📦 What is Stock, and Why Not Use One Account for Everything?
Let's assume you run a Pokémon Trading Cards shop with shelves full of colorful cards. Let’s say you love Pikachu, Bulbasaur, and Charmander the most. Your cards are the stock of your business. In accounting, stock means the items a business keeps to sell to customers.
Instead, accounting uses different notebooks (called accounts) to keep things clear and organized. Each account tracks something specific, like buying cards, selling cards, or handling returns. It’s like having separate boxes for your toys—one for dolls, one for cars, and one for blocks—so you always know what you have and where it’s going. It gives you a clear view of your card shop’s performance—are sales booming or do you need to restock that rare Pikachu?
Using just one stock account might seem easy, but it makes things confusing. For example, if you write down “+100 Pikachu Cards” when you buy them and “-50 Charmander” when you sell them in the same account, you can’t easily tell how much you spent or earned. Separate accounts make it easier to understand your business, like keeping your cards in neat, labeled boxes.
📈 Why Does Stock Increase?
Your card store’s stock goes up for two main reasons, and it’s like adding more cards to your shelves. Here's how it happens:
✅ 1. Customers Return Cards (Returns Inwards): Like if someone bought too many cards as a gift and brings some back unopened. When they return it, you put the card back on your shelf, which increases your stock. This is called Returns Inwards because the card is coming back into your store. It’s like when you lend a toy to a friend, and they give it back.
✅ 2. You Buy More Cards (Purchases): When you order new cards from a supplier, your stock increases. For example, if you buy 100 Pikachu and 50 Charmander cards to put on your shelves, you have more cards to sell. We refer to this as purchase since you’re spending money to get new stock. It’s like adding new toys to your collection to share with friends.
These two reasons—buying new cards and getting returns from customers—are the main ways your stock grows. Each one is recorded in a different account to keep things clear, like sorting your cards by type.
📉 Why Does Stock Decrease?
Just like stock can go up, it can also go down. Here are the two main reasons your card store’s stock decreases:
❌ 1. You Return Cards to Suppliers (Returns Outwards): Sometimes, you get cards from a supplier that’s not right—maybe the Snorlax cards are damaged or the Mew cards are the wrong version. When you send them back to the supplier, your stock decreases because the card is no longer in your store. This is called Returns Outwards because the card is going out to the supplier. It’s like giving back a toy that doesn’t work.
❌ 2. You Sell Cards (Sales): When a customer buys cards, it leaves your store, so your stock goes down. For example, if someone buys 20 Snorlax cards and 10 Pikachu Cards, you have fewer cards on your shelves. This is called a sale because you’re earning money by giving cards to customers. It’s like trading a toy for some coins.
These two reasons—selling cards and returning it to suppliers—are how your stock shrinks. By tracking them separately, you can see exactly why your stock is changing.
| 💼 Buying vs. Returns: How Purchases and Returns Inward Work |
Let’s look at two important notebooks (accounts) in your card store and how they’re different:
Purchases Account: This is where you write down all the money you spend to buy cards for your store. For example, if you buy $100 worth of cards from a supplier, you record it in the Purchases Account. This account shows how much you’re spending to get new stock to sell. It’s like keeping a list of all the new toys you buy for your collection.
Returns Inwards Account: This notebook tracks cards that customers bring back to your store. For example, if a customer returns $10 worth of Mew cards because they didn’t like them, you write it in the Returns Inwards Account. This account is separate because it’s not about buying new cards—it’s about cards coming back from customers, which adds to your stock.
Keeping these accounts separate is like having one box for new cards you buy and another for cards customers return. It helps you understand how much you’re spending versus how much is coming back for other reasons. Mixing them up would be like putting all your cards in one box and not knowing which ones you bought and which ones were returned.
📗 Sales Account vs. Returns Outwards Account
Sales Account: This is where you write down all the money you earn from selling cards. For example, if you sell $500 worth of cards to a customer, you record it in the Sales Account. This account shows how much money your store is making from selling stock. It’s like counting the coins you get when you trade your toys.
