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accounting for stock

stock accounting for goods sent next financial year

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Hi, I'd appreciate some thoughts on how we account for our stock. 

our business sell goods that are tied with years and so goods become obsolete when the year finishes. The goods are normally purchased before the end of  year, and some customers also pre-order them, and the goods are delivered near the year end for next year's use. 

The next year's goods have always been treated as they were never sold, at the full purchases at year end, even though some of them are in effect sold, but haven't left our premises. And income is treated as advance income for next year's accounts. 

A colleague questioned it, which made me think should the stock be actually adjusted to relfect the sales of next year's goods?   As the cost of sales used next year's costs, would not it not actually relfect the true cost of sales?

Our accounts are audited, so I would think the auditor would point it out if it's not done according to the accounting rules.

Any thoughts? 

Replies (10)

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By johngroganjga
12th Sep 2019 13:29

It depends what you mean by "in effect" sold. Does that mean they are sold or not?

If stock has been sold but has not left your premises it should be excluded from stock in your accounts, but it would be very unusual for sold goods still to be on your premises.

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Replying to johngroganjga:
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By Smalltalk
17th Sep 2019 09:50

Hi, customers paid for them so the goods are sold, but goods are delivered at a later date.

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By paul.benny
12th Sep 2019 13:46

The arrangements you describe may well qualify under the 'bill and hold' provisions of FRS102 (paragraph 23a.3) - in which case you would treat them as a current year sale.

If they don't meet those requirements, they're not treated as sold and the stock remains on the balance sheet.

You should have a word with your auditors. They should be privy to the specific facts of your case.

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Replying to paul.benny:
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By Smalltalk
17th Sep 2019 10:19

Thanks for directing to 23a.3

Example 1 ‘Bill and hold’ sales, in which delivery is delayed at the buyer’s request but the buyer takes title and accepts billing
23A.3 The seller recognises revenue when the buyer takes title, provided:
(a) it is probable that delivery will be made;
(b) the item is on hand, identified and ready for delivery to the buyer at the time the sale is recognised;
(c) the buyer specifically acknowledges the deferred delivery instructions; and
(d) the usual payment terms apply.

As it's our comany's decision to delay the delivery, rather than at buyer's request, the sales could be recoginised in the next finanical year and stock remains on the balance sheet?

Thanks for your suggestion.

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Replying to Smalltalk:
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By paul.benny
17th Sep 2019 14:45

If you (rather than the buyer) have delayed delivery, you can't bring the sale into the current year - simple as that.

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By adam.arca
17th Sep 2019 13:01

But surely the economic reality is that you have made the sale, regardless of the fact you have decided to delay delivery?

Any other outcome is an open door to manipulation of your accounts by deciding either to delay delivery or not depending upon what suits in terms of income recognition.

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Replying to adam.arca:
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By paul.benny
17th Sep 2019 14:43

On the contrary. If the customer has not paid for goods and/or has a right of return, they are not sold. Standards around revenue recognition are very clear about this - hence the conditions mentioned around bill and hold, and the other situations referred to in s23.

It's true that companies could depress income by not despatching goods, although that is hardly a common desire.

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Replying to paul.benny:
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By JoF
17th Sep 2019 17:32

The OP advised us that they have been fully paid for. But as yet we are awaiting the reason why they are not being delivered.

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Stepurhan
By stepurhan
17th Sep 2019 13:26

Why do you delay delivery?

The goods in question may relate to particular periods of time, but why should you not send them to your customers earlier? The very fact that you are talking about accounting for them as stock implies that the delay isn't about them being pre-ordered but not yet manufactured.

Ignoring the accounting aspects for a moment, aren't you creating an unnecessary risk for yourself? You have the goods now to fulfil a delivery that has already been paid for. Your customers are not asking you to hold the goods back (a service you could potentially charge more for) By keeping those goods on your premises you are taking on all the risks of the goods being lost/damaged. What would the consequences of that be?

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By [email protected]
19th Sep 2019 16:00

Seems like you need to have an open and frank chat with your auditors
revenue recognition is a tricky one at times and the devil is in the detail.
Some key questions to ask yourselves:
1) Are the goods invoiced or actually paid for in advance
2) when does title and risk pass
3) are you able to and do you segregate the goods that are sold
4) Is the transaction merely an advance payment to secure goods rather than actual purchase of goods

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