Introduction
In this article we will learn about the adjustment for 'Obsolete Stock' in partnership accounts.
Please note that the adjustment will be done in a similar manner whether you are doing admission, retirement, death or change in profit ratio question. You need not understand the adjustments separately for these chapters.
Meaning of Stock or Meaning of inventory
Let's first understand the meaning of stock.
- Stock means the items in which the firm deals in. It means the goods or material which a business holds either for sale or for further manufacturing. Stock is also known as inventory. Stock includes
- raw materials,
- work in progress,
- finished goods and
- traded goods
Raw Material Meaning
Raw Materials means goods on which the manufacturing process has not yet started. These are materials which have not yet entered the production process.
Work in process meaning
Work in progress means semi finished goods. The manufacturing process has started but it is not yet complete. They are at various stages of production process before completion
Finished Goods meaning
Finished goods means those goods on which the manufacturing process has completed. All the stages of manufacturing are over for such goods. These goods are ready for sale.
Stock in Trade Meaning
Stock in Trade are readily manufactured goods purchased only for resale. No manufacturing process takes place on such goods. These goods are basically traded goods.
Obsolete Stock meaning
Now we move to the meaning of obsolete stock. Obsolete stock means the stock which is no longer useful or saleable. The reasons could be changes in technology, changes in market demand, discontinued products or similar other factors.
Obsolete Stock example
Now that we have discussed the meaning of obsolete stock, let's take some obsolete stock examples to understand the concept better. Obsolete stock is also known as obsolete inventory
- A company like Apple or Samsung launches a new phone model every year. The older models may become obsolete because customers prefer the latest technology. These unsold older models lose value and may need to be sold at a discount or written off.
- A clothing retailer stocks clothes of latest fashion. If a new fashion trend emerges, the old fashion clothes may become outdated and difficult to sell at full price.
- Schools and bookstores may have large stocks of old textbooks that become obsolete when a new edition is published. The old books lose value because students and teachers prefer the updated version.
- With the rise of streaming services like Netflix and Spotify, physical media such as CDs, DVDs, and VHS tapes have become obsolete. Retailers may still have unsold stock that nobody wants to buy, leading to a write-off.
- Wired earphones have seen a decline in demand with the rise of Bluetooth and wireless earbuds.
In all the above examples the stock left with the producer or retailer loses its value. Its market value becomes less then its cost price. The value of such stock needs to be reduced in books of accounts to reflect its correct realizable value.
Obsolete Stock adjustment or Obsolete inventory adjustment
Next we come to understanding the adjustment for obsolete stock. The value of obsolete stock may either fall or become nil.
Stock is an asset for the firm. If the value of stock declines as explained earlier then this is a fall in the value of assets of the firm. Due to this, the firm incurs a loss. As the firm in incurring a loss so there is a loss on revaluation.
Obsolete Stock adjustment in question
Now that we have understood the meaning of obsolete, lets come to how 'Obsolete Stock' adjustments are given in the question.
| Liabilities | Amount | Assets | Amount |
| Stock | 20000 | ||
Additional Information - Stock includes Rs 3000 for obsolete items, Hence are to be written off.
As shown above the balance sheet in the question will give value of stock on assets side. The additional information in the question will write as follows. Stock includes Rs 3000 for obsolete items, Hence are to be written off.
Obsolete stock journal entry
Next we come to Obsolete stock journal entry.
- Revaluation A/c Dr.. 3000
- To Stock A/c 3000
Revaluation account gets debited by three thousand rupees as there is a loss for the firm. The value of stock which is an asset for the firm is decreasing. Decrease in assets is credited. So stock account gets credited. Instead of stock we can also write inventory.
Obsolete Stock in Revaluation Account
| Particulars | Amount | Particulars | Amount |
| To Stock A/c | 3000 |
Next we will discuss, how obsolete stock or obsolete inventory will be shown in revaluation account. Since there is a loss, so it will be shown on debit side of revaluation account. There will be no entry on credit side of revaluation account.
Obsolete Stock in Partner Capital A/c
There is no impact of this adjustment in the partners capital account as we have not passed any entry in partners capital account
Obsolete Stock in Balance Sheet
| Liabilities | Amount | Assets | Amount |
| Stock | -3000 | ||
Next we will discuss how this will be shown in balance sheet.
In the balance sheet the value of stock on assets side will be decreased by three thousand rupees.
There will be no impact on the liability side in balance sheet
Can assets other than stock become obsolete
We have discussed this adjustment for stock. But other assets of the firm can also become obsolete. Example obsolete machinery. The accounting treatment will remain same irrespective of the asset of the firm which has become obsolete.
Finally
Here is the summary of the whole adjustment.
That's all for this adjustment. Please go through below links for more partnership accounts adjustments on reconstitution.
