What is an Opening Stock?

Opening Stock is the initial quantity of any product/ goods held by an organization during the start of any financial year or accounting period. It is equal to the closing stock of the previous accounting period, valued based on suitable accounting norms depending on the nature of the business.

Types of Opening Stock

Depending on the nature of the business carried by an organization, inventory types will also vary. For example, the inventory of a trader will be different from the inventory of a manufacturing organization or a service-providing organization. However, in consolidated form, they can be divided into the following types:

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  • Raw Material – The raw material is the most basic form of opening inventory, i.e., material that has not gone under any transformation. It is just purchased and stored for future use.Work in Progress – For manufacturing industries, work in progress is a type of inventoryType Of InventoryDirect material inventory, work in progress inventory, and finished goods inventory are the three types of inventories. The raw material is direct material inventory, work in progress inventory is partially completed inventory, and finished goods inventory is stock that has completed all stages of production.read more that has undergone modification, conversion, and transformation, as the case may be but is not completely processed. To sell at full market price, some processing still needs to be carried out.Finished Goods – The final product of an organization in which it is engaged. It is complete in all respects, i.e., ready to be sold.

The formula for Calculating Opening Stock

Depending on the variety of data available, It can be calculated differently. Some formulas are presented below:

#1 – When different types of opening stock are mentioned.

Opening Stock Formula = Raw Material Cost + Work in Progress Values + Finished Goods Cost

#2 – When current year closing stock is given along with sales and cost of goods sold and gross profitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services.read more figures:

Opening Stock formula = Sales – Gross Profit – Cost of Goods SoldCost Of Goods SoldThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more + Closing Stock

Examples of Opening Stock

Now let us understand the following examples.

Example #1

Mr. Mark, the manufacturer manufacturing shirts, gives the following details of stock held as of 01/01/2019. Based on the available data, you are required to calculate the opening stock value with classification as RM, WIP, FG:

  • Raw Cotton: $5000Thread: $2000Colors: $3000Half Stitched Shirts: $20,000Stitched but not Coloured Shirts: $15,000Completed Shirts: $48000

Note: Completed shirts are at sales value with a gross margin of 20% on the cost price.

Solution

Based on available data Opening stock will be calculated as follows: –

Opening inventory = 10000 + 35000 + 40000 = 85000

Note: Since completed shirts (FG) were stated at the sales price of $48,000. This price had a margin of 20% on cost, therefore reducing valuation by diving from 120% to ascertain the cost price.

Example #2

Mark Inc., a cloth manufacturing industry, gives the following details. You are required to calculate the opening stock value as of 01/01/2018:

Opening stock will be calculated as follows:

Opening Stock Formula = Net Sales – Purchases – Gross Margin + Closing Stock

Opening Inventory = 1250000 – 800000 – 250000 -+ 100000 = 100000

Advantages

Some of the advantages are as follows:

  • Holding opening stock can help an organization meet its fluctuating market demands and cater to its customers’ needs.It helps an organization ensure better services/supply to its customers and hence increases customer satisfaction.The efficient supply of raw materials ensures smooth operations without hampering production.

Limitations of Opening Stock

Holding opening stock does have advantages, but at the same time, there are many disadvantages as follows: –

  • Inventory Holding Cost: The number of unsold goods/materials during the previous financial year. Holding inventory leads to increased costs like storage area rent, interest on the money value of inventory, etc.Obsolescence Risk: Holding inventory always has obsolete (inventory getting outdated, i.e., of no use) risk due to changing market conditions.Risk of Loss: An organization with an opening inventory will also have a risk of loss due to damage, theft, etc.Low Turnover: A huge amount of opening inventory depicts the organization’s inability to sell its products and may, therefore, reflect poor financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more.

Important Points

  • According to various amendments in guidelines, accounting assumptionsAccounting AssumptionsAccounting assumptions are a set of rules that ensures an organization’s business operations are conducted efficiently and as per the standards defined by the FASB (Financial Accounting Standards Board), which ultimately helps lay the groundwork for consistent, reliable and valuable information.read more, and Accounting standards, there are varied changes in opening stock calculation and disclosure requirements.Not only a dealer or manufacturer but now a service provider is also required to ensure proper accounting of opening stock. For example, A Chartered Accountant/ Certified Public Accountant must maintain records of inventory held in the form of stationery like a pen, paper, etc.Valuation of opening inventory is critical as it directly affects an organization’s profits.Not only products in which the organization deals but also other assets like spare parts and inventory of capitalized assets are also disclosed as inventory;

Conclusion

Opening Stock can be defined as several goods an organization holds at the initiation of any accounting periodAny Accounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company’s overall performance.read more. They can be categorized as raw materialsRaw MaterialsRaw materials refer to unfinished substances or unrefined natural resources used to manufacture finished goods.read more, work in progress, finished goods, etc. Based on the availability of data, opening inventory can be calculated with the help of different formulas. Holding inventory helps an organization cater to the fluctuating needs of its customers and has the cost of holding. Nowadays, various amendments are taking place in the calculation, accounting, and disclosure of opening stock.

This has been a guide to opening stock and its meaning. Here we discuss its formula, three types of opening stock (Raw material, work in progress, finished goods), and examples, advantages, & disadvantages. You may learn more about accounting basics from the following articles –

  • Construction Work in ProgressHolding CostPhantom Stock TypesClosing Stock MeaningInventory Write-Down