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- March 4, 2013 at 3:40 pm #119169
I am confused by double entry for Inventory. In the BPP book Pages 123-125 there is an example which deals with Inventory from the start of a business. This of course means there is no Opening Inventory balance. Basically in the example the Closing Inventory value is $1800. On the Income Statement this is deducted from Purchases to get cost of sales. On the Statement of Financial Position it is added as an Asset. As the Income statement net value is transferred to the Capital account the $1800 in the Income Statement effectively ends up in Capital and is balanced by the $1800 Assets in the Statement of Financial Position.
But I have no idea what would happen if there had been an Opening Inventory value. I would have added it to Purchases in the Income Statement before deducting Closing Inventory to get cost of sales. But I would add the full closing value alone to the Statement of Financial Position as an Asset. This means the Statement of Financial Position would be out of balance by the exact amount of the Opening Inventory as I haven’t double entered it. (It has only gone in once – in cost of sales)
Is Opening Inventory considered Income from a previous period for the Income Account? Should I take income as:
Income = The opening Inventory + Sales + Closing Inventory.
And therefore gross profit as:
GP = The opening Inventory + Sales + Closing Inventory – (Opening Inventory + Purchases) (i.e. GP = Income – Purchases)So should Opening Inventory be on the income statement twice then effectively cancelling itself out?
March 4, 2013 at 4:20 pm #119173Sorry everyone, please ignore the above question. I would remove it but i don’t think that is possible. I am so dumb. Of course the answer is that if there had been an opening inventory and it changed then it would be automatically be balanced by a combination of sales and closing inventory.
So in my example if I introduce an additional Opening Inventory then before I even start I need to either increase Sales by the same amount or increase Closing Inventory by that amount. The problem I had was not starting with a balanced situation to begin with. I feel really silly and I hope I haven’t wasted anyone’s time.
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