A value for work in progress and stock is included in the balance sheet of financial statements. The double entry for recording stock is Dr Stock in the balance sheet (a current asset) and Cr Closing stock in the Profit and loss account (increasing profit reported for the accounting period).

Accounting standards in UK require that stock is stated at the lower of cost and net realisable value. Therefore stock that will sell for a profit is stated at cost, for example the invoiced cost of a product held for sale. However, if stock realistically has to be sold at a loss, it is stated at the net sales value after deducting all the costs that need to be incurred to sell the stock. This is done to prevent overstating profits.  As accounts are prepared after the accounting period has ended, the sales value of stock sold after year end that was held at the year end can be used to estimate if unsold stock will sell at a loss or a profit.

The primary statement of profit and loss shows turnover (income) less cost of sales to work out the gross profit. Cost of sales are the direct costs incurred to produce the products or services sold and recorded as turnover. It includes cost of purchasing raw materials or products, transformation of raw materials to finished goods, the opening value of stock held at the beginning of the accounting period, less the closing value of stock held at the end of the accounting period.  In this way, the sales and directly related costs are matched to show the true profit made in the period. The items that are included in cost of sales will vary from company to company and is partly a judgement call made by the directors.

Your balance sheet will balance because you have adjusted stock and accumulated profit in the balance sheet by the same amount.

Provisions have to me made against stock that becomes obsolete due to competing products entering the market, old technologies replaced by better technologies, changing fashion trends or damage.  If stock items remain in store for longer than normal or directors decide they no longer have any use for the items, items should be written off as a loss to the profit and loss account. A review of obsolete stock is usually carried out monthly or at least annually. If there is a measure of uncertainty, closing stock is reduced by the provision and adjusted annually for changing trends.

For complicated businesses a bar coding system is used to record the costs and selling prices of individual stock lines, each line recorded using its own unique bar code.  Stock is counted under controlled conditions periodically to ensure that the record of invoiced purchases matches the physical count of stock. This old fashioned method is still the best to ensure any lost or stolen stock is identified.

A detailed record of stock is also used in product costing. To work out what the selling price of a product should be, one method is to add all the costs that go into producing the product  together and then to add a target profit on to the total cost of the product. The resulting prices need to cover any fixed overheads or general running costs of the business whilst maintaining a competitive edge over the price of competing products in the market. A detailed cost card records each cost that goes into producing a product. This is also a useful tool for the stock valuation of finished goods or work in progress.