PGBP

Tax queries 6736 views 7 replies

nishie

student

88 Points Joined January 2009

hey guys .. can anyone explain me the rfeason for adding " OVER VALUATION OF OPENING STOCK AND UNDER VALUATION CLOSING STOCK .." and vice versa ...

let say .. For e.g. opening stock Rs 10,00,000 is overvalued by 10% and Closing stock Rs 4,50,000 is undervalued by 10% ...

then we will add this : opening stock by Rs. 90909 (10,00,000 * 10/110)

and Closing stock by Rs. 50,000 ( 4,50,000 * 10/90)

But why hv we added this .. can any1 explain .. please .. ?

Replies (7)

Amir

Learner

4016 Points Joined December 2009

Dear Nishie,

First of all understand that Stoch has not been correctly valued & therefore adjustment has to be made for it's rectification..

Now, Opening Stock appears on the DEBIT SIDE of P&L A/c (i:e expenses side), so if this figure is overvalued that means the profit is less by that amount of overvaluation, & we have to add the amount of overvaluation to the figure of profit as a rectification..

P&LA/c

--------------------------------------------------------

Op Stock 1 Lac Sales 50 Lacs

Expenses 25 Lacs C/Stock 2 Lacs

Profit 26 Lacs

------------- ----------------

52 Lacs 52 Lacs

Now If I say that fifure of opening stock is excessive by Rs 0.50 Lacs, so what adjustment entry u would make -

26 Lacs +0.50 Lacs = 26.50 Lacs

Because had opening Stock was correctly valued, the Profit would have been Rs. 26.50 Lacs

Just reverse is the case of Closing Stock

C.Balaji

Learner

1867 Points Joined October 2008

Dear Nishie...

Mr.Amir brother is correct...

Overvaluation of Op. stock amounts to reduction in profit which means you have to add back the excess amount inorder to find out the correct profit....

Undervaluation of Clo. stock also amounts to reduction in profit therefore we add back the difference amount undervalued to get the correct profit figure,....

I think you are clear now...