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Hi sir.. Could you kindly explain the following question to me.
A business has opening inventory of $15000 at the start of an accounting period and closing inventory of $18500 at the end of the accounting period.
Which of the following trial balance extracts correctly shows how the opening and closing inventory will be recorded in the general ledger?
Option A
Dr Closing inventory 15000
Cr Opening inventory 18500Option B
Dr Opening inventory 15000
Cr Closing inventory 18500Option C
Dr Opening inventory 15000
Dr Closing inventory – SFP 18500
Cr Closing inventory – SPLOCI 18500Option D
Dr Closing inventory – SFP 18500
Cr Opening inventory 15000
Cr Closing inventory – SPLOCI 18500Isn’t the correct answer Option D.
Because Closing inventory would go to Statement of Financial Position as Current asset and would also reduce cost of sales in SOPL and OCI for the year (since the credit) and Opening inventory would be removed from accounts (since the credit)
Thanks in advance…
Where did you find this question (and what does the answer in the book say)?
I ask because it doesn’t really make sense as you have typed it. The trial balance is a list of balances and doesn’t show both opening and closing inventories.
Hello John,
Thank you for your reply. Although not my question, your reply is really interesting because I have seen opening inventory in TB which I have always found EXTREMELY confusing! The way I understand is that ALL balances in the TB should be closing balances.
However, I have seen examples where opening inventory shows on TB and then they put it as a DR Entry in the P&L columns of an ETB (DR entry since opening inventory is part of COGS).
Then the closing inventory is used as year-end adjustment, which is a CR entry in the P&L columns in the ETB (reducing COGS) and a DR entry in the SFP columns of an ETB.
Firstly, the trial balance is usually prepared before the year end adjustments are put through. For that reason it will normally include the opening inventory. It is only after preparing the trial balance that we put through the entries to remove the opening inventory and bring in the closing inventory.
Have you watched my free lectures because I do explain this with examples in my lectures. (The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.)
The extended trial balance is not examinable in Paper FA – it was removed from the syllabus many years ago.
Ah that makes better sense. Why did they remove ETB from the syllabus?
I read your lectures on and off as although I am not directly doing an ACCA, I am doing a very similar course and it is all relevant. 🙂
Big thank you. You do great!!!
PS: I found your notes on opening/closing inventory. 🙂
Does that mean that when opening inventory first appears in the TB, it is DR entry (as an asset). Now we do the year end adjustments, and remove opening inventory as an asset and put it through as part of cost of sales?
I found this qn on ACCA Study Hub.
The provided answer is Option C
Their explanation is as follows:
Opening inventory is a debit balance that is charged to cost of sales as an expense.
Closing inventory is included twice as a debit and credit to reflect that it is included in the statement of profit or loss and other comprehensive income and the statement of financial position.
It doesn’t seem to make any sense to me.
Could you please clarify if the qn is incorrectly worded..
Thanks in advance…!
Extended trial balances were removed because nobody prepares them in practice any more – they use computers.
The trial balance is simply a list of balances before the year end adjustments. On the inventory account will be the opening inventory as a debit balance. After the trial balance we put through the entries to remove the opening inventory and create the closing inventory just as I illustrate in my lecture on inventory.
The explanation in your third post. is correct and is just as I explain in my free lectures on this.
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