If an item is bought at cost for say £10, but it can only be sold at £5, how should this be shown?
I presume:
- Cost would stay the same at £10
- Net realisable value is £5
- GM would be a £5 loss
- The £5 write down would be part of Net Margin?
Can anyone confirm the correct way of showing and accounting for these type of adjustments? Do I need to set up a re-valuation reserve account?
many thanks,
Ian
Ian Dewhurst
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Replies (2)
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Clarification
Thanks for your comments. I need to clarify my query a little more. There are 2 issues for me here:
1. Assuming that I paid £10 for an item of stock, but could only sell it for £8, the trading account should look like this:
Sales 8
COS (10)
GM (2)
Margin Adj 0
NM (2)
Currently, the retail team can manually adjust the average cost in the system, and to enable them to value the stock at NRV they are reducing the average cost to £8. This then shows on the trading account as:
Sales 8
COS (8)
GM 0
Margin Adj (2)
NM (2)
Same Net Margin (NM) figure but GM has changed. I think the first trading account is the one I should be using?
2. If I use the first trading account, where and how do I show the revalued stock? I presume, I need 2 seperate accounts? One being the historical cost (£10) and the other being some kind of revaluation account to show the £(2) write down? The net of these 2 accounts will be the value of the stock for the balance sheet. Retail should NOT be changing the historical cost that was paid for the stock but show the reduced value in a seperate field (NRV?) Is this assumption correct?
Many thanks
Stock and Work In Progress
The simple, and first principle, is that these should be VALUED at the lowest of:
a) Cost
b) Replacement Value
c) Current Market Value.
Ian, I fear that you have become immersed in side-issues.
What should happen is that the PURCHASES Account (in the Nominal Ledger - remember them?) records the ORIGINAL price paid. This Nominal Account is written off against SALES in the TRADING ACCOUNT. However, it should be REDUCED by the value of UNSOLD ITEMS (i.e. "STOCK").
The end product is that the TRADING ACCOUNT reflects the COST of SALES.
Keep it simple. That's why my products are called ABC. They are all "as easy as ABC" to use. Try my website:
www.MartinLevinABC.co.uk
for more happy, and helpful information