Recording/Journalising the value of Closing Stock

... From Page 15

   
 

Information relating to Closing Stock

The Consignor may require the information relating to unsold stock at many points of time during the accounting period for a number of different purposes. However, the need for valuation does not arise in all these cases.

For the purpose of accounting, the value of unsold stock (Closing Stock) with the consignee is needed by the consignor at the time of preparation of his final accounts, i.e. when he tries to ascertain the profit or loss on account of consignment. This information relating to the quantity of stock is obtained by the consignor from the consignee, usually at the time of receiving the "Account Sales" from the consignee.

The consignee does not maintain any records regarding the values of closing stock since the ownership is with the consignor and he is only holding the stock as an agent of the consignor. Therefore information relating to the value of the closing stock cannot be obtained from the consignee. The account sales only gives the information relating to sales, the amounts spent by the consignee for the consignment, the consignees commission etc. Therefore, the quantity of closing stock, losses etc should be derived from the information available with the consignor and the information in the account sales.

Whenever there is a loss of stock, its information would be immediately passed on to the consignor. This is done to enable the consignor to make the insurance claim for loss of stock (if at all the stock had been insured),

The value of closing stock is ascertained by the consignor with the information that he derives and using the principles for valuation of stock (in consignment).

Valuation and Recording

The problem of valuation and recording the of closing stock are two different aspects. Valuing stock needs you to have the understanding relating to the principles of valuation. Recording the value in books needs you to have the accounting knowledge which is dealt with below.

00. June 15th: For the value of unsold stock with the consignee at the beginning Rs. 12, 500
14. June 30th: For the amount of unsold stock with the consignee at the end Rs. 34,500

Consignor's Books Hide/Show

Accounts Effected by the Transaction » Identification & Analysis:

At the end of the Current Accounting Period

  • Debit »

    • 14: Stock on Consignment a/c

      The closing stock with the consignee belongs to the consignor. This implies that the value of closing stock with the consignee should be treated as an asset of the consignor at the time preparation of his Balance Sheet. For this purpose a real account by name "Stock on Consignment a/c" is created and used in the books of the consignor. This account is debited with the value of unsold stock with the consignee.
      [Stock on Consignment a/c – Real a/c – Debit .... ]
  • Credit »

    • 14: Vijayawada Consignment a/c

      The value of goods sent on consignment are charged to the consignment account (debit to consignment account implies expenditure for consignment).

      To asertain the actual expenditure in relation to the goods that have been sold, the value of closing stock has to be eliminated from the Consignment a/c. This is similar to eliminating the value of Closing Stock (physically available with the organisation) from the "Trading a/c".

      Reducing the charge on consignment account would need us to credit the consignment account. Therefore the "Consignment a/c" is credited with the value of Closing Stock with the Consignee.
      [Consignment a/c – Nominal a/c – Credit .... ]

Note:

To avoid confusion, at times it would be convenient to support the debit and credit with logical reasoning rather than the principles of debit and credit.

Alternative Explanation

Transfer of a debit balance from One a/c to a Second would result in the Second a/c being debited and the first account being credited. Therefore, since a debit balance (the value of unsold stock on consignment with the consignee) is to be eliminated from the Consignment a/c it is transferred to the "Stock on Consignment a/c" resulting in a Debit in the "Stock on Consignment a/c" and a Credit in the "Consignment a/c"

At the beginning of the Subsequent Accounting Period

The closing stock on consignment in an accounting period would form the opening stock on consignment for the next accounting period.

The debit balance in the "Stock on Consignment a/c" appearing on the assets side of the opening balance sheet is transferred to the debit side of the "Consignment a/c" at the beginning of the next accounting period. The Consignment a/c being a nominal account is created afresh for each accounting period and is closed at the end of the accounting period by transfer to the profit and loss a/c.

Transfer of a debit balance from One a/c to a Second would result in the Second a/c being debited and the first account being credited. Therefore, since a debit balance (the value of unsold stock on consignment with the consignee) is to be eliminated from the Consignment a/c it is transferred to the "Stock on Consignment a/c" resulting in a Debit in the "Stock on Consignment a/c" and a Credit in the "Consignment a/c"

  • Debit » Vijayawada Consignment a/c

  • Credit » Stock on Consignment a/c

 

The effect of the transactions can be summarised as
00 :(i) Consignment a/c and (ii) Stock on Consignment a/c
14 :(i) Stock on Consignment a/c and (ii) Consignment a/c

DrVijayawada Consignment a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)

15/06/05

 

To St. Con a/c (00)

 



 

12,500

 


30/06/05
 


By St. Con a/c (14)
 



 


34,500
 

 
DrStock on Consignment a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
15/06/05
30/06/05
To Bal b/d (00)
To Vij. Con a/c (14)

12,500
34,500
15/06/05
By Vij. Con a/c (00)

12,500
  sub-total   47,000   sub-total   12,500
        30/06/05 By Balance c/d 34,500
  Total   47,000   Total   47,000
01/07/05 To balance b/d 34,500        

 
Journal in the books of M/s __ for the period from ____ to _____
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
June 15th Dr
12,500
12,500
June 30th Dr
34,500
34,500

Consignees Books Hide/Show

The ownership of the goods is with the consignor. The consignee is no way connected to the ownership of the goods. The consignee therefore will not record the value of goods in his books of accounts. Therefore he neither records the value of opening stock with him nor the value of closing stock with him in his books of accounts.

There is no entry for this in the books of the consignee

This does not mean that the consignee will have no record whatsoever of the goods. He does not take into his account books, but may be maintaining a stock record for the goods received and sold.

Author Credit : The Edifier ... Continued Page 17

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