The asset of Stock. Goods are sometimes sold at the same price at which they bought, but this is not usually the case. Normally they are sold above cost price, the difference being profit; sometimes, however, they are sold al less then cost price, the difference being loss.
If all sales were at cost price, it would be possible to have a stock account, the goods sold being shown as a decrease of an asset, i.e. on the credit side. The purchase of stock could be shown on the debit side as it would be an increase of an asset. The distinction between different sides would then represent the cost of the goods unsold at that date, if wastages and losses of stock are ignored. However, most sales are not at cost price, and therefore the sales figures include elements of profit or loss. Because of this, the difference between two sides would not represent the stock of goods. Such as stock account would therefore serve no useful purpose.
The stock account is accordingly divided into several accounts, each one showing a movement of stock. These can be said to be:
1. increase in the stock. This can be because of one of two causes:
(a) The purchase of additional goods.
(b) The return in to the firm of goods previously sold. The reasons for this are numerous. The goods may have been the wrong type, they may have been surplus to requirements, have been faulty and so on.
To distinguish the two aspects of the increase of stocks of goods two accounts are opened. These are:
- Purchase account – in which purchases of goods are entered.
- Returns Inwards Account – in which goods being returned in to the firm are entered. The alternative name for this account is the Sales Return Account.
2. decrease in the stock of goods. This can be due to one of two causes if wastages and losses of stock are ignored.
(a) the sale of goods.
(b) Goods previously bought by the firm now being returned out of the firm to the supplier.
To distinguish the two aspects of the decrease of stocks of goods two account are opened. These are:
- Sales Account– in which sales of goods are entered.
- Return outwards Account –in which goods being returned out to a supplier are entered. The elective name for this Is the purchases returns Account.
As stock is an asset, and these four accounts are all connected with this asset, the double entry rules are those used for assets. We will presently check out at certain passages in the following sections.
Purchase of stock on credit
1 February 19X8. Goods costing $175 are bought on credit from D Henry. In the first place, the twofold impact of the transaction must be considered so that the bookkeeping entries can be worked out.
1. The asset of stock is increased. An increase in an asset needs a debit entry in an account. Here the account is a stock account showing the particular movement of stock; in this case it is the ‘purchases’ movement so that the account must be the purchases account.
2. An increase in a liability. This is the liability of the firm to D Henry because the goods bought have not yet been paid for. An increase is a liability needs a credit entry, so that to enter this part of the transaction a credit entry is made in D Henry’s account.
| Purchase | |
| 19X8 $ Feb 1 D Henry 175 |
| D Henry | |
| 19X8 $ Feb 1 purchase 175 |
Purchase of stock for cash
2 February 19X8. Goods costing $32 are bought, each being paid for them immediately.
1. The asset of stock is increased, so that a debit entry will be needed. The movement of stock is that of a purchase, so that it is the purchases account which needs debiting.
2. The asset of cash is decreased. To reduce an asset a credit entry is called for, and the asset is that of cash so that the cash account needs crediting.
| Purchase | |
| 19X8 $ Feb 2 cash 32 |
| Cash | |
| 19X8 $ Feb 2 purchase 32 |
Sales of stock on credit
3 February 19X8. Sold goods on credit for $300 to J Lee.
1. An asset account is increase. This is the account showing that J Lee is a debtor for the goods. The increase in the asset of debtors requires a debit and the debtor is J Lee, so that the account concerned is that of J Lee.
2. The asset of stock is decreased. For this a credit entry to reduce an asset is needed. The movement of stock is that of a ‘sale’ so the account credited is the sales account.
| J Lee | |
| 19X8 $ Feb 3 sales 300 |
| Sales | |
| 19X8 $ Feb 3 J Lee 300 |
Sales of stock for cash
4 February 19X8. Goods are sold for $65, cash being received immediately upon sale.
1. The asset of cash is increased. This needs a debit in the cash account to show this.
2. The asset of stock is reduced. The reduction of an asset requires a credit and the movement of stock is addressed by ‘sales’. Thus the entry needed is a credit in the sales account.
| cash | |
| 19X8 $ Feb 4 sales 65 |
| Sales | |
| 19X8 $ Feb 4 cash 65 |
Return inwards
5 February 19X8. Goods which had been previously sold to F Lowe for $39 are now returned by him. This could be for various reasons such as:
- we have sent him goods of the wrong size, the wrong colour or the wrong model;
- the goods may have been damaged in transit;
- the goods are of poor quality:
And so on.
1. The asset of stock is increased by the goods returned. Thus a debit representing an increase of an asset is required, and this time the movement of stock is that of returns inwards. The entry therefore required is a debit in the returns inward account.
2. A decrease in an asset. The debt of F Lowe to the firm is now reduced, and to record this a credit is needed in F Lowe’s account.
| Returns Inwards | |
| 19X8 $ Feb 5 F Lowe 39 |
| F Lowe | |
| 19X8 $ Feb 5 Returns inwards 39 |
Return outwards
6 February 19X8. Goods previously bought for $106 are returned by the firm to K Howe.
1. The liability of the firm to K Howe is decreased by value of the goods returned to him. The decrease in a liability needs a debit, this time in K Howe’s account.
2. The asset of stock in an asset is needed, and the movement of stock is that of Returns outwards so that the entry will be a credit in the returns outwards account.
| K Howe | |
| 19X8 $ Feb 6 Returns outwards 106 |
| Returns Outwards | |
| 19X8 $ Feb 6 K Howe 106 |
reccomendation: https://mayoow.com/mayoow-academy-blog/
