How can you ensure accounting standards are met when valuing stock?

1 What are accounting standards?

Accounting standards are a set of rules and guidelines that specify how financial transactions and events should be recorded, measured, presented, and disclosed. They are designed to ensure that financial information is reliable, comparable, and transparent for users such as investors, creditors, regulators, and tax authorities. Different countries and regions may have different accounting standards, such as US GAAP, IFRS, or ASPE. However, most of them share some common principles and concepts.

2 Why is stock valuation important?

Stock valuation is the process of determining the cost or value of your inventory at a given point in time. It affects your balance sheet, income statement, and cash flow statement, as well as your tax liability and profitability. For example, if you overvalue your stock, you will report higher assets and lower cost of goods sold, which may inflate your net income and equity. On the other hand, if you undervalue your stock, you will report lower assets and higher cost of goods sold, which may reduce your net income and equity. Therefore, you need to value your stock in a consistent and realistic manner, following the accounting standards that apply to your business.

4 How to account for stock adjustments?

Sometimes, you may need to adjust the value of your stock due to various reasons, such as theft, damage, obsolescence, or price changes. These adjustments affect your inventory account and your income statement, and should be recorded according to the accounting standards. Common types of stock adjustments include stock write-offs, stock write-downs, and stock revaluations. Stock write-offs are reductions in the value of your stock due to losses, damages, or spoilages that make them unsaleable. You should debit your cost of goods sold account and credit your inventory account for the amount of the write-off, which reduces your net income and your assets. Stock write-downs are reductions in the value of your stock due to declines in market prices or demand that make them less valuable. You should debit your inventory write-down expense account and credit your inventory account for the amount of the write-down, which reduces your net income and your assets. On the other hand, stock revaluations are increases in the value of your stock due to rises in market prices or demand that make them more valuable. You should debit your inventory account and credit your inventory revaluation reserve account for the amount of the revaluation, which increases both your assets and equity.

5 How to monitor and control your stock?

To ensure that your stock valuation is accurate and consistent, you need to monitor and control your inventory levels and movements regularly. You can use tools and techniques such as stock counts, stock audits, and stock reports. Stock counts involve physical inspections of your stock to verify the quantity and condition of your inventory - you should conduct them periodically, such as monthly, quarterly, or annually. Stock audits are independent examinations of your stock and inventory records by external auditors or regulators - you should cooperate with them and provide the relevant documents and evidence. Stock reports are summaries of your stock and inventory activities - you should prepare and review them regularly, such as weekly, monthly, or quarterly. If there are any discrepancies, errors, irregularities, issues, or opportunities, you should investigate the causes, make necessary adjustments, correct them, implement recommendations, and take appropriate actions.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?