On the basis of starting from the known......
Opening stock is the stock your business has on hand on day one of the financial year. It is an asset, meaning it has value to the business and it could be finished goods for resale or raw materials for the business to use (nuts and bolts for example)
Closing stock is the stock you have left at the end of the financial year, it is effectively a credit item as it must be removed from this years profit/loss calculation and placed as the opening figure for the next year - a bit like a prepayment if that helps to understand the concept.
Stock is not normally held in a 'stock account' because it is not sold at the price it is bought for - the company does something to it to add value such that it can be sold at a profit. Goods for resale might be bought in bulk at a discount, repackaged and sold in smaller units for a profit maybe or the nuts and bolts suggested above might be built into something that is then sold. So the purchase of stock items goes into the purchase account as an expense of business i.e. a debt amount.
When the stock has been processed and sold, that amount goes to the sales account, a credit amount.
Hopefully so far, so good.
When we skip forward to trial balance, trading and profit and loss account and balance sheet we use the numbers to help show the current financial standing of the business.
There is a mnemonic to help remember which accounts go on the debit side and which on the credit.
DEAD CLIC
Debit Expenses Assets Drawings
Credit Liabilities Income Capital
So, when working with the trial balance (TB) opening stock is an asset, therefore debit . Generally you get the closing stock figure as an ammendment to be incoporated later but if it shows up here it would be a credit item, offsetting against the years profit (reducing it).
I'm not brillient with words and have probably used the wrong ones here - but hopefully you get the idea.
For the trading and profit and loss account (TPL) Cost of goods sold is
(Opening stock + purchases) less closing stock
the total value of all stock held in the year minus that part which is being carried over to next year.
For the balance sheet (BS), closing stock is an asset - it is value held by the company ready to use in the next financial year.
So if we back up to the TB and its adjustments - i.e. an Extended Trial Balance you will see opening stock once, as an asset and it moves forward to the TPL as an asset.
Closing stock shows as a liability on the TPL and a asset on the BS - in other words it is shown TWICE! So there is both a credit and a debit showing in the adjustments column of the ETB, the amount to remove to 'correct' the profit for this year and an equal amount given as an asset to start the next year with.
Hopefully this helps and has not confused you further.
As to remembering which is what - I don't know what to advise. Think of the movement - is it owned or owing. On the TPL closing stock is owing to the next financial period, on the BS closing stock is owned by the business.
|