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:
- Raw Material – The raw material is the most basic form of opening inventory i.e. material which 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 inventory which 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.
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 profit figures:
Examples of Opening Stock
Now let us understand the following examples.
Mr. Mark, a 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:
Based on available data Opening stock will be calculated as follows: –
Opening inventory = 10000 + 35000 + 40000 = 85000
Mark Inc., a cloth manufacturing industry gives the following details. You are required to calculate the opening stock value as on 01/01/2018:
Opening stock will be calculated as follows:
Opening Inventory = 1250000 – 800000 – 250000 -+ 100000 = 100000
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 do 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 be also 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 statements.
- According to various amendments in guidelines, accounting assumptions, 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.
Opening Stock can be defined as a number of goods held by an organization at the initiation of any accounting period. 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.
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 –