Inventory
Distinguish between the two stock systems:
Perpetual or continuous stock system
1. Keeps a continuous record of the movement of stock into and out of a business.
2. Updates the trading stock account for each transaction.
3. The cost of sales is calculated for each sales transaction and brought into account in the
3. books.
4. A physical count will verify the trading stock figure.
5. A business that deals in valuable items uses this meathod.
Periodic stock system
1. For businesses that deal in large volumes of goods with a low unit price.
2. The business does not calculate the coat of sales for every sales transaction.
3. A physical stock count is needed to calculate the cost of sales.
Advantages:
- Suited to a business in which it is difficult to find the cost of individual items because of the low
- value on the items and the high volume of turnover.
- The method is simple. (When an item is sold, only the sale is recorded)
- The cost of sales need not be brought into account for each sales transaction.
Disadvantages:
- A business cannot check the value of stock on hand at any time.
- It is not possible to calculate a trading stock deficit without a physical stock take and
- calculation of the cost of sales.
- There is less control over the actual stock.
- It is not suited to businesses dealing in valuable items.
- A record of movement is not kept of specific stock items into and out of the business.
GAAP Principles:
Historical cost: Stock is captured at historical cost or cost price (the price that you paid for it).
Prudence principle: Stock has different prices at different businesses and is therefore recorded
Prudence principle: at conservative prices
Faithful Representation: Keeping stock at realistic prices is due to the facts that some may be
. lost or become obsolete. According to IFRS, this is one of the most
Faithful Representation: important characteristics of useful accounting information.
Neutrality: Not to favour the interest of any particular stakeholder or group at the expense of
. any other.
Trading stock be realistic and as will follow, there are four methods to value stock, each
resulting in different figures.
The method used must be appropriate to the nature of the business and type of product sold as
it will affect the financial statements and ultimately the net profit and tax.
, Stock system 1: Perpetual or Continuous System
= Think trading stock
You can determine the value of your stock at any point in time.
A physical count of the stock will reveal if stock has gone missing.
Journals involving stock movements:
CRJ - Cash sales of stock
DJ - Credit sales of stock
DAJ - Stock returned by credit customers and allowances are awarded to them
CPJ - Stock purchased for cash
CJ - Stock purchased on credit
CAJ - Stock returned to suppliers and allowances granted to us
PCJ - Stock purchases from petty cash
GJ - Sundry transactions e.g. drawings, errors, etc.
+ Trading Stock -
1 Balance b/d 7 Cost of Sales CRJ
2 Bank CPJ 8 Cost of Sales DJ
3 Petty Cash PCJ 9 Creditors Control CAJ
4 Creditors Control CJ 10 Donation GJ
5 Drawings GJ 11 Drawings GJ
6 Cost of Sales DAJ Balance c/o
12 Balance b/d
1 Balance of the T/S account at the end of the previous month.
2 Stock purchased and paid for by cheque or electronic transfer.
3 Stock purchased and paid for by petty cash.
4 Stock purchased on credit.
5 Stock returned to the business that the owner had already taken as drawings.
6 Cost price of stock returned by debtors.
7 Cost price of stock sold for cash.
8 Cost price of stock sold on credit.
9 Cost price of stock returned to creditors.
10 Cost price of stock donated.
11 Cost price of stock taken by the owner for personal use.
12 Balance of the T/S account at the end of the month.
Distinguish between the two stock systems:
Perpetual or continuous stock system
1. Keeps a continuous record of the movement of stock into and out of a business.
2. Updates the trading stock account for each transaction.
3. The cost of sales is calculated for each sales transaction and brought into account in the
3. books.
4. A physical count will verify the trading stock figure.
5. A business that deals in valuable items uses this meathod.
Periodic stock system
1. For businesses that deal in large volumes of goods with a low unit price.
2. The business does not calculate the coat of sales for every sales transaction.
3. A physical stock count is needed to calculate the cost of sales.
Advantages:
- Suited to a business in which it is difficult to find the cost of individual items because of the low
- value on the items and the high volume of turnover.
- The method is simple. (When an item is sold, only the sale is recorded)
- The cost of sales need not be brought into account for each sales transaction.
Disadvantages:
- A business cannot check the value of stock on hand at any time.
- It is not possible to calculate a trading stock deficit without a physical stock take and
- calculation of the cost of sales.
- There is less control over the actual stock.
- It is not suited to businesses dealing in valuable items.
- A record of movement is not kept of specific stock items into and out of the business.
GAAP Principles:
Historical cost: Stock is captured at historical cost or cost price (the price that you paid for it).
Prudence principle: Stock has different prices at different businesses and is therefore recorded
Prudence principle: at conservative prices
Faithful Representation: Keeping stock at realistic prices is due to the facts that some may be
. lost or become obsolete. According to IFRS, this is one of the most
Faithful Representation: important characteristics of useful accounting information.
Neutrality: Not to favour the interest of any particular stakeholder or group at the expense of
. any other.
Trading stock be realistic and as will follow, there are four methods to value stock, each
resulting in different figures.
The method used must be appropriate to the nature of the business and type of product sold as
it will affect the financial statements and ultimately the net profit and tax.
, Stock system 1: Perpetual or Continuous System
= Think trading stock
You can determine the value of your stock at any point in time.
A physical count of the stock will reveal if stock has gone missing.
Journals involving stock movements:
CRJ - Cash sales of stock
DJ - Credit sales of stock
DAJ - Stock returned by credit customers and allowances are awarded to them
CPJ - Stock purchased for cash
CJ - Stock purchased on credit
CAJ - Stock returned to suppliers and allowances granted to us
PCJ - Stock purchases from petty cash
GJ - Sundry transactions e.g. drawings, errors, etc.
+ Trading Stock -
1 Balance b/d 7 Cost of Sales CRJ
2 Bank CPJ 8 Cost of Sales DJ
3 Petty Cash PCJ 9 Creditors Control CAJ
4 Creditors Control CJ 10 Donation GJ
5 Drawings GJ 11 Drawings GJ
6 Cost of Sales DAJ Balance c/o
12 Balance b/d
1 Balance of the T/S account at the end of the previous month.
2 Stock purchased and paid for by cheque or electronic transfer.
3 Stock purchased and paid for by petty cash.
4 Stock purchased on credit.
5 Stock returned to the business that the owner had already taken as drawings.
6 Cost price of stock returned by debtors.
7 Cost price of stock sold for cash.
8 Cost price of stock sold on credit.
9 Cost price of stock returned to creditors.
10 Cost price of stock donated.
11 Cost price of stock taken by the owner for personal use.
12 Balance of the T/S account at the end of the month.
