Hi,
After entering Stock of Petrol and Diesel currently available in the tanks to Inventory (through Stock entry), how do I account for daily price change of fuel. Should I create a ‘Price change’ account to which the ‘available stock * price difference for the day’ gets added, whenever the price change happens (6 am) ?
Multiple ways you can skin this cat. The price at which you bought this stock (unless it is on consignment basis and that’s the agreement with your supplier) does not change. What changes is your selling price. So, yes, you should update the selling price daily.
The commodities business is what your situation most closely resembles. You should look at the Accounting Models for Commodities business and pick the one that works for the best.
I think what’s reasonable is that you book a certain percentage to your Profit/Loss account for every transaction (like say 3% profit or loss) and the rest loss/gain you should book to a Asset/Liability account called Extraordinary Losses and Gains from Operations.
The idea being that unless you are into commodities trading (or even if), your approach is to make (or lose) upto a fixed percentage (say 3% or 5% or whatever is the standard in our line of business) and write anything above that percentage to the Extraordinary account. Hopefully the Extraordinary Losses will be compensated with Extraordinary gains and the other account, the steady profit/loss account is what tells you whether the business is attractive or not.
Does ERPNext do all of this? Not sure (unlikely is more like it). But you can customize EREPNext to support you to do whatever you decide is appropriate for your organization.
Hope this helps.
Thanks
Jay
So, I’ll create and Asset/Liability account called “Extraordinary Losses and Gains from Operations”, and make an accounting entry from ‘Stock In Hand’ to the ‘Extraordinary Losses and Gains’ whenever the daily price change happens. Will try this first, before the percentage profit/loss.
Thanks.
Ramji
Hi Ramji,
I wouldn’t do that for stocks at all. It is only a notional loss/gain. Unless you are running a business that is very hard nosed where you have both an internal consumption business (like manufacturing other products) and a trading business and you are making on the fly analysis as to whether it is optimal for you to make (another product) or sell (the commodity), there is really nothing you get by revaluing your stocks on a daily basis.
Let the stock value remain as is. Use Moving Average as the Valuation method so that you get the value averaged out anyways.
The Loss/Gain is only when you see (either the commodity) or a product made from the commodity sold. That’s when you have to book a loss or a gain. And at that stage it does make sense for you to write extraordinary profits and loss to a separate account, so that you understand what’s the money you are making (or losing) from your trading operations and what’s the money you are making (or losing) from the, possibly, speculative decisions you are taking on your stocking positions.
Unless, your regulatory framework compels you to revalue your stocks on a daily basis, doing it is a lot of work with no attendant benefits accruing.
Hope this helps.
Thanks
Jay
Hi Jay,
Thanks for your detailed replies. Will read up on Moving Average Valuation method.
Thanks.
Ramji