What is Opening Stock?
Opening Stock can be described as the initial quantity of any product/ goods held by an organization during the start of any financial year or accounting period and is equal to the closing stock of previous accounting period valued on the basis of suitable accounting norms depending on the nature of business.
Types of Opening Stock
Depending on the nature of the business carried by an organization, inventory types will also vary. Example inventory of a trader will be different than the inventory of a manufacturing organization or from a service providing organization. However, in consolidated form, they can be divided into the following types:
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For eg:
Source: Opening Stock (wallstreetmojo.com)
- Raw Material – The raw material is the most basic form of opening inventory, i.e., material that has not gone under any transformation. It is just purchased and stored for future use.
- Work in Progress – For manufacturing industries, work in progress is a type of inventoryType Of InventoryDirect material inventory, work in progress inventory, and finished goods inventory are the three types of inventories. The raw material is direct material inventory, work in progress inventory is partially completed inventory, and finished goods inventory is stock that has completed all stages of production.read more that has undergone modification, conversion, transformation as the case may be but are not completely processed. For the purpose of selling at full market price, still, some processing needs to be carried out.
- Finished Goods – The final product of an organization in which it is engaged in. It is complete in all respect, i.e., ready to be sold.
The formula for Calculating Opening Stock
Depending on the variety of data available, It can be calculated on a different basis. some formulas are presented below:
#1 – When different types of opening stock are mentioned.
#2 – When current year closing stock is given along with sales and cost of goods sold and gross profitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services.read more figures:
Examples of Opening Stock
Now let us understand the following examples.
Example #1
Mr. Mark, manufacturer manufacturing shirts, gives the following details of stock held as on 01/01/2019. Based on the available data, you are required to calculate opening stock value with classification as RM, WIP, FG:
- Raw Cotton: $5000
- Thread: $2000
- Colours: $3000
- Half Stiched Shirts: $20,000
- Stiched but not Coloured Shirts: $15,000
- Completed Shirts: $48000
Note: Completed shirts given are at sales value with a gross margin of 20% on the cost price.
Solution
Based on available data Opening stock will be calculated as follows: –
Opening inventory = 10000 + 35000 + 40000 = 85000
Example #2
Mark Inc., a cloth manufacturing industry, gives the following details. You are required to calculate the opening stock value as on 01/01/2018:
Solution
Opening stock will be calculated as follows:
Opening Inventory = 1250000 – 800000 – 250000 -+ 100000 = 100000
Advantages
Some of the advantages are as follows:
- Holding opening stock can help an organization to meet its fluctuating market demands and can cater to the needs of its customers.
- It helps an organization to ensure better services/supply to its customers and hence increases customer satisfaction.
- The efficient supply of raw material ensures smooth operations without hampering production.
Limitations of Opening Stock
Holding opening stock does have advantages, but at the same time there are many disadvantages as follows: –
- Inventory Holding Cost: It is the number of unsold goods/ material during the previous financial year. Holding inventory leads to an increase in costs like storage area rent, interest on money value of inventory, etc.
- Obsolescence Risk: Holding inventory always has obsolete (inventory getting outdated, i.e., of no use) risk due to changing market conditions.
- Risk of Loss: An organization having an opening inventory will also be having a risk of loss due to damage, theft, etc.
- Low Turnover: A huge amount of opening inventory depicts the organization’s inability to sell its products and may, therefore, reflect poor financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more.
Important Points
- According to various amendments in guidelines, accounting assumptionsAccounting AssumptionsAccounting assumptions are a set of rules that ensures an organization's business operations are conducted efficiently and as per the standards defined by the FASB (Financial Accounting Standards Board), which ultimately helps lay the groundwork for consistent, reliable and valuable information.read more, Accounting standards, there are varied changes taking place in opening stock calculation and disclosure requirements.
- Not only a dealer or manufacturer, but now service provider is also required to ensure proper accounting of opening stock. For example, A Chartered Accountant/ Certified Public Accountant is required to maintain records of inventory held in the form of stationery like a pen, paper, etc.
- Valuation of opening inventory is critical as it directly affects an organization’s profits.
- Not only product in which organization deals but also other assets like spare parts and inventory of capitalized assets are also disclosed as inventory;
Conclusion
Opening Stock can be defined as a number of goods held by an organization at the initiation of any accounting periodAny Accounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.read more. They can be categorized as raw materials, work in progress and finished goods, etc. Based on the availability of data, opening inventory can be calculated with the help of different formulas. Holding inventory helps an organization to cater to the fluctuating needs of its customers but also has the cost of holding. Nowadays, there are various amendments taking place in the calculation, accounting, and disclosure of opening stock.
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This has been a guide to what is opening stock and its meaning. Here we discuss its formula, 3 types of opening stock (Raw material, work in progress, finished goods) along with examples, advantages & disadvantages. You may learn more about accounting basics from the following articles –
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