What is Opening Stock?
Opening Stock is defined as the amount or quantity of goods available to the business for sale at the beginning of the accounting period. The opening stock for the current period is usually derived from the stock available after the conclusion of sales from the last accounting period, based on the nature of the business. It is the quantity and value of raw materials, work-in-progress, and finished goods that are available at the beginning of each accounting year with the entity.
Types of Opening Stock
Inventory depends upon the nature of the business, the entity works in. An entity that is in the manufacturing sector will have different types of inventory as compared to an entity that is in the service industry. Types of opening stocks can be studied under three major heads:
- Raw Material
- Work in Progress
- Finished Goods
1. Raw Material: As the name suggests, all the stock of raw materials which are not yet processed for further processing is considered under the head raw material. Raw materials can be direct raw materials, which are directly used in the manufacturing process, such as wood for a table, value of direct raw materials inventory appears as a current asset side of the balance sheet. Raw material is the primary and most basic substances required for production of any commodities. Stock units which are showed as raw material awaits to be further sent to work in progress.
2. Work in Progress: Work in progress stock is usually visible in manufacturing concerns, it is the stage between raw material and finished goods. Stock units under work in progress are those units which have been sent for production and production process has been started on those units but they are not fully ready and awaits final completion.
3. Finished Goods: Finished goods are those stock units which have gone through the work in progress stage and all the production process and transformation have been already done on these units. These units have passed all the manufacturing process, but are not yet sold or distributed to the customers. These units are ready for the market for further trading and earn revenue for the entity. These are the final product of the entity and are intended for sale. They are also called ready to sale goods.
Opening Stock = Raw Material Cost + Work in Progress Values + Finished Goods Cost
Opening Stock = Sales – Gross Profit – Cost of Goods Sold + Closing Stock
Examples of Opening Stock
Example 1:
Following figures are gathered from the financials of a manufacturing company,
Sales for the year: ₹7,50,000
Closing Stock: ₹70,000
Purchases: ₹6,50,000
Direct Expenses: ₹50,000
Gross Profit: ₹2,60,000
Calculate Opening Stock.
Solution:
Opening Stock = (Sales + Closing Stock + Gross Profit) – (Direct Expenses+ Purchases)
Opening Stock = (7,50,000 + 70,000 + 2,60,000) – (50,000 + 6,50,000)
Opening Stock = ₹3,80,000
Example 2:
Following is the trial balance of an entity, calculate the missing figure of opening inventory.
|
Opening inventory
|
?
|
Sales
|
1,10,000
|
|
Purchases
|
65,000
|
Closing Stock
|
30,000
|
|
Direct Labour
|
5,000
|
|
|
|
Gross Profit
|
20,000
|
|
|
Solution:
Opening Stock = (Sales + Closing Stock) – (Purchases + Direct Labour + Gross Profit)
Opening Stock = (1,10,000 + 30,000) – (65,000 + 5,000 + 20,000)
Opening Stock = (1,40,000) – (90,000)
Opening Stock = ₹50,000
Advantages Of Opening Stock
1. Demand Forecasting: Holding opening stock can help an organisation to meet its fluctuating market demands and cater to its customer’s needs. Opening stock makes sure that some extra quantity is available with business for smoother trading operations.
2. Customer Satisfaction: It helps an organisation to ensure better services/supply to its customers and hence increases customer satisfaction.
3. Effective Operations: The efficient supply of raw materials ensures smooth flow of operations without hampering production which helps the concern to ensure that business operations are intact.
4. Ascertainment of Stock: It enables the business to identify slow-moving stock or obsolete stock, which helps business to formulate different policies for these stock items and take necessary corrective actions.
5. Helps in Calculating Ratios: Opening stock is an important and financial element for businesses, as it helps in calculating several ratios and identify inventory turnover which are used by several stakeholders to identify financial well-being of business.
Limitations of Opening Stock
1. Holding Cost: Holding inventory leads to increased costs as it requires space and requires proper maintenance by involving proper human resource some costs involved with maintain opening stock are warehouse rent, interest on the money value of inventory, Salary to storekeeper or warehousing team etc.
2. Obsolescence Risk: Holding inventory always has risk of getting obsolete, as inventory might get outdated because of use and prevailing market conditions might also change. In order to eliminate this risk businesses have to either sell the old stock at price less than the market price or scrap the inventory items, ultimately costs the business.
3. Risk of Loss: An organisation with an opening inventory will also have a risk of loss due to damage, theft, fire etc. as they are stored for a long time. Businesses use to take insurance for covering these inventory items. Longer holding of inventory also increases the chance of misappropriation of inventory.
4. Low Turnover: A huge amount of opening inventory shows that the business is unable to sell their products and this long holding of inventory depicts poor financial statements.
1. Proper Accounting Policies to be Followed: For the calculation of opening stock several amendments in guidelines, accounting assumptions, and accounting standards set out different methodologies. Entity should have a key understanding of there applicable financial reporting framework and should follow those principles uniformly.
2. Applicable to Service Industry: Inventory Management is not only applicable on manufacturing or trading concerns, but service industry is also required to keep the opening inventory details. Instances of such are Service providers keeping stock details of printing paper, cartage details, stationery stock, etc.
3. Affect the Profitability of an Entity: An entity should carefully value the opening inventory, as opening stock has effects on profits. Entity should deploy proper resources for the correct reporting and disclosure of opening inventory. Entity can use stock audits to eliminate such risks.
4. Capitalisation of Elements of Opening Stock: The entities are required to capitalise the assets like spare parts and inventory of capitalised assets are also disclosed as inventory in the financial statements apart from the main inventory.
Conclusion
Opening Stock can be defined as goods which an organisation holds at the beginning of any accounting period. There are three major bifurcation of opening stock, they can be categorised as raw materials, work in progress, finished goods. As per the accounting records and availability of data, opening inventory can be calculated with the help of different formulas, however entity should understand there applicable financial reporting framework. Holding inventory helps an organisation to mitigate the fluctuating needs of its customers. However, holding opening stock has its own cost of holding. Opening stock is an essential element of an entity’s business, hence it should be managed carefully in order for there true and fair reporting and disclosures.
Share your thoughts in the comments
Please Login to comment...