You bought R200,000 of stock in July. Your books show a R120,000 loss for July and a suspiciously large profit in September. Nothing was stolen and nobody made a mistake on the sales side. The problem is that the stock purchase was treated as an expense, and it isn't one.
Buying stock doesn't make you poorer
When you pay a supplier for goods you intend to resell, you haven't spent money in the accounting sense — you have swapped one asset for another. Cash left the bank; goods arrived on the shelf. Your net worth is the same the moment after the purchase as it was before.
So the purchase sits on the balance sheet as inventory (stock on hand). It only reaches the profit and loss account when you sell the goods — at which point it becomes cost of sales, matched against the sale that earned it. Revenue and the cost of earning it belong in the same month.
Book it as an expense on the day you buy it and you get the pattern above: a fake loss in the buying month, a fake profit in the selling month, and a balance sheet showing a business with no stock in it.
What this costs you in practice
- Your margin is meaningless. If cost of sales includes goods still in the storeroom, your gross profit percentage tells you nothing.
- You make bad decisions. A "bad month" that was really a stock build-up leads to cutting the wrong things.
- Your tax is wrong. SARS requires closing stock to be brought to account (section 22 of the Income Tax Act). Deducting stock you still hold overstates your deduction, and the correction usually carries interest.
- Your balance sheet won't support a loan. Stock is often a small business's biggest asset; leaving it off makes you look weaker than you are.
Then what is the stock worth?
Easy when every item costs the same. Harder in real life, where the same product arrives at different prices. Say you buy 10 units at R100, then 10 more at R150. You now hold 20 units that cost R2,500 in total. A customer buys one. What is the cost of that sale — R100 or R150?
There are two accepted answers in South Africa:
- FIFO (first in, first out) — assume the oldest units sell first, so the cost is R100. What's left is valued at the newest prices.
- Weighted average — spread the cost across all units: R2,500 ÷ 20 = R125 each. Every sale comes out at R125 until the next purchase changes the average.
Both are allowed by IFRS and accepted by SARS. LIFO (last in, first out) is not permitted in South Africa — not for financial reporting and not for tax. If a spreadsheet or an old system is costing your sales at the most recent price paid, that's a problem worth fixing.
Weighted average is the easier one to run honestly, because it doesn't ask you to track which physical box came from which delivery. It also smooths out price jumps instead of letting one cheap old delivery flatter a month's margin.
The other half: counting
Whatever costing method you use, the value in your books is only right if the quantity is right. Count your stock at least once a year, more often for high-value or easily-lost items. When the count differs from the system, that difference is a real cost — breakage, theft or a capture error — and belongs in the profit and loss as a stock adjustment, not quietly ignored.
One more rule that catches people out: when a customer returns goods, they come back into stock at the cost they left at, not at today's average. Bring a return back at a higher cost than it went out at and you have invented profit that never happened.
Getting it right without becoming a bookkeeper
None of this needs a spreadsheet if your accounting software knows the difference between a stock item and a service. 360books tracks stock on invoice-based sales: buying stock debits inventory on your balance sheet, issuing the invoice moves the cost to cost of sales at the moving weighted average, returns come back at the cost they left at, and stock takes post the difference where it belongs. Try it on the live demo.