These summaries are prepared in relation to a financial period, which can be as short or as long as suits the business. However, it is usual for annual summaries to be prepared for taxation purposes or to comply with legislation. These are referred to as being for the financial year. The financial year need not
be a calendar year, but usually ends on the last day of a month
Seasonal businesses traditionally choose a 'quiet' month to end their financial year so
that their busiest trading time is not disrupted by the need to obtain accounting information.
Many retail fashion stores choose February or March to end their financial year
(i .e. the time between the January sales and the new spring collections appearing).
This is inventory which the business has bought during the period which is unsold at the end of the period and carried forward to the next period. In the general ledger, we show the information in an 'inventory account'. This records only information relating to opening and closing inventory, not goods bought during the period (which are shown in the purchases account in the general ledger). Due to the prudence principle, inventory is valued at the lower of cost and net realisable value,l which in simple terms means either what the inventory cost
the business or the value it might fetch if for some reason (damage, changing fashions, etc.) it is anticipated that it could only be sold at a price less than cost. Inventory is never valued at normal selling price, as that would anticipate a profit, which is unacceptable under the prudence principle.
In a trial balance prepared at the end of a financial period, it is usual to see the opening inventory (i.e. the balance brought forward) as a debit entry representing the opening asset of unsold inventory. The value of closing inventory then appears as a note (usually the first) appended to the trial balance. The way in which inventory values are shown in the financial summaries is explained later in this chapter. The accruals principle is relevant here, as by transferring values of unsold goods into the financial summaries, we are ensuring that the income from the sale of goods is matched only by the cost of those goods, and excludes the value of any unsold inventory at the end of the period.