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ACCT 301 Lecture Notes - Bank Reconciliation, Financial Statement

Course Code
ACCT 301

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Chapter 15
At the end of the accounting period, when the accountants begin to close off accounts
in preparation for the financial statements, there are a few important tasks to do first.
The first of which is to calculate the closing stock of the period, to prepare the
Trading, Profit & Loss Account, Bank Reconciliation, etc.
On the bases of the accruals concept, revenues should be matched with their relevant
cost as per the corresponding period. As such, any stock that remains unsold at the
end of the accounting period isn’t included as a part of the cost of sales for that
period. Get it? Well, it’s like a prepayment, u don’t actually account for it during the
current period, because it is relevant only to the following period.
Well, for this reason, the company should find out how much stock it has on hand at
the end of the accounting period, this stock is called closing stock, and the process of
finding out how much you have of it is called stocktaking.
This process is easy if the company is a relatively small where it could actually
physically count each item of stock. Yet as the business grows larger the quantity of
stock held becomes harder to determine.
Therefore a business may wish to close down for a short period for a stock take, or a
business may prefer to keep a detailed record of stock movements whilst baring the
large related costs and headaches!
In more complicated cases, a business may wish to maintain continuous stock records.
This means that a card is kept for every item of stock, showing receipts and issues
from the stores, and a running total.
The Cost of Goods Sold
Now that we figured out what the closing stock value is, all we simply need to do is to
deduct it from the cost of sales during a period to determine the profit. The cost of
sales, or cost of goods sold is simply the expense incurred purchasing stock during the
period. It is calculated using the following formula:
Cost of Sales:
Opening Stock
Add: Purchases
Add: Carriage In
Less: Returns Inwards / Purchase Returns
Less: Damaged or Stolen goods
Less: Closing Stock
Please note that the cost of goods manufactured or purchased is adjusted to allow for
increases or reduction in stock levels during the period. This is why purchases,
opening stock and closing stock are used in the formula.
The next step is to draw up the Stock Account and the Trading, Profit & Loss
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