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How to keep a handle on balancing the stock

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Keeping track of the physical stock an organisation holds is essential to its wellbeing. Makbul Patel looks at the importance of keeping an eye on the balance of assets.

1st May 2024
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Most companies out there, operating as going concerns, will have assets. These assets will vary. Whatever they may be they will be part of the company’s balance sheet valuation. 

In this article I will concentrate on the stock asset, and by this I mean the physical stock by which the organisation conducts its business – what it physically holds.

Stock varies from company to company but the principal of the valuation holds true and consistent on the balance sheet. I have written before about stock valuation but it will get a bit messy if I start bringing that into this discussion. Suffice to say that whatever method the company adopts must remain logical, true and consistent.

My day job as a finance business partner involves dealings with stock issues for departments and valuations. We have just concluded another arduous year end, a year end where in the previous year end we had promised that future year ends will be different, easier, controlled and quicker. Dream on. Anyway, I digress.

Stock control

Keeping a track of what stock an organisation holds is essential. It can, and will, break a company if the controls are not sufficient. This is a very brief summary of why stock control is important and the list is by no means exhaustive.

  • Stock control reduces fraud and theft.
  • Keeping a track of stock optimises cashflow, to see where the money is tied up.
  • Stock control helps meet demand.
  • Some stock may have short life spans so stock control reduces losses.
  • In some instances, stock control may be part of a regulatory framework.

Whatever the reason, the control and valuation of stock is central to an organisation’s good health.

Stock asset and the balance sheet

To people who are not directly engaged in the stock process this area of management accountancy will be a little mysterious. It is however directly relevant to a company’s performance. 

I will try to explain the whole process of how stock is treated, from the moment it comes into the organisation as an asset, to its utilisation and then right at the end to the final valuation and reconciliation with the balance sheet, and why there would be a difference.

When this process is broken down into bite-sized steps it makes accountancy so much easier and less daunting.

Stock scenario

Let’s look at a specific scenario. GoodHomes is a social housing organisation that is also responsible for maintaining the homes its tenants live in. In this particular instance it orders £7,000 worth of doors with a view to refurbishing some houses. Here is what happens to the stock from an accounting perspective.

Stage 1: Stock delivery

£7,000 worth of doors ordered from the supplier and is delivered to GoodHomes. 70 doors at £100 each. These doors are kept in the warehouse.

Accounting impact

Debit: Balance sheet asset code – £7,000

Credit: Supplier account – £7,000

Stage 2: Stock usage

Over the months 50 doors are issued to the maintenance department to be fitted in houses.

Accounting impact

Credit: Balance sheet asset code – £5,000 (50 doors @ £100 each)

Debit: Maintenance department general ledger – £5,000

Stage 3: Period end stocktake

Warehouse stocktake says there are 12 doors in stock – value £1,200.

Stage 4: Reconciliation

Balance sheet asset code balance: DR £2,000 (DR £7,000, CR £5,000).

Warehouse stocktake value: DR £1,200.

There is a debit difference of £800 between the balance sheet and stocktake.

Stage 5: Investigation on the difference

The stocktake has shown that the warehouse is £800 (8 doors @£100) short.

This could have resulted from many things including:

  • stock was issued to the maintenance department but was not recorded
  • stocktake was incorrect – the doors were physically present but were missed in the count
  • theft – the doors may have gone through the back door (pun intended)
  • wastage – stock may have been damaged or replacements issued to faulty stock
  • shortage on delivery – the doors were delivered in batches and some deliveries were missed and this wasn’t followed up.

Whatever has caused the difference must be investigated and should not be taken lightly by the organisation. Systems, security and processes must be subjected to audit and checks.

Stage 6: Correcting the balance sheet

If the investigation does not yield any results, GoodHomes will have to make a decision. Does the difference go to losses/wastage, or does it assume the doors were fitted in houses but were not recorded? Either way the balance sheet has to be corrected.

Accounting impact

Credit: Balance sheet asset code – £800

Debit: Maintenance/losses – GL £800

Final result

Warehouse stock: £1,200 debit

Balance sheet assets balance: £1,200 debit (a decrease of £800)

(The above two now balance.)

Maintenance department: £5,800 debit (an increase of £800).

Impact of the differences

In the scenario with GoodHomes it was originally thought the maintenance department only cost GoodHomes £5,000 if the general ledger was left untouched and no reconciliation took place. The true cost however is £5,800 with the extra £800 added at period end.

Stock variations are a major headache for organisations that do not have robust systems, checks and controls in place. All organisations that hold a significant level of stock must keep a close eye on this part of the company and resources invested for tight controls and audit. Losses will be to its detriment.

On the flip side though, there could be instances where there is more stock in the warehouse than reflected on the balance sheet. This is also of concern as it demonstrates the organisation still has a lack of control and will send the wrong signals to stakeholders and employees. Stock control is crucial for the wellbeing of the company.

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