Closing Stock Discrepancy

[NEF]

Can someone explain in laymans terms a solution if your physical closing stock is higher than it should be within your accounts, it seems figures are out quite a bit, what is the best way to adjust this to reflect, without causing issues with accounting and profit and loss...

 

[Paul Norman]

It is not uncommon for physical stock to differ from book stock at the end of the year - there are many reasons why that happen.

If the stock is higher than expected, I would double check, because normally, it's the other way around! But if you are sure, then it is completely legitimate to make an accounting entry to correct the stock so that it agrees to physical.

In large businesses, that can be a fairly substantial amount!

It will, of course, increase or decrease your profit. That isn't an issue, it's just correctly reflecting the business outcome.

 

[Spur Support Services]

As Paul says, it's normal. The stock recorded in the accounts should reflect what is held in your storage areas, however, you may wish to place provisions on slow moving stock, to reduce the value of items unlikely to generate future income.

Having more physical stock could be down to returns that haven't been recorded.
If you received deliveries just before the period end, ensure that the goods have been invoiced or accrued. It may be that they haven't been logged on the system.

 

[NEF]

So can someone explain how me having more physical stock than calculated affects the profit and loss in simple terms in terms of more taxation.

 

[Paul Norman]

So can someone explain how me having more physical stock than calculated affects the profit and loss in simple terms in terms of more taxation.

If you process an entry to increase your stock value, it will increase your profit, which, all other things being equal, will add to your tax bill.

 

[Spur Support Services]

Following on from Paul's excellent comment..

The stock valuation is carrying forward the costs already recognised, to match against the year in which those costs generate sales income. Therefore the stock value carried forward increases the current year profit as Paul said.

Stock valuations should be true and fair and can be reduced by "provisioning" against stock that is unlikely to produce future sales income. Provisioning reduces value of the stock carried forward and therefore reduces the profit in the current year.

 

[Paul Norman]

Following on from Paul's excellent comment..

The stock valuation is carrying forward the costs already recognised, to match against the year in which those costs generate sales income. Therefore the stock value carried forward increases the current year profit as Paul said.

Stock valuations should be true and fair and can be reduced by "provisioning" against stock that is unlikely to produce future sales income. Provisioning reduces value of the stock carried forward and therefore reduces the profit in the current year.

The last paragraph there is important, too.

I have a written policy on this, so that I can show some consistency year on year. I make a 50% of cost provision against any stock that is over 6 months old, and a full provision against stock over a year old. But if I were selling perishables, that policy would not be the best one - I would recommend forming your own policy and applying it.

 

[UK Contractor Accountant]

make a 50% of cost provision against any stock that is over 6 months old, and a full provision against stock over a year old

should be lower of cost or net realisable value according to UK GAAP.

Does your provisioning policy roughly bring stock down to relaisable values?

 

[Paul Norman]

should be lower of cost or net realisable value according to UK GAAP.

Does your provisioning policy roughly bring stock down to relaisable values?

Yes. I would say it does.

Obviously, across a few thousand lines, it is a bit of a generalisation, but that has been normal practise for me.

In the motor trade, at year end, we operated an across the board policy like mine for spare parts and accessories stock. For vehicle stocks, they were valued individually at year end.

 

[NEF]

Can you give an example of how this would be done ? Visually on P&L

Also so a stock provision is the best solution ... It's case of some faulty items and the rest incorrect stock quantity to what is physically there

 

[Spreadsheet Accountant]

So can someone explain how me having more physical stock than calculated affects the profit and loss in simple terms in terms of more taxation.

Profit goes up, so does associated tax. Ceteris paribus.

 

[NEF]

What for example would you do if you had say a large quantity of surplus stock at the year end, lets say for example £50,000 more than you should have, how would this be accounted for and what would the effect on the P&L sheet be, would a surplus provision be used ?

 

[DontAsk]

Fire the stock keeper.

Surplus of £50,000 compared to what?

If it should have been £10,000 I would be seriously worried.

If should have been £10,000,000 then it's neither here nor there. Just enter the actual final stock value.

 

[NEF]

Fire the stock keeper.

Surplus of £50,000 compared to what?

If it should have been £10,000 I would be seriously worried.

If should have been £10,000,000 then it's neither here nor there. Just enter the actual final stock value.

More like £40,000 but actual physical stock £110,000 , I think some boxes got misplaced and unaccounted for, what's the way to correct this ?

 

[Scalloway]

How does your accounting system work? Do you enter stock when a purchase invoice is added to the accounts or is stock entry a separate excercise?

Do you account for stock sold by updating it from a sales invoice or is it a separate exercise?

Do you have stock returns?