Businesses may inventory of unsold goods at the beginning of the period called opening inventory. Normally, an assumption is made that this inventory is the first lot to be sold during the current accounting period. In other words, it is part of the cost of sales of the current period and should therefore be added to purchases in the trading section of income statement. A new business will naturally have no opening inventory in the first year.
Entry, Account Preparation and Example of Opening Inventory:
Opening inventory is given on the debit side of a trail balance so if we prepare inventory account that would appear as follows assuming its amount was $4000, (To explain opening inventory account, take the entry from closing inventory page).
We can see that two entries in inventory account; one to transfer the opening inventory out and into the trading section of income statement, and the second entry to transfer the closing inventory in from the trading account.
Trading section of income statement would appear after incorporating inventory values in the following way:
Trading Section of Income Statement (Horizontal or Account Style) with Opening Inventory:
To prepare trading section of income statement (horizontal or account style) and vertical style, with adding opening inventory, we take trading account from closing of incomes and expenses page.
Trading Section of Income Statement (Vertical Style) with Opening Inventory:
Formulas Used in the Trading Section of Income Statement: