Stock (UK accounts still say stock more often than inventory) is goods held for sale, goods being made and the materials that go into them. In the nominal ledger it is a current asset. What makes it awkward is that its value only becomes certain when someone counts it, so the account has to work alongside cost of sales rather than on its own.
There are two ways to keep the stock account up to date. Pick one deliberately, because each needs a different set of accounts.
Method one: periodic stock with a closing adjustment
Purchases of goods are posted straight to a purchases account in cost of sales during the period. The stock account is only touched at month end or year end, when the counted value replaces the old one. You need:
- Stock (balance sheet, current assets)
- Purchases (cost of sales)
- Opening stock and closing stock, or a single stock movement account (cost of sales)
Worked example
A garden centre starts the year with stock valued at £18,000. During the year it buys plants and products for £60,000, posted to purchases. The year-end count, valued at cost, comes to £22,500.
First reverse the opening value out of the balance sheet:
| Account | Debit | Credit |
|---|---|---|
| Stock movement (cost of sales) | £18,000 | |
| Stock | £18,000 |
Then bring in the counted value:
| Account | Debit | Credit |
|---|---|---|
| Stock | £22,500 | |
| Stock movement (cost of sales) | £22,500 |
Cost of sales becomes £18,000 + £60,000 − £22,500 = £55,500, and the balance sheet shows stock of £22,500. The two journals carry no VAT; VAT was dealt with on the supplier invoices.
The periodic method is simple, but between counts the management accounts show purchases rather than true cost of sales. A month in which the shop stocks up for spring will look loss-making unless someone estimates closing stock.
Method two: perpetual inventory
If your sales system or stock module tracks quantities and costs item by item, purchases go directly into the stock account, and each sale moves the cost of the items sold into cost of sales:
| Account | Debit | Credit |
|---|---|---|
| Cost of sales | £42.00 | |
| Stock | £42.00 |
This gives an up-to-date gross margin every day. Counts are still needed, but they now check the system rather than create the number. Differences between the system quantity and the shelf go to a shrinkage and wastage account, not back into purchases, so losses stay visible.
Do not mix the methods. If purchases are posted to the stock account and the year-end adjustment is also run, cost of sales is counted twice.
Raw materials, work in progress and finished goods
A business that makes things should split stock into three accounts, because the Companies Act balance sheet formats list them as separate sub-headings under stocks:
- Raw materials and consumables – timber, fabric, components, packaging
- Work in progress – partly made items, valued at materials plus the labour and production overheads spent on them so far
- Finished goods and goods for resale – complete products, and bought-in items sold unchanged
A fourth sub-heading, payments on account, covers deposits paid for stock not yet received. Service businesses with unbilled time use work in progress in a different sense; keep it separate from manufacturing WIP.
Valuing what was counted
FRS 102 Section 13 measures stock at the lower of cost and estimated selling price less costs to complete and sell. Cost includes the purchase price, import duty and carriage in, but not selling costs, storage after production or general admin. Slow-moving or damaged lines that will sell below cost are written down, and the reduction goes to an inventory write-down account in cost of sales. The full year-end routine, including cost formulas such as FIFO and weighted average, is set out in stock valuation at year end.
Keeping the stock account trustworthy
- Hold the count sheets or the stock report behind every closing figure; HMRC and your accountant will want to see how the number was built. Our guide to stock count records lists what to keep.
- Get cut-off right: goods received before the count but invoiced after it need a goods received not invoiced accrual, or stock is in the count without its cost.
- Goods taken for own use or given away come out of stock at cost, with VAT considered separately.
- Never value stock at selling price, and never leave last year’s figure in place because nobody counted.