Its all about matching cost to revenue rule
example
you buy 100 chairs @ 5 per chair, total cost of purchase is 500
You sell each chair for 10, say you sold 80 chairs generating total revenue of 800
How much would be cost of sale to generate 800 revenue, its not 500, it should be 400
you are left with 20 chairs costing 5 each , total 20x5=100 this cost should match with income once actual stock is sold and till that stock is not sold it is asset of business
hence
sales 800
Cost of sale (COS)
purchases 500
less closing stock 100
COS = 400
Profit 400
I sort of understand the calculation better now, but if it was the way it makes sense in my mind then it would be 300 profit (800 sales minus 500 costs) regardless of what you have left at the end of the year. By including the end of year stock it pushed the profit figure up and makes you pay more income tax does it not?
no it does not make you pay more in tax bcaz next year you will have this stock as opening stock to match with revenue of correct period
So Opening Stock is entered at the start of the tax year and the figure is the same as closing stock so effectively cancels it out so you don’t pay more tax?
How do I enter opening stock into QF then?
Once you run year end , you will have stock figure in opening balance sheet which can be moved to P&L through journal
Dr Opening stock (P&L)
Cr Closing stock (Balance sheet)
I guess I will understand this more once I actually try it and try using journals and so on. It’s all new to me. Thanks for your help with it all.
You are most welcome. Actually going through things make it more clear for sure.