Stock Valuation

The value of the items in stock will always be reflected in the balance of the stock account. Two “values” are held for each individual product: the buy price and the total stock value. Both these figures are automatically adjusted whenever you purchase stock. The buy price represents the latest price that you paid for the item, and the stock value is the total of what was paid for the stock. The average price is always the total stock valuation divided by the stock on hand. If you start off with no items, the average price will be the same as the buy price.

Example You buy 5 units of a new stock item for $10 each. The buy price is $10, the stock value is (5 * 10) = $50, and the average cost is 50 / 5 = $10. You then purchase 5 more for $12. The buy price is now $12, and the stock value increases by (5 * 12) = $60 to $110. The average cost is now 110 / 10 = $11.

The average cost is used as the cost of goods when stock is sold. The buy price represents replacement cost.