Question

How does the selling of inventory or services impacts a companies financial statements?

Answer 1

SELLING OF INVENTORY

Inventory is treated as an asset for any organisation. it is a current asset and reflected in Balance sheet under heading current asset.When we sell inventory it decreases from asset side & also as a result closing stock which is shown in Trading Account or Statement of Income & Expenditure decreases.When inventory is sold this amount is reflected as revenue for the company and after deducting cost of goods it provides profit to the firm.

Thus to conclude for inventory we can say that it is having three effects in financial statements.

• It decreases the value of closing stock in Trading account & Balance sheet of the company.
• It add revenue in Trading account of the company
• If inventory is sold on credit then debtors will increase otherwise if sold in cash then cash\bank of the company will increase. Which will be reflected in Balance sheet.

SELLING OF SERVICE

Service is not like inventory, it is an intangible activity which provides revenue to the organisation. It is an economic activity through which service providers earn their revenue. It varies from customer to customer. When any organisation sells service it increases the revenue of the company. For providing services organisation spends resources like manpower assets etc for which it incurs cost and these costs are deducted from revenue to show profit earned by the firm.

Thus to conclude for Services we can say that it is having two effects in financial statements.

• When service is provided it effects the revenue section as company earns revenue by providing services from customers.
• If service is provided on credit then debtors will increase otherwise if sold in cash then cash\bank of the company will increase. Which will be reflected in Balance sheet.

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