UK How to value stock?

[Fay40]

Hi all,

I have a query relating to stock valuation and if the value of stock impacts the P&L. I am receiving mixed messages on the correct double entry for this.

Basically, we purchase stock items on the overhead number. So debit P&L, credit Accounts Payable. Then when a project comes along and needs to use some of the stock, we credit the P&L and debit the project with the cost. This is the right and logical thing to do as the project should incur the cost as opposed to buying it elsewhere. This happens all throughout the year. So purchase on the P&L then post the costs onto projects as and when it is required.

At the moment, the warehouse is full of this stock. Most of it is bulk bought as it is cheaper but the downside to this is most of it collects dust and eventually becomes obsolete. We are conducting quarterly valuations and the financial accountant has confirmed if there is a gain in the stock value, the double entry would be debit stock credit P&L and vice versa. The problem I have is the stock value will go down as we are getting rid of a lot of obsolete stock (which has become obsolete recently) This means the P&L will get a big hit. I cannot justify this as it means the P&L will get two hits. One hit for the invoice (as costs are incurred on the overhead) and then another hit for the reduction in stock value. Is this right? If so, how so? What is the double entry for the above scenario?

Thanks in advance.

 

[Fidget]

You value stock at the lower of cost or net realiseable value. If it's obsolete, and you can't shift it in any way, then its value needs to be reduced to zilch, and you have to take the hit for that at the time it happens.

I'm not following you on the invoice thing though. Can you tell me more about that?

 

[kirby]

By your method, you already record the stock to expense at the point you buy it. So no further writedown is needed. If you want to track the obsolescence cost, then when stock is declared obsolete, you could DR Obsolete stock expense and CR the P&l Acct you used to record the purchase of the stock.

 

[Mikeqw]

Hi ive a little problem im doing some work experience with some but my balance sheet is never balance
Asset less current liability must always be same but does that also mean a new company in first years operation has to also balance

 

[davidotieno]

Hi all,

I have a query relating to stock valuation and if the value of stock impacts the P&L. I am receiving mixed messages on the correct double entry for this.

Basically, we purchase stock items on the overhead number. So debit P&L, credit Accounts Payable. Then when a project comes along and needs to use some of the stock, we credit the P&L and debit the project with the cost. This is the right and logical thing to do as the project should incur the cost as opposed to buying it elsewhere. This happens all throughout the year. So purchase on the P&L then post the costs onto projects as and when it is required.

At the moment, the warehouse is full of this stock. Most of it is bulk bought as it is cheaper but the downside to this is most of it collects dust and eventually becomes obsolete. We are conducting quarterly valuations and the financial accountant has confirmed if there is a gain in the stock value, the double entry would be debit stock credit P&L and vice versa. The problem I have is the stock value will go down as we are getting rid of a lot of obsolete stock (which has become obsolete recently) This means the P&L will get a big hit. I cannot justify this as it means the P&L will get two hits. One hit for the invoice (as costs are incurred on the overhead) and then another hit for the reduction in stock value. Is this right? If so, how so? What is the double entry for the above scenario?

Thanks in advance.

Hallo,

i think the major issue here the fact that you are posting invoices directly into the P and L.
I would advise you post the invoices to the stock account, which you will credit and debit project cost on utilization of these stock items.
On valuation, for loss in value of the stock, Cr the stock account and Dr P and L, and vice versa for gain in loss in value.