Ledger entries for stock transactions are crucial for tracking inventory movements, calculating the cost of goods sold (COGS), and ensuring accurate financial reporting. Below are detailed examples of common stock-related transactions and their corresponding ledger entries to illustrate how inventory is managed in accounting records.
1. Purchase of Stock
When stock is purchased, it is recorded in the inventory account. If the purchase is on credit, accounts payable is credited; if paid in cash, the cash account is credited.
Example 1: Purchase of Stock on Credit
Scenario: A company purchases $6,000 worth of raw materials on credit.
| Account | Debit (Dr.) | Credit (Cr.) |
|---|---|---|
| Inventory (Stock) A/c | $6,000 | |
| Accounts Payable A/c | $6,000 |
Example 2: Purchase of Stock with Cash
Scenario: A company purchases $4,000 worth of stock and pays in cash.
| Account | Debit (Dr.) | Credit (Cr.) |
|---|---|---|
| Inventory (Stock) A/c | $4,000 | |
| Cash A/c | $4,000 |
2. Sale of Stock
When stock is sold, two entries are made: one to record the revenue from the sale and another to account for the cost of goods sold (COGS).
Example 3: Sale of Stock on Credit
Scenario: A company sells goods worth $10,000 on credit. The cost of the goods sold is $6,000.
Entry 1: Record the Sale
| Account | Debit (Dr.) | Credit (Cr.) |
|---|---|---|
| Accounts Receivable A/c | $10,000 | |
| Sales Revenue A/c | $10,000 |
Entry 2: Record the Cost of Goods Sold (COGS)
| Account | Debit (Dr.) | Credit (Cr.) |
|---|---|---|
| Cost of Goods Sold (COGS) A/c | $6,000 | |
| Inventory (Stock) A/c | $6,000 |
3. Returns
A. Purchase Returns (Returning Goods to Suppliers)
When goods are returned to suppliers, the inventory account is credited, and accounts payable is debited.
Example 4: Return of Stock Purchased on Credit
Scenario: A company returns $1,500 worth of defective goods to a supplier.
| Account | Debit (Dr.) | Credit (Cr.) |
|---|---|---|
| Accounts Payable A/c | $1,500 | |
| Inventory (Stock) A/c | $1,500 |
B. Sales Returns (Goods Returned by Customers)
When customers return goods, sales revenue is reduced, and inventory is increased if the goods are resalable.
Example 5: Return of Sold Goods
Scenario: A customer returns goods worth $2,500, and the cost of the returned goods is $1,500.
Entry 1: Reverse the Sale
| Account | Debit (Dr.) | Credit (Cr.) |
|---|---|---|
| Sales Returns A/c | $2,500 | |
| Accounts Receivable A/c | $2,500 |
Entry 2: Adjust the Inventory
| Account | Debit (Dr.) | Credit (Cr.) |
|---|---|---|
| Inventory (Stock) A/c | $1,500 | |
| Cost of Goods Sold (COGS) A/c | $1,500 |
4. Stock Adjustments (Write-Downs and Write-Offs)
Adjustments are made when inventory loses value due to obsolescence, damage, or market price decline.
Example 6: Stock Write-Down
Scenario: Inventory originally valued at $4,000 is now worth only $3,200 due to market price decline.
| Account | Debit (Dr.) | Credit (Cr.) |
|---|---|---|
| Inventory Loss (Expense) A/c | $800 | |
| Inventory (Stock) A/c | $800 |
5. Recording Closing Stock
At the end of the accounting period, the value of closing stock is recorded as an adjustment in the trading account and shown as a current asset on the balance sheet.
Example 7: Recording Closing Stock
Scenario: The closing stock at year-end is valued at $12,000.
| Account | Debit (Dr.) | Credit (Cr.) |
|---|---|---|
| Closing Stock A/c | $12,000 | |
| Trading Account A/c | $12,000 |
The closing stock is also reported as a current asset in the balance sheet.
The Role of Ledger Entries in Stock Management
Accurate ledger entries for stock are essential for tracking inventory movements, calculating the cost of goods sold, and ensuring the integrity of financial statements. Whether purchasing, selling, returning, or adjusting inventory, each transaction must be recorded precisely to reflect the company’s true financial position. By following consistent accounting practices, businesses can maintain effective inventory management and support sound financial decision-making.