VU Lesson 15

Financial Accounting - I – MGT101 VU
Lesson # 15
RECORDING OF STOCK (Continued)
Stock is termed as “the value of goods available to the business that are ready for sale”. For
accounting purposes, stock is of two types:
• Opening stock
• Closing stock
Opening stock is the value of goods available for sale in the beginning of an accounting
period.
Closing stock is the value of goods unsold at the end of the accounting period.
Journal Entries to Record Stock
In Case of Trading Concern:
Journal entries for those goods which are bought for resale purposes are as follows:
Purchase of goods:
Debit: Stock/Material Account

Credit: Cash/Bank/Creditor
Consumption of goods
Debit: Cost of goods sold

Credit: Stock
Payment in case of credit purchase
Debit: Creditors Account

Credit: Cash/Bank
In Case of Manufacturing Concern:
• In case of manufacturer there are at least two types of Stock Accounts:

o Raw Material Stock Account
o Finished Goods Stock Account
Raw Material
Raw material is the basic part of an item, which is processed to make a complete item
Finished Goods
Finished goods contain the items that are ready for sale, but could not be sold in that accounting
period.
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Work in Process
In manufacturing concern, raw material is put in a process to convert it into finished goods. At
the end of accounting period, some part of raw material remains under process. i.e. it is neither
in shape of raw material nor in shape of finished goods. Such items are taken in stock as work
in process.
Flow of Costs
Raw Material Stock Other Costs Accounts
Work in Process Account
Finished Goods Account
Cost of Goods Sold Account
In manufacturing concern, Raw material stock is put into process. For accounting purposes, all
value of stock and other manufacturing costs are charged to work in process account. When the
process is completed and the goods are prepared, all the value of work in process is charged to
finished goods account. The business sells finished goods for the whole accounting year. At the
end of the year, goods that are unsold are deducted from cost of goods sold account.
Journal Entries
For Manufacturing Concern
Purchase of raw material
Debit: Stock/Material Account

Credit: Cash/Bank/Creditors
Other direct costs incurred
Debit: Relevant cost/Expense Head

Credit: Cash/Bank/Payables

Raw material issued and other costs allocated to production of units
Debit: Work in process

Credit: Stock Material Account
Debit: Work in process

Credit: Relevant Expense Head Account
When production is completed
Debit: Finished Goods Stock Account

Credit: Work in process account
Entry for Cost of sale
Debit: Cost of Goods Sold Account

Credit: Finished Goods Stock Account
Entry for sale of goods
Debit: Cash/Account receivable Account

Credit: Sales Account
Return of material purchased
There are two options for recording purchase material return:
• Option 1
Debit: Goods Return Account

Credit: Stock Material Account
AND
Debit: Cash/Bank Account

Credit: Goods Return Account
OR
If our supplier suppliers use some other material in exchange of material returned. Then:
Debit Raw Material Stock Account

Credit: Goods Return Account
In the first case above, cash is received in return of goods. In the second case, defective
goods are exchanged with quality goods. That is why, we debited our stock account. Both
entries are correct for return of purchased items.

o Option 2
Debit: Cash/Creditor Account

Credit: Stock Account
Example 1:
• Record the following transactions:
1. Purchased goods for cash Rs. 10,000

2. Purchased goods on credit from ABC Co. Rs. 25,000
3. Sold goods whose cost was Rs. 20,000
4. Returned goods to ABC Co. that originally cost Rs. 5,000
5. Paid to ABC Co. Rs. 15,000 through cheque
6. Sold goods whose cost was Rs. 5,000
Required:
1. Cost of goods sold
2. Value of closing stock
3. Amount payable to ABC Co.
1 – Purchased goods for cash Rs. 10,000
Cash Account Code --

Date No. Narration Dr. Rs. Cr. Rs. Bal. Dr/(Cr)
1 Purchased goods for cash 10,000 (10,000)
Stock Account Code --

