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Stock reconciliation and profit adjustment tips – CPT

As the CPT exams are round the corner I am writing quick tips relevant for accountancy students. The moment CPT students hear the word reconciliation, they get a phobia. They are already scared of the term bank reconciliation. Unfortunately the term “stock reconciliation” scares them equally.

 

Stock reconciliation is about finding differences between physically available stock and stock recorded in books of account. Technically both should be the same. There should not be any differences. However, differences arise due to following reasons.

 

When stocks are purchased and received, it is physically available. But the accountant has forgotten to make entries in books. This would result in a difference between physically available stock and recorded stock.

Similarly when stocks are purchased, the accountant passes entry based on purchase invoice received. However the goods are still in transit. In this case also, recorded stock will be more than the physically available stock.

Another reason could be: goods sent on approval basis. In this case, the supplier of a new product is unsure of the marketability of the product. Therefore the customer is also reluctant to buy such products. Until the customer approves, goods are kept at customer’s location at the supplier’s risk. Therefore stocks are physically available at customer’s location but recorded as his own stock by the supplier.

Yet another reason could be delay in despatching the goods at the buyer’s request. The buyer has taken ownership in this case, so the sale has been recorded. As a result the stocks are deducted in books of account. However the stocks are physically held by seller.

When goods are sent on consignment the receiver is an agent holding goods on behalf of the consignor. The consignor has these stocks recorded in his books but they are not physically available with consignor. Similar opposite principle applies when stocks are received on consignment. Someone else’s stock held physically, not recorded in books.

When stocks are stolen or lost, to that extent physically available stocks are less than the recorded stock

Reconciliation is done as follows:

Stock as recorded in books

Add: Goods received but purchase not recorded

Less: Goods purchased recorded but not received

Less: Good sent on approval

Add: Goods received on consignment

Less: Goods sent on consignment

Add: Goods sold but not despatched at buyer’s request.

Less: Goods despatched but not yet recorded as sale

Less: Goods lost or stolen

Result: Physically available stock

As the stock reconciliation exercise is done, the stocks are adjusted at cost. Cost implies that it should not include the gross profit margin on sales. When selling price for stocks are given, make suitable adjustments to eliminate profit, to arrive at cost. Recorded stock may be then adjusted downward if net realisable value is lesser than cost of stock.

Profit adjustment is one area where students in general have a challenge. Let me make an attempt to keep it simple.

Let selling price be $100 and profit is given as 20% on selling price. Then Profit = 20%*100 = $20

Let selling price be $5000, profit is 25% on cost. To find profit, we cannot directly apply the rate on selling price. Now, assume cost to be $100, profit = 25%*100 = 25. Selling price = 100+25 = 125. Cost of the product can be computed as 100/125 * 5000 =$4000. Profit = 25/125*5000 = $1000

Let cost price be $800, profit be 20% on selling price. To find the profit, assume selling price as 100, profit = 20% *100 = 20. Cost price = 100 – 20=80. Therefore profit on this product is 20/80 *800 = $200. Therefore selling price of the product is $1000.

Watch out this space for more quick tips for accountancy students. Post your queries on issues relating to the subject.