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Hallo,
I am reading from the F3 book the part about Inventory a/c and I don’t understand why the entries for the Inventory a/c op. and cl. balances are given as follows?
For the opening inventory
Debit the income statement with the value of the opening inventory.
Credit the inventory account with the value of the opening inventoryFor the closing inventory
Debit the inventory account with the value of the closing inventory
Credit the income statement with the value of the closing inventory.Because, if we look at the Inventory T a/c the entries are the opposite, compared to the entries for the I/S a/c which coincide with its T a/c::
Inventory a/c
——————————————————–
Dr | Cr
Op. inv. b/f A | I/S a/c A
I/S a/c B | Cl. inv. c/f B– why is there such a difference between the entries above and the T a/c op. and cl. bal., does the author talk about two different things which I am not understanding?
Thank you for some idea!
MP
Inventory there are two separate codes with the same name – one is in profit and loss and is part of the cost of sale calculation, the second is in balance sheet.
Let’s start with year 1 – inventory from previous year nil.
At the year end you have let say £1000 goods of closing inventory:
Entry Inventory Dr (balance sheet) £1000
Inventory Cr (P+L) £1000Remember Cost of sale is opening inventory + purchases less closing inventory – so your closing inventory in P+L will be part of this calculation.
Then we have next year.
What was closing inventory now is your opening. Numers from P+L are now all nil as we start new year of trading.
So we need to Cr Inventory (BS) Dr Opening inventory (P+L) – in other words reverse previous year entry but not to closing inventory in P+L but to opening.
Then at the end of the year 2 will be stock taking and let’s say inventory now is £800
And you need entry to bring in closing inventory to P+L and BS again
Dr Inventory BS £800
Cr Inventory P+L £800
So it would look:
P+L
Dr Opening inv £1000
DR Purchases £x
Cr Closing inv £800BS
Dr Inventory £800Hallo,
Thank you very much for the illustration. May I ask two more related questions?
1. As far as I understand, the inventory closing entries go to B/S as part of assets, but the balance on the a/c which goes to B/S is left there, i.e. is not reversed, and the balance is c/d as an opening balance next year. We only reverse a/cs which go to I/S a/c, i.e. are nil for the next year. Then are there two inventories a/cs, one which is for the B/S, and one which is for the I/S, and then an I/S a/c itself, for me there are three accounts here, because I don’t reverse an entry in a B/S a/c, or how is it here, I am misled?
2. I am still wondering, why in the T a/c below as given in the F3 book, the entries are different from in your answer:
Dr Inventory account Cr
———————————————————————————-
Current Year
Dr Opening inv. b/f (A) || Cr Income Statement (A)
Dr Income Statement (B) || Cr Closing inventory c/f (B)
———————————————————————————–
(A + B) || (A + B)
————————————————————————————
Next Year
Opening inv. b/f (B)Basically this shows that we Debit both Inventory a/c and the I/S a/c with the opening balance and we Credit them both with the closing balance, i.e. these entries are not opposite, and that’s why I am confused?
Thank you for help if you understand this!
MP
Hallo,
I would like to add an example from the book to the 2nd point above, maybe my question will be clearer:
The book shows this example:
In Year 2, Bubbles had opening inventory of $10,000. Sales during the year were
$80,000 and purchases were $30,000. Closing inventory at the end of Year 2 was
$12,000. The entries in the main ledger of Bubbles can be summarised as follows:Inventory account
——————————————————————————
Opening balance b/f 10,000 || Income statement 10,000
Income statement 12,000 || Closing balance c/f 12,000
22,000 || 22,000
Opening balance b/f 12,000Income statement
———————————————————————————
Opening inventory 10,000 || Sales 80,000
Purchases 30,000 || Closing inventory 12,000
Gross profit c/d 52,000
92,000 || 92,000
|| Gross profit b/d 52,000So, I don’t understand why these T a/cs are different from the entries you talk in your first reply?
Thank you so much!
MP
The difference may be due to the fact that I told you what I do on the daily basis when preparing the financial statement and in the book you may have something like a model entries appropriate for F3.
I work in UK, in chartered accountants practice. In my ledger I have separate codes for Opening inventory in I/S, Closing inventory in I/S and Closing inventory in Balance sheet.
It is hard to me to think at F3 level – I am studying for P6:-) Instead they want you to use the Income statement account where I talked about Inventory in Balance sheet.
In my entries:
Opening balance b/f 10,000- this is ok I would have it on the same side in IS || Income statement 10,000- this would be my reversal of Inventory BS
Income statement 12,000- this is the other side of my entry of Closing inventory to BS || Closing balance c/f 12,000-this is ok, I would have the same
It seems like they don’t want you to mess up with the balance sheet codes for now. So forget my explanation and stay what they want from you.See how it works: Sale Cr 80 000
Less Cost of sale calculated: (28000)
Opening stock 10 000 Dr
plus purchases 30 000 Dr
less closing stock (12 000) Cr
Gross profit 52 000
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