Returns Outwards Account: Also called Purchase Returns. This notebook tracks cards you send back to your supplier. For example, if you got $200 worth of damaged cards and return them, you write it in the Returns Outwards Account. This is separate because it’s not about selling cards—it’s about sending stock back to the supplier, which reduces your stock.
Keeping these accounts separate is like having one box for money you earn from selling cards and another for cards you return to suppliers. It helps you see how much you’re earning versus how much you’re sending back, so you don’t get confused.
🧾 How Stock Moves In and Out
To keep your cards store organized, you use different accounts to track stock changes. By recording each change in a separate account, you’ll always know what’s affecting your stock and why. Here's a step by step understanding:
🔼 When Stock Increases:
Buying Cards (Purchases): When you buy $1000 worth of cards, write $1000 in the Purchases Account. This shows you spent money to get new stock. Think of it as noting down how much you paid for new toys.
Customer Returns (Returns Inwards): If a customer returns $200 worth of Mew Cards, write $200 in the Returns Inwards Account. This shows the cards are back on your shelf, increasing your stock. It’s like noting when a friend returns a toy.
🔽 When Stock Decreases:
Selling Card (Sales): When you sell $500 worth of cards, write $500 in the Sales Account. This shows you earned money and your stock went down. It’s like recording the coins you got for trading a toy.
Returning Cards to Suppliers (Returns Outwards): If you return $200 worth of damaged cards, write $200 in the Returns Outwards Account. This shows your stock went down because the cards left your store. It’s like noting when you return a broken toy.
At the end of the month, you can use these records to update your Stock Account, which is like a master list showing how many cards you have left. To do this, you start with the stock you had at the beginning of the month, add any purchases and Returns Inwards, and subtract any sales and Returns Outwards. This gives you a clear picture of your stock, like counting all the cards in your store.
🎯 The Magic Formula to Know How Many Cards You Have Left
📦Closing Stock = Opening Stock + Purchases + Returns Inwards – Sales – Returns Outwards
💡 What Do ‘Purchases’ and ‘Sales’ Mean in Accounting?
Let’s make sure we understand these two important words:
Purchases: This is the money you spend to buy items to sell in your store. For example, if you buy $1000 worth of cards to put on your shelves, that’s a purchase. It’s all about getting new stock to sell later, like buying new crayons to draw pictures you’ll share.
Sales: This is the money you earn when customers buy your items. For example, if someone buys $5000 worth of cards, that’s a sale. It’s about the money coming in when you sell your stock, like getting coins for selling your drawings.
Think of purchases as filling your cards boxes with new cards and sales as emptying the boxes while filling your piggy bank with money. These terms help you keep track of what’s coming into your store (stock) and what’s going out (money).
📦 Cards In vs. 💰 Money Out
Inventory Change = Purchases (Cards In) - Sales (Cards Out)
Cards in Box ↔ Money in Piggy Bank. Think of it like this: when your cards go in, money goes out—and vice versa.
💳 Buying Cards: Credit vs. Cash 💵
When you buy cards for your store, you can pay in two ways, and each is recorded differently:
🕐 Purchases on Credit: This means you promise to pay the supplier later, like saying, “I’ll take these $1000 worth of cards now and pay you next month.” In accounting:
Write $1000 in the Purchases Account because you got new stock.
Write $1000 in a Creditors Account (also called Accounts Payable) because you owe the supplier money.
Later, when you pay the supplier $1000, you reduce the Creditors Account by $1000 and decrease your Cash Account by $1000.
It’s like borrowing a toy from a friend and agreeing to pay for it later. You get the toy now, but you need to track what you owe.
💵 Purchases Paid in Cash: This means you pay right away with cash, a card, or a bank transfer. For example, you buy $1000 worth of cards and pay immediately. In accounting:
Write $1000 in the Purchases Account because you got new stock.
Reduce your Cash Account by $1000 because you spent money right away.
It’s like buying a toy and paying for it on the spot. You don’t owe anyone anything, so it’s simpler.
The big difference is that credit purchases create a debt you track in the Creditors Account, while cash purchases just use your Cash Account. Credit means you’re promising to pay later, so you need an extra account to keep track of that promise.
