Meaning and treatment of stock reserve in departmental a/c

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pavithra kannan (Querist)

05 June 2015 Hai..This is pavithrakannan..In Advanced Accounting under departmental accounting, can anyone explain briefly about meaning of stock reserve and why we are debiting the closing stock reserve and crediting the opening stock reserve in general p&l A/C. while calculating G.P % for stock reserve, why we are taking previous year for opening stock reserve and current year for closing stock reserve..

CA. Sunil Gokhale

CA. Sunil Gokhale (Expert)

17 June 2015 As you know, stock should never be valued above cost. Inter-dept. transfers are made above cost to evaluate the performance of each dept. So stocks in dept. trading account are shown at cost to the dept. but this is above cost to the enterprise. No adjustment for profit element is made till P&L a/c because this is where we know the performance of each dept. But profit made by a dept. by transferring goods to another dept. is not actual profit earned by the enterprise unless the goods are sold to outsiders. The profit element in stocks must therefore be adjusted to find out the actual profit earned by the enterprise. The opening stock contains profit element but this is profit which was earned in the previous year & hence the previous year's G.P. rate is used. The opening stock appears on the debit side of trading account and to reduce it to its cost the stock reserve is transferred to the credit side. The closing stock assumed to be out of the goods of this year and the profit element at the rate of G.P. of current year. As the closing stock is on the credit side of trading account and above cost we reduce the profit element by debiting the General P&L a/c.

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pavithra kannan

pavithra kannan (Querist)

13 January 2016 understood sir...thank you sir

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