Stock refers to all items that a business normally engages in buying or selling to make a profit. Stock is an asset because it represents goods owned by the business .In accounting certain terms have specific or restricted meaning but these terms may have a different meaning outside the context of accounting. In Accounting the term Purchases refers to buying of stock only. Sales refer to selling of stock only. There are items which may occasionally be bought and sold by a business which are not stock. These items are fixed assets which are bought not for resale but to be used in the business for a long time.
Goods may be bought and sold for cash or on a credit basis. When goods are sold on credit the customer becomes indebted to the business and is called debtors. Debtors are a form of asset and represents customers who owe the business money usually for items sold on credit. When goods are bought on credit the business becomes indebted to the supplier and is called creditors. Creditors are a form of liability and represents suppliers to whom the business owes money usually for items bought on credit.
There are four basic movements of stock, two representing increases in the asset of stock and two representing decreases in stock; Each movement requiring its own accounting entry. These movements are:
Increase of Stock
–Purchases of stock: The Purchase Account will be debited because purchases represent increases in the asset of stock.
–Returns Inwards of stock: Returns Inwards represent goods returned to the business by customers. These goods were previously sold so they are also referred to as sales returns. The asset of stock will increase by the goods returned in, therefore the Returns Inwards (or Sales Returns) Account will be debited. Goods are sometimes returned due to excess amount received by customers, wrong type, damaged goods, or inferior quality.
Decrease of Stock
–Sale of stock: The Sales Account will be credited because sales represent decrease in the asset of stock due to the leaving of stock.
–Returns Outwards of stock: Returns Outwards represent goods returned out to suppliers by the business. These goods were previously purchased so they are also referred to as purchases returns. The asset of stock will decrease by the goods returned out, therefore the Returns Outwards (or Purchases Returns) Account will be credited.