock

Stock (Inventory)

Stock, also called inventory, is the value of goods, spares, and other items that a business has on hand at a given point in time. It is often referred to as "stock in hand."

For a trading concern (a business that buys and sells goods without manufacturing them), the stock on hand at the end of an accounting period consists of goods that remain unsold. This is called closing stock (or ending inventory).

For a manufacturing company, closing stock is broader. It includes three categories:

• Raw materials — materials yet to be used in production
• Semi-finished goods (work-in-progress) — goods partially completed
• Finished goods — completed products not yet sold

Similarly, opening stock (or beginning inventory) is the value of stock held at the start of the accounting period. Opening stock of the current period is simply the closing stock of the previous period.

Accounting treatment for closing stock:

At the end of the accounting period, the value of closing stock is recorded through an adjusting journal entry:

Why this entry? Closing stock is an asset, so it is debited. The credit goes to the Trading Account because the value of unsold goods is deducted from the cost of goods sold to arrive at the correct gross profit. …