Stock transactions

There are two ways to handle stock transations.

The first is to debit all trade purchases into the Purchases account, and maintain a separate (perhaps manual) stock account.

In this method, to calculate your cost of sales, you would:

1. Add opening stock balance
2. Add Purchases
3. Deduct Closing stock

Your Profit & Loss account would look like this:

	Sales		100,000.00
	Less: Cost of sales
	Opening stock	35,000.00
	Purchases	75,000.00
		110,000.00
	Less: Closing stock	30,000.00
			80,000.00
	Gross profit		20,000.00

You would have to do a stock take to ascertain the value of your closing stock as at any point in time, and pass a journal entry into the system so that Gross Profit can be calculated.

The alternative is to maintain a perpetual stock system.

With this method, purchases are debited to a stock account and, as stocks are sold, the cost is deducted from it.

At any point in time, the amount reflected in the stock account would therefore be the value of stocks on hand.

In this scenario, the Profit & Loss Account would look like this:

	Sales		100,000.00
	Less: Cost of sales		80,000.00
	Gross profit		20,000.00

The real impact on the bottom line is the same. I say real because with the previous system the closing stock value would, at best, be an estimate as you would first have to do a stock take, and then value the stock. This would be time consuming, and, except at the financial year end, most businesses would just take an estimated value and plug it in.

To maintain such a system manually would be too tedious, but the good news is that most, if not all, modern day accounting systems cater for this.

There are primarily three advantages to using this system.

The first is that you can ascertain the gross margin on each sale, as well as ascertain your profits at any given time.

Secondly you know the exact value of your stock in hand, as well as what is in stock and what needs re-ordering.

Thirdly, you can easily do a month to month comparative of your monthly income, because the actual cost is recorded at the time of recording the sale.

Note that although you do not have to perform stock takes just to ascertain the value of your stocks, you would still need to do one at the end of each financial year for audit purposes.

It's also a good idea to do selective stock takes to ensure that the balances in your system tally with that of the physical stock. This will also discourage pilferage.