The valuation of stocks for use in the revenue accounts is necessary for the purpose of finding the cost of goods or material sold in the period covered. The final revenue accounts should be charged only with the material actually used in the production of the period, whatever may be the value of purchases.

Again, the goods sold during the period may have been produced partly in the previous period; some of the goods used in the production of the current period may not be sold until a future period.

The cost of material used in production forms part of the cost of production for the period. The cost of production includes the cost of completed articles and also be cost of partly finished goods or work in progress. The value of unfinished work must therefore be deducted from the cost of production for the purpose of arriving at the cost of completed production for sale.

Part of the cost of completed production may consist of work done and costs incurred in the previous period of account, and such amount will be represented by the work in progress or stock of unfinished goods which existed at the beginning of the account period. This opening figure of stocks of work in progress must therefore be added to the current cost of production. Reference should be made to the section headed Manufacturing Account for an example of the procedure.

Having in this way arrived at the cost of completed production during the period (the sum to be credited to the Manufacturing Account and debited to the Trading Account) there remains the question of finding the cost of sales; for profit consists of the difference between sales and their cost.

To the cost of completed production transferred to the Trading Account from the Manufacturing Account there must be added the stock of finished goods not sold at the end of the previous period. Similarly, the stock of completed goods not sold at the end of the period under review must be deducted from the total of costs now appearing in the Trading Account.