Overview: 

Understanding the performance of your business is crucial, especially when it comes to buying and selling stock items and assessing their profitability. The financial data related to your sales and expenses is typically outlined in your Profit and Loss report. However, for an accurate calculation of the profitability of your stock items, it’s essential to consider any remaining unsold stock at the end of a specific period. Failing to include unsold stock can lead to distorted profit figures or even losses in your financial report. To ensure that unsold stock is accounted for, it’s recommended to post opening and closing inventory journals. Here is a link to importing journals to Zumzum Financials and a link to the Salesforce article on Managing and Viewing Transaction Journals.

Calculating the cost of sales involves determining the direct costs associated with the production or acquisition of goods sold by a business during a specific period. Here’s a general formula to calculate the cost of sales:

Cost of Sales = Opening Inventory + Purchases – Closing Inventory

Let’s break down each component:

Opening Stock: This refers to the value of stock (or inventory) that the business had at the beginning of the accounting period. This includes the cost of goods that were unsold from the previous period.

Purchases: This represents the cost of stock purchased or manufactured during the accounting period.

Closing Stock: This is the value of stock remaining at the end of the accounting period. It includes the cost of goods that have not yet been sold.

By subtracting the closing stock from the sum of the opening stock and purchases, you get the cost of goods that were sold during the period. This figure is known as the cost of sales.

It’s important to note that the cost of sales is a key component in calculating gross profit. Gross profit is calculated by subtracting the cost of sales from the total revenue generated from sales during the same period.

In summary, calculating the cost of sales is crucial for understanding the direct expenses associated with the goods sold by a business and is essential for determining gross profit and overall profitability.

Cost of Sales Example calculation

let’s walk through an example to calculate the cost of sales.

Let’s say you own a retail store selling clothing. Here are the relevant details for the accounting period:

1. Opening Stock: £10,000
2. Purchases: £20,000
3. Closing Stock: £12,000

To calculate the cost of sales, you would use the formula:

Cost of Sales = Opening Stock + Purchases – Closing Stock

Now let’s plug in the numbers:

Cost of Sales = £10,000 (Opening Stock) + £20,000 (Purchases) – £12,000 (Closing Stock)

Cost of Sales = £10,000 + £20,000 – £12,000

Cost of Sales = £30,000 – £12,000

Cost of Sales = £18,000

So, the cost of sales for your retail store during this accounting period is £18,000. This means that the direct costs associated with the goods sold amount to £18,000. This figure is essential for calculating gross profit and assessing the profitability of your business.

To calculate the profit with the cost of sales, you can use the formula for gross profit. Gross profit represents the difference between total revenue and the cost of goods sold. Here’s the formula:

Gross Profit = Total Revenue – Cost of Sales

Let’s illustrate this with an example:

Suppose your retail store generated total revenue of £50,000 during the same accounting period for which we previously calculated the cost of sales as £18,000.

Using the formula:

Gross Profit = £50,000 (Total Revenue) – £18,000 (Cost of Sales)

Gross Profit = £32,000

So, the gross profit for your retail store during this accounting period is £32,000. This represents the amount of money left after accounting for the direct costs associated with the goods sold. Gross profit is an essential metric for assessing the profitability of your business before considering other operating expenses.

Opening and closing Nominal Accounts for stock

Zumzum Financials default chart of accounts contains the following Nominal Accounts for recording your stock transactions.  

If you have modified or deleted these default Nominal Accounts, you will need to create these nominal accounts. Follow the help article to create new Nominal Accounts.  

The default Nominal Accounts are below  

Nominal Category	Sub Category	Nominal Account Name	Nominal Code	Financial Report	Financial Report Group
Current Assets	Stock (Balance Sheet)	Stock	1001	Balance Sheet	01 Assets
Purchases	Stock (P&L)	Opening Stock	5200	Profit & Loss	05 Purchases
Purchases	Stock (P&L)	Closing Stock	5201	Profit & Loss	05 Purchases

Once you have your opening and closing nominal accounts, you are ready to post your manual stock journals. 

