The value of inventory at the end of the financial year or balance sheet date is called closing stock. Closing stock includes: Raw Material Work-in-Progress Finished Goods Example: If the value of raw material is Rs 10,000, value of WIP is Rs 5,000 and value of Finished Goods is Rs 15,000 then valueRead more
The value of inventory at the end of the financial year or balance sheet date is called closing stock. Closing stock includes:
- Raw Material
- Work-in-Progress
- Finished Goods
Example:
If the value of raw material is Rs 10,000, value of WIP is Rs 5,000 and value of Finished Goods is Rs 15,000 then value of Closing Stock will be Rs (10,000 + 5,000 + 15,000) = Rs 30,000
Adjustment entries are done on the accrual basis of accounting, that is, income is recorded when earned and not received and expenses are recorded when incurred and not paid. Adjustment entries are usually made before or after the preparation of the trial balance at the end of the accounting period.
If the entries are made after the preparation of the trial balance, then two adjustment entries are recorded while preparing Trading and Profit & Loss A/c.
Since closing stock is an item outside the trial balance, the double-entry would be:
The journal entry
Closing Stock A/c (Dr.) | Amt | |
To Trading and Profit & Loss A/c | Amt |
- Trading and Profit & Loss A/c is credited because it is of profit to the company and hence will be shown on the credit side.
- Closing Stock is debited as an asset for the company and it will be recorded for the first time in accounting books, hence, will be debited.
The second adjustment would be to show closing stock on the balance sheet and since the closing stock is an asset it is shown under the head Current Assets.
In case where adjustment for Closing Stock is to be done before preparation of Trial Balance, then it will be shown on the credit side of the Trial Balance, since it is an asset for the company and will have a credit brought down balance as shown in the image.
Later, while preparing Balance Sheet, Closing Stock will be shown on the Asset side of the Balance Sheet.
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The journal entry for Cash Sales is- Particulars Amount Amount Cash A/c Dr $$$ To Sales A/c $$$ Sales Account is a Revenue Account and Cash Account is an Asset Account for the business. So, According to the modern approach for Sales account:Read more
The journal entry for Cash Sales is-
Sales Account is a Revenue Account and Cash Account is an Asset Account for the business.
So, According to the modern approach for Sales account:
According to the Modern approach for Cash account:
So, the journal entry here is about cash sales and since there is an increase in Revenue on account of goods being sold, the sales account will be credited as per the modern rule and due to the increase in cash on account of sales, cash account will be debited.
For Example, Polard sold goods for cash worth Rs 2,000 for his business.
I will try to explain it with the help of steps.
Step 1: To identify the account heads.
In this transaction, two accounts are involved, i.e. Cash A/c and Sales A/c.
Step 2: To Classify the account heads.
According to the modern approach: Sales A/c is a Revenue account and Cash A/c is an Asset account.
Step 3: Application of Rules for Debit and Credit:
According to the modern approach: As Sales increases, because goods have been sold, ‘Sales A/c’ will be credited. (Rule – increase in Revenue is credited).
Cash account is an Asset account. As cash has been received on account of goods sold, there is an increase in assets and hence Cash account will be debited (Rule – increase in Asset is debited).
So from the above explanation, the Journal Entry will be-