the opening balance in stock reserve account is transferred to
Answers
Answer:
The opening stock appears on the debit side of trading account and to reduce it to its cost the stock reserve is transferred to the credit side.
Answer:
The opening balance of the stock reserve account is transferred to the Credit side of the General P&L account.
Explanation:
• As you are aware, stock shouldn't be valued higher than its cost.
• Inter-departmental transfers are made above and beyond budget to assess each department's performance.
• Stocks in the department's trading account are therefore shown at cost to the department even though they are above cost to the business.
• Because P&L accounts are where we can see how each department is doing, no adjustments for the profit portion are performed before these accounts.
• However, unless the items are sold to outside parties, the profit produced by a department when transferring goods to another department does not represent the enterprise's true profit.
• Therefore, the profit component in stocks needs to be changed in order to determine the true profit made by the company.
• The opening stock has a profit component, but since this profit was achieved in the prior year, the G.P. rate from that year is applied.
• The opening stock shows on the debit side of the trading account, and the stock reserve is moved to the credit side to decrease it to its cost.
• The closing stock was presumptively depleted of this year's goods and profit at the rate of G.P. for the current year. We minimise the profit element by debiting the General P&L account because the closing stock is above cost and on the credit side of the trading account.
Hence we can conclude that, the opening balance of the stock reserve account is transferred to the Credit side of the General P&L account.
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