1 Purchased goods for cash 10,000 10,000
2 – Purchased goods on credit from ABC Co. Rs. 25,000
ABC Co. Code --

2 Purchased goods from ABC 25,000 (25,000)

2 Purchased goods from ABC 25,000 35,000
3 – Sold goods whose cost was Rs. 20,000.
Cost of Goods Sold Code --

3 Goods sold 20,000 20,000

3 Goods sold 20,000 15,000
4 – Returned goods to ABC Co. cost Rs. 5,000
ABC Co. Code --

4 Returned goods to ABC 5,000 (20,000)

3 Goods sold 20,000 15,000
4 Returned goods to ABC 5,000 10,000

5 – Paid to ABC Co. Rs. 15,000 through cheque
ABC Co. Code --

5 Paid to ABC 15,000 (5,000)
Bank Account Code --

5 Paid to ABC 15,000
6 – Sold goods whose cost was Rs. 5,000.

3 Goods sold 20,000 20,000
6 Goods sold 5,000 25,000

3 Goods sold 20,000 15,000
6 Goods sold 5,000 5,000
Cost of Goods Sold

3 Goods sold 20,000 20,000
6 Goods sold 5,000 25,000

Value of Closing Stock

3 Goods sold 20,000 15,000
6 Goods sold 5,000 5,000
Amount Payable to ABC CO.
ABC Co. Code --

5 Paid to ABC 15,000 (5,000)
Example 2:
• Using the following data calculate the Cost of Goods Sold of XYZ Co.
Stock levels Opening Rs. Closing Rs.
Raw material 100,000 85,000
Work in process 90,000 95,000
Finished goods 150,000 140,000
Purchase of raw material during the period Rs. 200,000
Paid to labor Rs. 180,000 out of which Rs. 150,000 used on production.
Other production costs Rs. 50,000
Raw Material Account Labor Account

O/S 100,000 Cost 180,000 Charge 150,000
Purchases 200,000 WIP 215,000
C/S 85,000
Total 300,000 Total 300,000 Total 180,000 Total 180,000

Other Costs Account Work in Process Account
Paid 50,000 Charge 50,000 O/B 90,000

Raw M 215,000
Labor 150,000 F/G 410,000
O/H 50,000 C/B 95,000
Finished Goods Stock Account Cost of goods sold
O/S 150,000 COS 420,000 F/G 420000

WIP 410,000 C/S 140,000
Total 560,000 Total 460,000
Illustration # 1
Record the following transactions

• Purchased goods for cash Rs, 10,000
• Purchased goods from Ali Brothers. worth of Rs. 20,000
• Sold goods having cost of Rs.15,000
• Returned goods to Ali Brothers. worth of Rs. 4,000
• Sold goods having cost of Rs. 5,000
• Paid to Ali Brothers. Rs. 10,000.
Also ascertain
• Cost of goods sold.
• Value of closing stock.
• Payable to Ali Brothers.
Solution
First, we will pass journal entries
Particulars Amount(Dr.) Rs. Amount(Cr.)

Rs.
Stock Account 10,000

Cash Account 10,000
Goods purchased for cash


Rs.
Ali Brothers. 20,000
Goods purchased from Ali Brothers.

Rs.
Cost of goods sold 15,000
Goods sold whose cost was Rs. 15,000
Particulars Amount(Dr.) Amount(Cr.) Rs.

Rs.
Ali Brothers. 4,000
Stock Account 4,000
Goods returned to Ali Brothers.
Particulars Amount(Dr.) Rs. Amount(Cr.) Rs.
Cost of goods sold 5,000
Stock Account 5,000
Goods sold whose cost was Rs. 5,000

Particulars Amount(Dr.) Rs. Amount(Cr.) Rs.
Ali Brothers. Account 10,000
Cash Account 10,000
Paid to Ali Brothers.

Payable to Ali Brothers
Ali Brothers Account

Date Particulars Code Amount Date Particulars Code Amount
# Rs. # Rs.
(Dr.) (Cr.)
Goods 4,000 Purchased goods 20,000
returned
Paid cash 10,000
Balance 6,000
Total 20,000 Total 20,000
Cost of Goods Sold
Cost of goods sold Account

# Rs. # Rs.
(Dr.) (Cr.)
Goods sold 15,000
Goods sold 5,000
Balance 20,000
Value of Closing Stock
Stock Account
# Rs. # Rs.
(Dr.) (Cr.)
Purchased 10,000 Goods sold 15,000
goods for cash Returned to Ali 4,000
Purchased 20,000 Brothers
goods from Goods sold 5,000
Ali Brothers.
Balance 6,000

