INCREASE IN PROVISION FOR STOCK OBSOLESCENCE: |
Assuming a provision for Stock Obsolescence of $100,000 is created at Quarter 1. At end of Quarter 2, you have re-done the provision and noted that you need increase a further amount of $50,000. How should we treat this increase in provision?
For Quarter,
Let’s us have the Original Entry: Debit : Provision for Stock Obsolescence ( Income Statement)     100,000 Credit: Provision for Stock Obsolescence ( Balance Sheet)                       100,000 Being creation of provision for Stock Obsolescence at Quarter 1.
In Quarter 2,
We increase the provision by an additional  $50,000 namely:- Debit: Provision for Stock Obsolescence ( Income Statement)        50,000 Credit: Provision for Stock Obsolescence ( Balance Sheet)                         50,000 Being further increase in provision for Stock Obsolescence at Quarter 2
Let’s look at the impact from the Income Statement:-
For Quarter 2, Profit is lowered by $50,000 For Year To Date Quarter 2 : Profit is lowered by $100,000+$50,000 =$150,000
From the Balance Sheet :-
At Quarter 1: Stock                     $500,000 ( say) Less: Provision for Stock Obsolescence (100,000)
Net Stock              $400,000
At Quarter 2:
Stock                     $500,000 ( say) Less: Provision for Stock Obsolescence (150,000) ( $100,000+50,000) Net Stock              $350,000
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(DECREASE) IN STOCK OBSOLESCENCES: |
Assuming the same   $100,000 was created as provision for Stock Obsolescence in Quarter 1. In quarter 2, some of the stock from this provision amounted to $80,000 manage to be sold off. How should we treat this reduction?
Original Entry (Quarter 1):
Debit : Provision for Stock Obsolescence ( Income Statement)Â Â Â Â Â 100,000 Credit: Provision for Stock Obsolescence ( Balance Sheet)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 100,000
In Quarter 2,
We reduce the provision by $80,000 namely:- Debit: Bank                                                                 80,000 Credit: Provision for Stock Obsolescence ( Income Statement)      80,000
By doing so, Let’s look at the impact from the Income Statement:-
For Quarter 2, Profit is higher by $80,000 For Year To Date Quarter 2 : the “netâ€Â Profit is $100,000-$80,000 =$20,000
From the Balance Sheet :- At Quarter 1: Stock                     $500,000 ( say) Less: Provision for Stock Obsolescence (100,000) Net Stock              $400,000
At Quarter 2: Stock                     $500,000 ( say) Less: Provision for Stock Obsolescence  (20,000) ( $100,000-80,000) Net Stock              $480,000
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