Fourthly, unless we have sold every last item we purchased, we will have unsold items remaining. The accruals concept tells us that costs should be recognised in the period in which they were incurred, and furthermore, that revenue should be matched to the same period in which their costs were incurred. Since we haven’t yet sold these items of stock, their costs should not be recognised in this period. This becomes an adjustment to cost of sales.
First we value the stock left over - this must be the lower of cost or net realisable value. This implies that if stock is damaged or worth less than cost, then it must be written down to that value.
Next we create a credit entry in the stock (profit and loss) account and a debit entry in stock (balance sheet) account. Finally, when we prepare the final accounts, we transfer the profit and loss stock item to the profit and loss account as a reduction in cost of sales, and transfer the balance sheet stock to the current assets.