Journal Entries for Opening and Closing Stock

Start of Fiscal Year – Opening Stock Journals Entry 

You will only need to perform this step if you have a value for Stock (Balance Sheet) in your balance sheet nominal account (1001). Create and post a new manual journal to move this to your profit and loss Opening Stock nominal account (5200).

If you do not have any values in your Stock (Balance Sheet) then you should plan to post a Closing Stock Journal entry as your first journal, at the end of the first fiscal month. You will do this if you have purchased stock for your company in the fiscal month.  

1. Go to the Journal tab and 
   1. Click New to create a new manual journal
   2. Enter a Reference 
   3. Enter a Date 
      1. Ensure your date is in the correct month for the first period of your fiscal year
   4. Enter the below journal line items

N/C	Detail	VAT	Debit	Credit
1001 – Stock	Stock – Balance Sheet	No VAT	0	value
5200 – Opening Stock	Opening Stock – P&L	No VAT	value	0

1. Click Save Draft or Save and Post

The value of your stock has now been moved to the Profit and Loss account. The balance remains as a debit in the Opening Stock nominal account (5200) for the rest of the year and is offset by the value recorded in your Closing Stock nominal account (5201).

First Month – Closing Stock Journals

For the first month of your fiscal year, when you have completed processing all your transactions, post a manual journal to move the closing stock value back to the balance sheet stock nominal account (1001). This ensures that your stock balance is listed as an asset on your company’s Balance Sheet report.

1. Go to the Journal tab and 
   1. Elick New to create a new manual journal
   2. Enter a Reference 
   3. Enter a Date 
      1. Ensure your date is in the correct month for the first period of your fiscal year
   4. Enter the below journal line items
   5. Click Save Draft or Save and Post

N/C	Detail	VAT	Debit	Credit
5201 – Closing Stock	Closing Stock – P&L	No VAT	value	0
1001 – Stock	Stock – Balance Sheet	No VAT	0	value

Once you’ve posted this manual journal, run your Profit and Loss Report and review your results. 

Second Month (and following months) – Opening Stock Journals

Post a manual journal to move the value of the opening stock from the balance sheet Stock nominal account, 1001, to the profit and loss Opening Stock nominal account, 5201.

The opening stock value for month two is the closing stock value for month one.

To enter a new manual journal follow these steps: 

1. Go to the Journal tab and 
   1. Click New to create a new manual journal
   2. Enter a Reference 
   3. Enter a Date 
      1. Ensure your date is in the correct month for the first period of your fiscal year
   4. Enter the below journal line items
   5. Click Save Draft or Save and Post

N/C	Detail	VAT	Debit	Credit
1001 – Stock	Stock – Balance Sheet	No VAT	0	value
5200 – Opening Stock	Opening Stock – P&L	No VAT	value	0

Please run your Trial Balance, Profit and Loss and Balance Sheet reports to confirm you are satisfied with your journal entries. 

For each month you wish to record opening stock, repeat the entry of the above manual journal. 

Second Month (and following months) or the end of your fiscal year – Closing Stock Journals

Post a manual journal to move the value of the profit and loss Opening Stock nominal account, 5201 to the balance sheet Stock nominal account, 1001. 

To enter a new manual journal follow these steps: 

1. Go to the Journal tab and 
   1. Click New to create a new manual journal
   2. Enter a Reference 
   3. Enter a Date 
      1. Ensure your date is in the correct month for the first period of your fiscal year
   4. Enter the below journal line items
   5. Click Save Draft or Save and Post

N/C	Detail	VAT	Debit	Credit
5200 – Closing Stock	Closing Stock – P&L	No VAT	value	0
1001 – Stock	Stock – Balance Sheet	No VAT	0	value

When you run a Profit and Loss report at the start of your new fiscal year, the values of Opening Stock and Closing Stock are calculated for the new period so therefore commence with zero balances. 

When you run a Balance Sheet report, you will the see the value of Retained Profit and Loss Account (3200) which is the profit from the previous fiscal year. This will be displayed in Capital and Reserves group of your Balance Sheet report. 

You will also see your current stock from the previous fiscal year will remain as an asset on your balance sheet in the nominal account Stock 1001.  At the commencement of your new fiscal year, you then follow the steps in Start of Fiscal Year – Opening Stock Journal Entry section.