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Stock reserve

Nitesh Nanu (Team Leader) (85 Points)

27 March 2012

Hello Seniors,

Can anyone please explain, is Stock Reserve a Capital or Revenue Loss ?

Thanks & Regards,

N N.

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CMA Shilpa Shinde (COST ACCOUNTANT) (217 Points)
Replied 27 March 2012

Following from https://wiki.answers.com/Q/What_is_stock_reserve

Many a times, it so happens that a manufacturer, consignor or a head office does not directly engage in selling its products. It instead sends or consigns the goods to a profit centre--a dedicated centre for selling its products. The profit centre in case of a consignor is a consignee and in the case of a head office, its branch or retail outlet. Now when the principal sends the goods to the profit centre, it issues/transfers the goods at a price which is higher than the cost of production of those goods. This price is generally called Invoice Price (I.P.) and this is the value at which the branch/consignor records the receipt of the same. When the branch sells these goods it sells at a price greater than the I.P. thus earning a profit which has two components-- 1.The mark up on the cost of production (i.e., the difference between the I.P. and the cost of production), and 2.The profit made by the branch/consignee (i.e., the difference between seeling price of the branch and I.P.) At the end of the accounting period, any stock is lying unsold with the branch/consignee is having the value of I.P. (at which the head office/consignor had issued the goods). But as per AS-2, inventory can only be valued at cost or NRV, whichever is lower. The excess mark-up on the value of the goods needs to be removed as that is unrealised profit. This unrealised profit is given a name in accountancy - STOCK RESERVE.

Therefore can be cncld. as revenue loss. actually loading i.e., profit element is removed and transfered to Stock Reserve, which will be again gets transfered next financial year to related branch.

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