🧾 Selling on Credit vs. Selling for Cash
When you sell cards, customers can pay in two ways, and each is recorded differently:
💰 Sales on Credit: This means the customer promises to pay you later. For example, Mark (your customer) buys $500 worth of Pikachu Cards and says, “I’ll pay you next week mate.” In accounting:
Write $500 in the Sales Account because you made a sale.
Write $500 in a Debtors Account (also called Accounts Receivable) because Mark still hasn’t paid—classic Mark.
When Mark pays you $500 later, you reduce the Debtors Account by $500 and add $500 to your Cash Account.
It’s like letting a friend borrow a toy and promising to pay you later. You track what they owe you until they pay.
💰 Sales Paid in Cash: This means the customer pays right away with cash, a card, or a bank transfer. For example, Jenny buys $500 worth of cards and pays immediately. In accounting:
Write $500 in the Sales Account because you made a sale.
Add $500 to your Cash Account because you got money right away.
It’s like selling a toy and getting coins on the spot. You don’t need to track any debts because you’re paid immediately.
The big difference is that credit sales mean you’re waiting for money, so you track it in the Debtors Account. Cash sales mean you get money right away, so you just update your Cash Account.
🎯 Why This Isn't Just Boring Bookkeeping?
Using all these accounts is like keeping your cards store super organized, like sorting your toys into labeled boxes. If you mix everything up in one big pile, you won’t know how many cards you bought, sold, returned, or have left. You might think you’re making lots of money, but really, you’re just getting a lot of returns!
By using separate accounts for purchases, sales, Returns Inwards, Returns Outwards, creditors, and debtors, you can see exactly what’s happening in your store. It’s like having a treasure map that shows you where your cards and money are going. You can tell if you’re spending too much on new stock, not selling enough, or getting too many returns. This helps you make smart decisions, like buying more popular cards or fixing damaged ones.
📚 Let's See This in Action: A Week in Your Card Store
Let’s imagine you’re running your card store for a month. You start with 100 Pikachu cards in your Stock Account. Here’s what happens:
Monday 🍭: You buy 50 more cards for $500 on credit. You write $500 in the Purchases Account because you got new stock. Your stock is now 150 Pikachu cards.
Tuesday 🍫: A customer buys 20 cards for $300. You write $300 in the Sales Account and reduce your stock to 130 cards.
Wednesday 🍬: A customer returns 5 cards worth $75 because they didn’t like them. You write $75 in the Returns Inwards Account, and your stock goes back up to 135 cards.
Thursday 🍩: You find 10 cards are damaged and return them to the supplier for $100. You write $100 in the Returns Outwards Account, and your stock drops to 125 cards.
Friday 🍪: Mark buys 30 cards for $450 on credit. You write $450 in the Sales Account and $450 in the Debtors Account because he’ll pay later. Your stock is now 95 cards.
Saturday 🍦: You pay the supplier $500 for Monday’s purchase, which you bought on credit. You reduce the Creditors Account by $500 and the Cash Account by $500.
At the end of the week, you check your Stock Account to see you have 95 Pikachu cards left. Your other accounts show you spent $500 on purchases, earned $750 from sales ($300 in cash + $450 on credit), had $75 in Returns Inwards, and $100 in Returns Outwards. Everything is clear, and you know exactly how your store is doing!
🏁 Final Thoughts
Accounting is like a fun game of keeping track of your cards store’s treasures. By using different accounts, you can see how many cards you have, what you’re buying, what you’re selling, and what’s coming back. Whether you’re 10 years old dreaming of running a cards store or a grandma keeping your business tidy, these ideas help you stay organized and make smart choices.
📘 Quick Glossary Box
1. Stock - The items you sell - your Pokémon cards!
2. Purchases - Cards you buy from vendors
3. Sales - Cards sold to customers
4. Return Inwards - Cards customers return to you
5. Return Outwards - Cards you return to vendors
6. Debtors Account - Also known as Accounts Receivable - People who owe you money (like Mark!)
7. Creditors Account - Also known as Accounts Payable - People you owe money to (like your vendor)
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