Sunday, 23 August 2015

Can there be a Balance Sheet with no closing stock?

Otherwise a very simple question with a simple answer, but I would like to answer this with a few specific examples to give you more clarity.

Firstly, to speak about the basics, a balance sheet is the statement of assets and liabilities of a business on a particular day. The stock at the end of any particular day is the closing stock for that day, and thus, in case a business has some inventory, the value for such inventory will have to be shown in the balance sheet to reflect a true picture of the business' assets on that day.

Now, to give you examples of situations in which there will be no closing stock.

1. In case the business is of a service provider, who is not dealing in any goods. His nature of work would not require him to maintain any stocks. E.g. Chartered Accountant, Lawyer

2. In case the realizable value of the stock at the end of a day is nil (zero), the balance sheet may not reflect the value of closing stock.

3. For a commission agent or a consignee, who keeps stock of another for sale, without being the owner of such stock himself, there will appear no closing stock value in the balance sheet despite there being physical presence of stock.

4. If a person keeps stock-on-approval basis, which means that he has physical stock received from the supplier, but it will not be accepted till the time the same has been approved by the management. In such cases too, the closing stock figure may not reflect the value of such inventory.

5. For job workers, who perform customised operations on the principal manufacturers' stock, the value of closing stock may be zero, as they are not the owners of the stocks lying with them.

6. Where the value of the stocks are not that material and only nominal, they may be (after careful consideration of the materiality of such inventory), booked under consumables and treated as consumed as and when they are purchased. For example, in case a doctor has some stock of medicines lying with him, which may not be of a very high amount, and he may be using them on his patients as and when required, they will be treated as consumables and not closing stock, owing to the nature of such item.

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