Stock valuation in FreeAgent
How FreeAgent handles the accounting when stock is bought and sold.
Because FreeAgent produces accounts in real-time, we use a system called perpetual inventory.
That means that, when you buy stock, FreeAgent will put the cost of that stock into the balance sheet.
It will create a new code in the balance sheet, code 609, with a sub-code for each stock item.
You can see here that there are separate sub-codes for the different stock items, apples and pears.
Here's an example of an entry into one of these codes. The user has bought some apples.
When you enter a sale of stock, FreeAgent works out, from the quantity you sold, how much that stock cost when it was bought.
How does FreeAgent work out the cost price?
It uses the "first-in, first-out" (FIFO) method to value stock, which is one of the methods accepted in the UK.
So for example, if I'm a greengrocer and bought 5 apples costing 20p each, then at a later date another 5 apples which cost 10p each, and then sold 7 apples for 30p each, FreeAgent would work out the cost price of those 7 apples as 5 at 20p plus 2 at 10p - because the apples that cost 20p were bought first.
Once FreeAgent knows what the sold stock cost to buy, it posts journal entries automatically.
The sold stock is removed from the balance sheet, because the business no longer has it.
It's transferred to the profit and loss account as a cost, to the default code you set up for purchases of this stock item.
Does FreeAgent stop quantities of stock items from going below zero?
This is because you might enter all your invoices for a month before you do your banking, so in fact you do have those stock items to sell, but FreeAgent doesn't yet know that.
So what would happen if I sold more stock than FreeAgent thought I had on hand?
FreeAgent wouldn't know the cost price of those items, so it will initially use the sale price to value them.
It will post the journal entries for the sale, as above, at the sale price. That's acceptable under UK accounting rules.
When you then enter a purchase of this item into FreeAgent, the software will adjust the journal entries so that, instead of the sale price, the cost price is used.
You can see in the picture that there's a new entry for the purchase of the oranges, and that the entry for the sale has been automatically reduced.
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