How it worksBy default, the Profit and Loss Report calculates gross profit without opening and closing stock: - Sales – purchases = gross profit
Adding opening and closing stock journals allows you to demonstrate the cost of sales: - Opening stock + purchases - closing stock = cost of sales
Subtracting the cost of sales from your total sales provides a more accurate picture of gross profit in a given period: - Sales – cost of sales = gross profit
Refer to our example cost of sales calculation below to understand its application. Month 1 In January, you purchase £10,000 worth of stock and sell £5,000 worth of stock for £12,000. A gross profit calculation without stock journal entries is sales minus purchases. - Sales: £12,000 - Purchases: £10,000 = Gross Profit: £2,000
This method, however, doesn't include the £5,000 worth of remaining stock and the cost of sales. That calculation looks like this: Accounting for the closing stock reflects the profit more accurately. Month 2 In February, you sell the remaining £5,000 worth of stock for £12,000. Gross profit without stock journal entries is sales minus purchases. - Sales: £12,000 - Purchases: £0 = Profit: £12,000
However, this doesn’t include the £5,000 of stock remaining from January. The calculation with opening and closing stock is: - Opening stock: £5,000 – Closing stock: £0 = Cost of sales: £5,000
- Sales: £12,000 - Cost of sales: £5,000 = February Profit: £7,000
Summary Posting opening and closing stock lets you track monthly profitability, even though the total profit for the two-month period remains £14,000. Enter your opening and closing stock To report on the cost of sales, post opening and closing stock journals to account for this. Create the opening and closing stock nominal ledger accounts By default, you already have a balance sheet stock nominal ledger account, code 1000. You also need to create profit and loss nominal ledger accounts for opening and closing stock. - From Settings, then Business Settings, select Financial Settings and then Chart of Accounts.
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Select New Ledger Account and complete the required information. Ledger account fields explained: | Included in Chart | Leave this selected | | Ledger Name* | Opening stock | | Display Name* | Opening stock | | Nominal Code* | 5200
If code 5200 is already in use, enter a different code. It doesn’t matter what code you enter as it’s the category that determines where it appears on your reports. | | Category * | Direct Expenses | | VAT Rate | No VAT | | Visibility | Leave the defaults selected | - Select Save.
- To create your Closing Stock, repeat the steps and use a new nominal code, for example, 5201.
Start of month 1 or your financial year If you have stock in your nominal ledger account (code 1000), transfer it to your profit and loss opening stock account (code 5200). If this is the first month you’ve purchased any stock, you won't have a value on your balance sheet for stock. Record the purchase as normal then the first journal to post is a closing stock journal. For more information, see End of month 1 – Closing stock journal below. - From Journals, select New Journal.
- Enter a date and reference.
This doesn’t have to be the first day of the month. The reports will show the correct values as long as the date is in the correct month. - Enter the relevant information for your journal
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See Example:
| Ledger Account* | Details | Debit | Credit | Include on VAT Return? | | Stock (1000) | Opening stock | | Value | Leave clear | | Opening stock (5200) | Opening stock | Value | | Leave clear | - Select Save.
The value of your stock has now moved to the profit and loss account. The balance remains as a debit on the opening balance nominal ledger account 5200 for the rest of the year. The value in your closing stock account offsets this value. End of month 1 – Closing stock journal At month-end, transfer the closing stock value to the balance sheet stock nominal ledger, making the stock an asset on the Balance Sheet Report. - From Journals, select New Journal.
- Enter a date and reference.
This doesn’t have to be the first day of the month. The reports will show the correct values as long as the date is in the correct month. - Enter the relevant information for your journal.
See Example | Ledger Account* | Details | Debit | Credit | Include on VAT Return? | | Closing stock (5201) | Closing stock | | Value | Leave clear | | Stock (1000) | Closing stock | Value | | Leave clear | - Select Save.
You can now produce the Profit and Loss Report from Reporting. Start of month 2 and subsequent months – Opening stock journal Post a journal. Move the value of the opening stock from the balance sheet stock nominal ledger account 1000 to the profit and loss account 5201. The opening stock value for month 2 is the closing stock value for month 1. - From Journals, select New Journal.
- Enter a date and reference.
This doesn’t have to be the first day of the month. The reports will show the correct values as long as the date is in the correct month. - Enter the relevant information for your journal.
See Example
| Ledger Account* | Details | Debit | Credit | Include on VAT Return? | | Stock (1000) | Opening stock | | Value | Leave clear | | Closing stock (5201) | Opening stock | Value | | Leave clear | - Select Save.
Repeat these steps for each month you want to record the opening stock. End of month 2, subsequent months or the end of your financial year – Closing stock journal Post a journal to move the value of the opening stock to the balance sheet stock account: - From Journals, select New Journal.
- Enter a date and reference.
This doesn’t have to be the last day of the month. The reports will show the correct values as long as the date is in the correct month. - Enter the relevant information for your journal.
See Example
| Ledger Account* | Details | Debit | Credit | Include on VAT Return? | | Closing stock (5201) | Closing stock | Value | Leave clear | | Stock (1000) | Closing stock | Value | Leave clear | - Select Save.
The year end At your financial year end, when you create a report in the new year, the values transfer to the profit and loss account (3100). You'll see this in the Equity section of the Balance Sheet Report, Your unsold stock is an asset on the nominal ledger account 1000. Follow the steps in the Start of month 1 or your financial year section to start posting opening and closing stock for the new year. [BCB:299:UKI - Personal content block - Dane:ECB][BCB:306:UKI - Search override - Accounting UK / IE:ECB] [BCB:276:UKI - hide back button:ECB] |