Inventory

STOCK OR INVENTORY

The term Stock includes the value of those goods which are lying unsold at the end of accounting period. The Stock may be of two types:

1.     Opening Stock: The value of goods lying unsold at the beginning of the accounting period.

2.     Closing Stock: The value of goods lying unsold at the end of the accounting period.

Types of Stock: In case of manufacturer, there can be three types of Opening or Closing Stock:-

·        Stock of Raw Material

·        Stock of Work-in-Progress

·        Stock of Finished Goods

Raw Material: It includes stock of raw materials purchased for using them in the products manufactured but still lying unused.

Work-in-Progress: It means goods in semi-finished form. Such goods need further processing for converting into finished products. Therefore they are termed as partly finished goods. For the valuation of work-in-progress, the value of raw material used in it, the cost of labour, power, fuel and other expenses on proportionate basis are included.

Finished Goods: It includes the stock of those goods which have been completely processed and are ready for sale but are lying unsold at the end of the accounting period.

Calculation of closing stock

It is very important to ascertain the value of closing stock because it affects the Net Profit & hence Balance Sheet also. According to the new rule, closing stock is valued at cost price or realizable value whichever is less. For example: if certain goods were purchased for ₹1,00,000 but at present its realisable value is ₹1,20,000, it will be valued at ₹1,00,000 and not ₹1,20,000. But if realizable value of same goods is ₹90,000, it will be valued only at ₹90,000. The basic principle under this is that anticipated losses should be taken into account, but all unrealized gains should be ignored.

To ascertain the value of closing stock, a complete list of all items in the godown is prepared with their quantities. Raw material, semi-finished goods and finished goods are mentioned in a separate list which is called stock taking.

The following points should be kept in mind while stock taking:-

·        Goods which have been sold but remain undelivered should not be included in the list of stock.

·        Goods purchased and received but which have not been recorded in the purchase book should also not be included in the list.

·        Goods sent to the customers on sale or return basis should be included.

·        Goods sent to agents for sale but remain lying with them as unsold should be included.