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Silly yet crucial doubt

Mohit (CA) (755 Points)

23 January 2013

Hi Guys,

This doubt has been in my mind for a long time. This might look silly but will be really grateful if someone clears it. I wanted to know what is the logic of Opening and Closing stock coming in the Trading Account. It is understood that Purchases, Direct expense etc are all debited, Sales etc is all credited. But why is that Opening and Closing stock come in Dr and Cr side of Trading respectively. I mean what is the correlation or nexus b/w Opng Stock, Closing Stock wrt Trading account.

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10 Replies

Saurabh Maheshwari (B.com,ACA) (5923 Points)
Replied 23 January 2013

Dear, Opening Stock appears in Dr. side because the sale item as appearing in Cr. side may consist of (i)sale of purchases made in the year or

(ii) may be of earlier year purchases(i.e. sale ofrom opening stock).

As far as Closing Stock is concerned it will appear in Dr. side because the Op stock+Purchases(Goods avaiable for sale) you are showing in Dr. side is not fully sold by you. So as Sales it will appear in Cr. side.

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Mohit (CA) (755 Points)
Replied 23 January 2013

Hmm i am not clear on this Saurabh... Didnt understand it....

Mandar D. Rane (CA Final & CS Executive Student) (236 Points)
Replied 23 January 2013

Hi Mohit,

Opening Stock indicates the stock we have already purchased and is in hand

Closing Stock indicates the portion of opening stock which is left in hand after we have made some sales

Say

Opening Stock 120

Closing Stock 21

This tells of the cost of goods sold 99 (Opening Stock - Closing Stock)

Now Suppose Sales amt is 160

The cost of goods we have derived will help us arrive at Gross Profit figure (160-99=61) which is the ultimate aim of preparing Trading Account

For More Clarity,

Opening Stock (Given) 120 Sales (Given) 160

Gross Profit (Bal. Fig.) 61 Closing Stock (Given) 21

Total 181 Total 181

Hope this satisfies ur Query

Mohit (CA) (755 Points)
Replied 23 January 2013

Hmm still not very clear Mandar... Basically what does the difference of Opng and Closing stock signify.. Ig Opng is 10, closing is 8 dosen't that mean we have sold 2? Will this 2 not be included in Sales?? Could someone explain the whole Audit Trail with Journal Entries (i.e from Purchase of goods to ultimate selling - which all will be cost, which will be inventory etc)... Really confusing this seems to be... And also what exactly does Cost of Sales mean? Will be obligied if somebody clarifies the same with a simple example.

Mohit (CA) (755 Points)
Replied 24 January 2013

Any article on the basics of Trading Account if someone could share would be great.

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Mandar D. Rane (CA Final & CS Executive Student) (236 Points)
Replied 24 January 2013

See Debit and Credit gets Net Off

See Opening 10 (Cost of earlier year's purchases) and closing 8 (Cost of Remaining Items of earlier year's purchases) tells us the cost of goods sold out of earlier year's purchases that is 2 ( Opening stock and closing stock nets off to give us Cost of goods sold)

Now this 2 is already included in sales figure say 5 because while selling we add GP Margin to our cost

and just because of that we can get our GP figure thats (5-2) Rs 3

If u r stil not clear I would suggest u to refer to 11th 12th standard text books of accounts to get fundas clear (NO OFFENCE just guiding u)

Mohit (CA) (755 Points)
Replied 24 January 2013

Cool thanks Mandar... I guess I ll just read 12th Book on this to get the concept right.. Thanks for the help anyways :)

CA Suhas Prabhu (Chartered Accountant) (159 Points)
Replied 25 January 2013

It is due to matching concept of accounting. That is to say we match the expense to the incomes.

First, Cost of sales must be matched up with current year’s revenue and as the inventory at the end of the period has not been sold and thus should not be accounted against sales revenue, therefore it must be deducted from cost of sales. That is the conceptual reason why we deduct closing stock from the total of opening inventory and purchases.

Second, in order to account for the inventory at the year end in the trading account, closing entry is passed and due to this closing entry closing stock appears at the credit side of trading account

Hope this is clear.