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Himanshu Arora (Articleship)     10 September 2012

Why we add opening stock and minus closing stock??

hello friends,

Its really silly question,but very important I want to know why we add opening stock and minus closing stock in chpaters like NPO and others.



 6 Replies

Giridhar S Karandikar

Giridhar S Karandikar (Team Lead)     10 September 2012

to arrive at the figure of goods consumption.
1 Like
Bhaskar Unnikrishnan CPA CMA

Bhaskar Unnikrishnan CPA CMA (Accounts / Administration)     10 September 2012

It’s not a stupid question, rather I appreciate you for good observation in detail. I had similar doubts about (Still have) through out.

According to matching principle of only related expenses for revenue for certain period should be accounted. You may have purchased 100 units of certain product, but sold only 70, then 30units  should be your closing stock and cost of only cost of 70 units can be accounted in that period. i.e. cost is 100-30 (deducting closing balance). 

 

Same way, if you had opening balance of 20 units, out of 70 units sale, you would consume 20 units in current year before taking any newly purchased units. That makes current year cost of 20+(100-50) (or 20+50) i.e. opening stock + purchase – closing stock.

 

Hope you got an idea! Keep posting such questions to refresh brain...

2 Like
Anu sharma

Anu sharma (Intermediate IPC)     10 September 2012

1. first of all I would like to say that No Question is Stupid in this world, those person term it a stupid question who doesnot know the Ans.

2 Explaination to your question

We prepare Trading Account for one Accounting year say from 01jan 2012 to 31 dec 2012

which contains 12 months.

the main purpose of preparing the trading A/c is to know that What all activity took place during this 12 month and how we arrived at gross profit.

MAIN ANS

opening stock is nothing but your closing balance of last year so last year which ever goods remains unsold that are sold in the current accounting year so WE ADD IT

Closing Stock is nothing but your current accounting year closing balance this is nothing but your unsold goods which remaines in your Godown.

Things which you are not able to sell it how you can take benefit out of it so WE MINUS it or DEDUCT it

How to find

ADD OPENING STOCK       XXXX

ADD PURCHASES               XXXX

ADD DIRECT EXPENSES  XXXX

LESS CLOSING STOCK    XXXX

COST OF GOODS SOLD  XXXX

If I am worng See the FORMAT of any COST SHEET in any good quality Costing book

Thanks

Sekhar

small.sekhar @ gmail.com

 

1 Like
Himanshu Arora

Himanshu Arora (Articleship)     11 September 2012

Thanks for your great and brillient answers.its clear my opening and closing stock doubt .

 Hope you dont mind. I have one another question in thiis series which is related to Prepaid and Outstanding expense.While creating income and expendture account we Add :Current O/S expense Add:Previous year prepaid expense Less:current prepaid expense and Less:Previous year O/S expense.

While thinking i got an soultion related to why we add and less prepaid expense.Hope Iam right ,the answer is current year prepaid expense is related to next year that why we less it and Previous year prepaid expense  is related to current year so we add it to arrive at the total expense in an accounting year of an item.

But Iam confused with cuurrent and Previous year O/S expense Can you tell me why we add and subtract it.

Giridhar S Karandikar

Giridhar S Karandikar (Team Lead)     11 September 2012

Outstanding expense is just the reverse of Prepaid Expense. It is nothing but the expense whihc was related to the previous year and remains unpaid. So we create a provision for the said expense in the previous year to book th expense for that particular period & pay it in the subsequent year. So the equation for o/s expense would be as follows: Current Years Expense+O/s expense of current year-o/s expense of PY.
1 Like
ramcharan

ramcharan (articled assistent)     11 September 2012

see we are adding op bal and deducting closing bal is to satisfy matching principle and to find out is there    any loss of stock 


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