Tracking Stock and Calculating the Cost of Sales

Connect stock quantities and purchase costs to the goods sold and recognise losses that need investigation.

Part 6 of 10 | Bookkeeping for Small Businesses

Learning goals

You will maintain a simple stock card, compare expected and counted quantities and calculate a basic cost of sales. You will distinguish stock cost from selling price and understand why an unexplained shortage should not be hidden as a sale.

Before you begin

Allow 60 minutes with a calculator and paper. Use one fictional product bought at a constant unit cost. There are no returns, taxes, freight charges or damaged goods in the main example unless a later step introduces them. These assumptions make the arithmetic clear; real stock valuation can need additional policies and adjustments.

Start with quantities

A stock card records the product, unit of measurement, opening quantity, quantities received, quantities issued and expected balance. Use one card per distinguishable product. A carton, packet and individual item are different units. State the conversion if you buy in one unit and sell in another, and test it before posting movements.

Record each stock movement with a date and source reference. Incoming deliveries should be checked against what was ordered and invoiced. Sales, accepted returns, damage and owner use need their own descriptions. A stock card answers how many units should remain; it does not prove that the units are physically present or still saleable.

Work through the quantity example

Start with 20 identical items. Receive 30 more and sell 35. Expected closing stock is 20 plus 30 minus 35, or 15 items. Count the physical stock without changing the card first. If 15 usable items are present, the quantity record agrees with the count under the stated assumptions.

If only 14 are present, one item is unexplained. Check receiving records, sales records, unit conversions, authorised samples, damage and the count itself. Do not automatically invent one more sale. The item might have been sold without being recorded, but it might also have been lost or incorrectly counted. Record the investigation and any approved correction.

Attach cost rather than selling price

Assume each item cost GMD 100 throughout this example. Opening stock cost is GMD 2,000 and purchases cost GMD 3,000. The 15 closing items cost GMD 1,500. Cost of sales is opening stock plus purchases minus closing stock: 2,000 plus 3,000 minus 1,500 equals GMD 3,500.

If all 35 items sold at GMD 160 each, sales total GMD 5,600. Gross profit is GMD 5,600 minus GMD 3,500, or GMD 2,100. This is before rent and other operating expenses. The GMD 3,000 paid or owed for new purchases is not the same as the GMD 3,500 cost of items sold, because some opening stock was also sold.

Understand the limits of the simple formula

With a shortage valued at GMD 100, a closing count of 14 units would leave stock cost of GMD 1,400. The basic opening-plus-purchases-minus-closing calculation would then produce GMD 3,600. That figure includes the unexplained GMD 100 reduction, not just the known GMD 3,500 cost of sold units. Identify the difference rather than implying every missing unit earned sales revenue.

Real businesses may have changing purchase prices, freight, purchase returns, goods held for others, damaged stock or products made from several inputs. Consistent valuation methods and suitable adjustments are needed. Do not switch methods simply to obtain a preferred profit. Keep the underlying quantities and costs so an adviser can apply the appropriate treatment.

Use the records for buying decisions

Review which products sell regularly and which remain unsold. A full shelf ties up money and may hide ageing stock. Low quantities can also create missed sales if replacements take time. Note supplier lead times and decide a practical reorder point from actual demand rather than purchasing solely because cash happens to be available.

Schedule counts and record who performed them. Where practical, have someone check the count independently of the person maintaining the card. For a one-person business, recount selected items before accepting a difference. Secure valuable or easily lost stock and keep personal use visible. The records should help explain activity, not only create a month-end total.

Guided exercise

1. Draw a stock card for the fictional item, stating that the unit is one item. Post the opening 20, receipt of 30 and sale of 35.

2. Calculate the expected closing quantity and cost using GMD 100 per item. Keep cost separate from the GMD 160 selling price.

3. Calculate sales, cost of sales and gross profit for the 35 known sales. Show each calculation in words or numbers.

4. Introduce a count of 14 and prepare a one-item discrepancy note. Explain why it is not automatically evidence of an extra sale.

5. Describe one buying decision that better stock records could improve and the additional information you would need.

Knowledge check

1. What is the expected closing quantity?

2. What are cost of sales and gross profit in the main example?

3. Should closing stock be valued at its intended selling price in this exercise?

Answer guide

1. Fifteen items.

2. Cost of sales GMD 3,500 and gross profit GMD 2,100, before other expenses.

3. No. The exercise uses purchase cost of GMD 100 per unit.

Completion standard

Produce a correct quantity card, stock valuation and gross-profit calculation. Explain the one-item shortage separately and state at least two assumptions that would need review in a more complex real business.

Sources and verification notes

Original bookkeeping explanations and fictional worked examples. Simplified management records do not establish statutory accounts or tax treatment.