Which of the following is not regarded as closing inventory?

This explains how to calculate the profitability of your stock items, when you record the purchase of stock on your balance sheet.

Only follow the steps in this article if you’ve recorded the purchase of stock to your balance sheet.

Why to do this

If you buy and sell stock items, it’s important to know their profitability so you can analyse your business's performance. The value of your sales and purchases appears on the Profit and Loss Report.

To correctly calculate stock profitability and show the cost of sales on the Profit and Loss Report, you need to account for unsold stock at the end of a given period. If you don't, unsold stock can create inflated profits or even a loss on the report.

How it works

By default the Profit and Loss Report calculates gross profit without opening and closing stock:

• Sales – purchases = gross profit

If opening and closing stock journals are added you can then demonstrate the cost of sales too:

• Opening stock + purchases - closing stock = cost of sales

The cost of sales is then taken off your total sales to give a more accurate picture of gross profit in a given period:

• Sales – cost of sales = gross profit

You may like to refer to our example cost of sales calculation to help your understanding on how it's applied.

See example

Month 1

In January, you purchase £10,000 worth of stock and sell £5,000 worth of stock for £12,000.

A gross profit calculation without stock journal entries would be sales minus purchases.

• Sales: £12,000 - Purchases: £10,000 = Gross Profit: £2,000.

This method however, doesn't take into account the £5,000 worth of remaining stock and the cost of sales. That calculation looks like this: 

• Opening stock: £10,000 – Closing stock: £5,000 = Cost of sales: £5,000

• Sales: £12,000 – Cost of sales: £5,000 = January Profit: £7,000.

Accounting for the closing stock reflects the profit more accurately.

Month 2

In February, you sell the remaining £5,000 worth of stock for £12,000.

Gross profit without stock journal entries would be sales minus purchases.

• Sales: £12,000 - Purchases: £0 = Profit: £12,000

However, this doesn’t take into account the £5,000 of stock remaining from January.

The calculation with opening and closing stock is:

• Opening stock: £5,000 – Closing stock: £0 = Cost of sales: £5,000.
• Sales: £12,000 - Cost of sales: £5,000 = February Profit: £7,000.

Summary

You'll notice the profit for the two month period is the same, £14,000 in total, but posting opening and closing stock means you can track profitability month by month.

Enter your opening and closing stock

To report on the cost of sales, you'll need to ensure unsold stock is accounted for by posting opening and closing stock journals.

Create the opening and closing stock nominal ledger accounts

By default, you already have a balance sheet stock nominal ledger account, which is code 1000. In addition to this, you also need to create profit and loss nominal ledger accounts for opening and closing stock.

1. From Settings, then Business Settings, select Financial Settingsand then Chart of Accounts.

2. Select New Ledger Account and complete the required information.

   Ledger account fields explained

1. Select Save.
2. To create your Closing Stock, repeat the steps and use a new nominal code, for example, 5201.
   

Start of month 1 or your financial year

If you have a value for opening stock on your balance sheet stock nominal ledger account, code 1000, you need to post a journal to move this to your profit and loss opening stock account, 5200.

You might not have any values on your balance sheet stock account, for example, if this is the first month you’ve purchased any stock. If you don’t, record the purchase as normal then the first journal you should post is a closing stock journal. For more information, please see End of month 1 – Closing stock journal.

1. From Journals, select New Journal.

2. Enter a date and reference.

   This doesn’t have to be the first day of the month. As long as the date is in the correct month, the Profit and Loss Report and the Balance Sheet Report will show the correct values.

3. Enter the relevant information for your journal.

   See example

   Ledger Account*	Details	Debit	Credit	Include on VAT Return?
   Stock (1000)	Opening stock		Value	Leave clear
   Opening stock (5200)	Opening stock	Value		Leave clear

4. Select Save.

The value of your stock has now moved to the profit and loss account. The balance remains as a debit on the opening balance nominal ledger account 5200 for the rest of the year and is offset by the value in your closing stock account.

End of month 1 – Closing stock journal

At the end of the month, you need to post a journal to move the closing stock value back to the balance sheet stock nominal ledger account 1000, so the stock appears as a company asset on the Balance Sheet Report.

1. From Journals, select New Journal.

2. Enter a date and reference.

   This doesn’t have to be the first day of the month. As long as the date is in the correct month, the Profit and Loss Report and the Balance Sheet Report will show the correct values.

3. Enter the relevant information for your journal.

   See example

   Ledger Account*	Details	Debit	Credit	Include on VAT Return?
   Closing stock (5201)	Closing stock		Value	Leave clear
   Stock (1000)	Closing stock	Value		Leave clear

1. Select Save.
   

You can now produce the Profit and Loss Report from Reporting.

Start of month 2 and subsequent months – Opening stock journal

Post a journal to move the value of the opening stock from the balance sheet stock nominal ledger account 1000 to the profit and loss account 5201.

The opening stock value for month 2 is the closing stock value for month 1.

1. From Journals, select New Journal.

2. Enter a date and reference.

   This doesn’t have to be the first day of the month. As long as the date is in the correct month, the Profit and Loss Report and the Balance Sheet Report will show the correct values.

1. Enter the relevant information for your journal.

   See example

   Ledger Account*	Details	Debit	Credit	Include on VAT Return?
   Stock (1000)	Opening stock		Value	Leave clear
   Closing stock (5201)	Opening stock	Value		Leave clear

1. Select Save.

Repeat these steps for each month you want to record opening stock.

End of month 2, subsequent months or the end of your financial year – Closing stock journal

Post a journal to move the value of the opening stock from the profit and loss nominal ledger account 5201 to the balance sheet stock account 1000.

1. From Journals, select New Journal.

1. Enter a date and reference.

   This doesn’t have to be the last day of the month. As long as the date is in the correct month, the Profit and Loss Report and the Balance Sheet Report show the correct values.

1. Enter the relevant information for your journal.

   See example:

   Ledger Account*	Details	Debit	Credit	Include on VAT Return?
   Closing stock (5201)	Closing stock		Value	Leave clear
   Stock (1000)	Closing stock	Value		Leave clear

2. Select Save.
   

The year end

At the end of your financial year, when you produce a report dated in the new year, the values are automatically cleared from the opening and closing stock nominal accounts to the profit and loss account, 3100.

You'll see this value in the Equity section of the Balance Sheet Report, leaving your unsold stock as an asset on nominal ledger account 1000.

Follow the steps in the Start of month 1 or your financial year section to start posting opening and closing stock for the new year.

Which is the following is not an inventory?

Which one is not example of inventory?

What are the 4 types of inventory?

What are the 3 types of inventory?