Stock And General Ledger

Many of the sub-systems in CAPITAL Office effect stock. Invoicing, purchase order deliveries, shipment costing, stock deliveries and returns, and direct adjustments, to name a few. All of these processes will produce automatic journals that directly or indirectly effect your "inventory" account.

Direct stock adjustments

There are two broad approaches to the handling of stock. The first is to instruct CAPITAL Office to record every adjustment to your inventory account (as a journal) as it occurs. The second is to rely on CAPITAL Office's stock control system at the end of the period to report a "closing stock" or total stock balance, and update the general ledger with this amount manually.

The first approach is more elegant in theory but may be difficult to implement in practice. For example, it is not always possible to have the latest prices in stock control at the time that an invoice is raised. Most organisations will, from time to time, go into "negative stock" in stock control. As well, "shrinkage" or damaged stock or theft or incorrect stock taking work towards widening the gap between your "real" inventory value and your general ledger "book" value. A system that directly updates your inventory account as transactions are processed is unlikely to always be entirely accurate simply because of human error factors. The task of cleaning up these variances would need to be performed periodically by an operator who has kept meticulous records on the reasons behind them.

CAPITAL relies on a price field referred to as the cost in store or CIS price and the quantity in stock field to determine the value of stock items in your stock file. The value of stock held for a particular stock item is the CIS price (cost) multiplied by the "stock in".

Any process in CAPITAL that would effect either the CIS or in stock quantity would generate automatic journals to record the adjustment. (the exception would be if either the CIS or "stock in" was set to zero, because, of course, any number multiplied by zero amounts to zero.) An example will help clarify this point:

A direct adjustment is the simplest way to alter the value of your stock. Edit a stock record, for example, and increase or decrease the quantity in stock, or (if the quantity in stock is not zero) change the CIS price. This would produce two automatic journals. The first would credit or debit your "inventory" account, the second would debit or credit your "inventory adjustments" account.

Obviously, directly adjusting stock does not tell us why this was necessary in the first place. If the purpose of the direct adjustment was to reduce stock due to damage or theft, then a better approach might have been to raise an invoice (to yourself) with a zero sales value. At least some explanation could then be included on the invoice. The adjustment would be taken up as "cost of sales" when your sales report for the period is printed.

Let us consider the first method again. The operator decreases the stock available by a certain quantity to account for damage or shop soiling. This causes the "inventory" account to be credited and the "inventory adjustments" account to be debited. The operator would then have to clear the "inventory adjustments" account by crediting it, and debiting an appropriate expense account, such as "stock written off". If appropriate, the "inventory adjustments" account could be directly connected to the "stock written off" expense in your chart of accounts. If this was not appropriate, the adjustment would have to be done in the general ledger through a set of adjusting journals, rather than in the invoicing sub-system or directly from stock control.

generate/Hint.gifKey point: It is always good policy to record adjustments to stock by raising credit notes, special sales, returns, etc., In the appropriate CAPITAL Office sub-system. Avoid performing manual journal entries in the general ledger to account for differences such as "shrinkage" or written off stock wherever possible. The job of reconciling the differences between your CAPITAL Office sub-systems and your general ledger balances can always be kept to a minimum by enforcing this approach.

A system that directly updates your "inventory" account during the processing of a sale, for example, is also capable of directly updating your "cost of sales" account. The automatic journal entries would be fairly straight forward:

A credit note would be the reverse:

When a purchase order is taken delivery of, both the "creditors" account and "inventory" account are effected. In a direct updates system the journals would be:

It is at times desirable to be able to find out what the total purchases for the period or year were. CAPITAL Office can also post another set of automatic journals that provide this information:

Note the use of the special account "closing purchases".

Debiting the "purchases" account requires a balancing credit, but the "inventory" and "creditors" accounts have already been adjusted via the previous journals. Thus, "closing purchases" is used to offset the extra debit. In a direct adjustments system the "purchases" and "closing purchases" accounts should always be treated as a pair and their net effect on your balance sheet will be nil. Nonetheless, it is useful to be able to inspect the balance of the "purchases" account if you need to know (quickly and easily) what your purchases were for a period or year. Having a separate purchases account also allows you to compare current purchasing against a budget or a prior year.

If you don't wish to use "purchases" and "closing purchases" you would simply assign these accounts to your "inventory" account code. The debit and credit would cancel each other out and your inventory balance would remain unchanged. For more information on assigning general ledger account codes, see: General Ledger Sets.

Opening and closing stock

The second approach relies on a method of calculating cost of sales that most accountants would be more comfortable and familiar with.

For invoicing: your "inventory" account and "cost of sales" account are both assigned to the same account code. Usually this is your "inventory" account. Invoicing stock will still reduce stock levels in stock control, but the inventory balance in the general ledger will remain unaffected. This is because the credit to "inventory" is exactly cancelled by the "debit" to cost of sales. The net effect on your balance sheet is nil.

For direct adjustments: the same approach applies again. Your "inventory" account and your "inventory adjustments" account are both assigned to the same account code. Usually this is your "inventory" account.

For purchasing: your "closing purchases" account is assigned to your "inventory" account. This ensures that "purchases" is updated with new stock, but the "inventory" account is not updated. When "inventory" is credited an amount, it is also debited the amount in "closing purchases". The amounts for "inventory" and "closing purchases" are the same, so the net effect on your "inventory" is nil.

What is the point of preventing the "inventory" account from being effected? This is necessary because inventory is determined by what the stock control system reports. A stock valuation report is printed at the end of each period, and this total is entered directly into the general ledger. For more information on performing opening/purchases/closing stock journals, consult "End of period procedures".

The main advantage of this approach is that variances due to "shrinkage" etc., Are taken up into "cost of sales" for each period. The "real" value of your stock (held in stock control) and the "book" value of your stock (held in the general ledger) are always the same.


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