Illustration # 2
• Using the following data calculate the Cost of Goods Sold of XYZ Co.
Stock levels Opening Rs. Closing Rs.
Raw material 100,000 85,000
Work in process 90,000 95,000
Finished goods 150,000 140,000
o Purchase of raw material during the period Rs. 200,000
o Paid to labor Rs. 180,000 out of which Rs. 150,000 used on production.
o Other production costs Rs. 50,000
Solution
Raw Material Stock Account Labor Account

Debit Credit Debit Credit
O/S 100,000 Cost 180,000 Charged 150,000
Purchases 200,000 WIP 215,000
C/S 85,000
Other Costs Account Work in Process Account

Paid 50,000 Charge 50,000 O/B 90,000
Raw M 215,000
Labor 150,000 F/G 410,000
O/H 50,000 C/B 95,000
Finished Goods Stock Account Cost of Goods Sold Account

O/S 150,000 COS 420,000 F/G 420,000
WIP 410,000 C/S 140,000
Total 560,000 Total 560,000
In Raw Material Account, the debit side contains:

o Opening balance 100,000
o Purchases 200,000
On the credit side, closing balance of Rs. 85,000 is shown along with the balancing figure of
Rs. 215,000 which is charged to work in process OR WIP account through the following entry:

Debit: Work in process OR WIP Account
Credit: Raw Material Account
Labor cost of Rs. 180,000 is given, out of which Rs. 150,000 is charged to production.
(Remaining cost of Rs. 30,000 will be explained in some later stage). That means Rs. 150,000
is charged to work in process OR WIP account through the following entry:

Credit: Labor Cost Account
Other costs of Rs. 50,000 are also charged to work in process OR WIP account through the
following entry:

Credit: Other Costs Account
Work in process account has the opening balance of Rs. 90,000 and closing balance of Rs.
95,000. After charging all the above mentioned accounts to WIP, balancing figure of work in
process of Rs. 410,000 is charged to finished goods account through the following entry:
Debit: Finished Goods Account

Credit: Work in process Account
Finished goods account has the opening balance of Rs. 150,000 and closing balance of Rs.
140,000. After charging WIP account to finished goods, the balancing figure of Rs. 420,000, is
charged to cost of goods sold account through the following entry:
Debit: Cost of Goods Sold Account

Credit: Finished Goods Account

VU Lesson 15

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Financial Accounting - I – MGT101 VU

RECORDING OF STOCK (Continued)

Journal Entries to Record Stock

In Case of Trading Concern:

Debit: Stock/Material Account

Debit: Cost of goods sold

Payment in case of credit purchase

Debit: Creditors Account

In Case of Manufacturing Concern:

• In case of manufacturer there are at least two types of Stock Accounts:

© Copyright Virtual University of Pakistan 115

Raw Material Stock Other Costs Accounts

Work in Process Account

Finished Goods Account

Cost of Goods Sold Account

For Manufacturing Concern

Purchase of raw material

Debit: Stock/Material Account

Other direct costs incurred

Debit: Relevant cost/Expense Head

© Copyright Virtual University of Pakistan 116

Debit: Work in process

Debit: Work in process

When production is completed

Debit: Finished Goods Stock Account

Entry for Cost of sale

Debit: Cost of Goods Sold Account

Entry for sale of goods

Debit: Cash/Account receivable Account

Return of material purchased

There are two options for recording purchase material return:

Debit: Goods Return Account

Debit: Cash/Bank Account

Debit Raw Material Stock Account

© Copyright Virtual University of Pakistan 117

Debit: Cash/Creditor Account

• Record the following transactions:

1. Purchased goods for cash Rs. 10,000

1 – Purchased goods for cash Rs. 10,000

Cash Account Code --

Stock Account Code --

2 – Purchased goods on credit from ABC Co. Rs. 25,000

ABC Co. Code --

© Copyright Virtual University of Pakistan 118

3 – Sold goods whose cost was Rs. 20,000.

Cost of Goods Sold Code --

Stock Account Code --

4 – Returned goods to ABC Co. cost Rs. 5,000

ABC Co. Code --

Stock Account Code --

© Copyright Virtual University of Pakistan 119

ABC Co. Code --

Bank Account Code --

6 – Sold goods whose cost was Rs. 5,000.

Cost of Goods Sold Code --

Stock Account Code --

Cost of Goods Sold

Cost of Goods Sold Code --

© Copyright Virtual University of Pakistan 120

Value of Closing Stock

Stock Account Code --

Amount Payable to ABC CO.

ABC Co. Code --