The simple definition of what is closing stock is the number of unsold products that are left after closing the balance sheet inventory. The balance of inventories depends on various factors such as the demand for the product in the market, the product's quality, and the competitor's strategies.
Ending stock or closing stock is the overall remaining product that is unsold within a specific period. By understanding what is closing stock in accounting, businesses can manage closing stock and opening stock inventory properly and make an effective further plan of action. If you are a manufacturer and want to understand the valuation of the closing stock, why closing stock is a current asset, and the closing stock formula, stay tuned with us on this blog. You will also gain insights into what is closing stock, what factors affect closing stock, and how it's calculated.
This article will build your knowledge of all these important topics to help you manage your business's closing stock better.
Valuation of Closing Stock
To know the valuation of closing stock, first, you need to know what is closing stock in accounting and why it must be calculated. Closing stocks are the remaining items of the last period or financial year. It is necessary to have the right inventory management system and evaluate unsold stocks correctly. The closing stocks are added to the financial year account to match the purchase and sales data. A specific formula is required to calculate the valuation in which new entries are included in the ending inventories, minus the cost of the goods sold.
To know the closing stock is valued at which number in a given year, businesses may leverage various methods as mentioned below.
1. First-In, First-Out Method
First-in, first-out, also known as FIFO, is an asset management and valuation method used for the goods and inventories that are bought first and sold or disposed of first. This method closely matches the flow of actual goods and is considered the most theoretically correct evaluation method based for businesses.
2. Last-In, First-Out Method
The last-in, first-out method, also known as LIFO, is where the last purchased goods are sold first. This approach is useful in inflationary situations where most recently purchased higher-cost products are sold first. The lower-cost inventories are retained in inventory to increase the cost of the goods resulting in lower taxable costs and other benefits.
3. Retail Inventory Method
This accounting method used to estimate the cost of goods sold in a specific period for the valuation of the closing stocks is called the Retail Inventory Method. The accountant takes the value of the opening inventory, adds the purchases, and subtracts the closing inventory. This method is commonly used to calculate retail inventory and the cost of the goods sold.
4. Lower of Cost or Market Rule
The Lower of Cost or Market Rule (LCM) is used when the company's inventory is recorded on the balance sheet on the basis of historical cost to the market value. The method is applicable for a business that has held its inventories for a long time, and the passage of time brings it to the proceeding condition.
5 Weighted Average Method
In the weighted average method, each data point value is multiplied first by the assigned weight, summed up together, and divided by the number of the data point. This is another accurate way to calculate the data and find the right valuation of closing stocks. This is how you can calculate closing stock using various methods with the current and old data.
Having understood what is closing stock, and various valuation stock methods, it is also important to know the position of closing stocks on the balance sheet accurately.
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What Is Closing Stock in Balance Sheet?
Closing stock in the balance sheet is the amount of unsold stock that reflects under the current asset side of the balance sheet. The unsold inventory of closing stock includes raw materials, ready-to-sell products, or products that are in process or in a semi-finished state. This is why closing stock is a current asset.
These unsold inventories contain specific valuations that are determined by various methods depending on the business requirement and the nature of the product. Closing stocks are further adjusted with new inventory for the upcoming period or year to the balance sheet.
Now that we know why closing stock is a current asset on the balance sheet, let's move on to know how to calculate closing stock.
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How to Calculate Closing Stock?
The formula for calculating closing stock is
Opening Stock + Purchases – Cost of the Goods Sold.
To keep it simple, start the financial year with the carry forward goods from the previous financial year, which is known as opening stock. Now you need to add the purchases and then subtract the cost of the goods sold (COGS) from it. Finally, you will get the correct calculation for your closing stock using the closing stock formula.
Closing Stock in Profit and Loss Account
Profit and loss accounting is the final calculation that includes debits and credits separated by two sections, namely profit account and loss account. On the left side, all the debits, like opening stocks, purchases, direct expenses, and other entities, are recorded under the profit account section. The closing stock is recorded on the right side along with, gross loss, indirect expenses, and other entities, under the loss account section. However, the calculations of both sides should be equal, but if the credit side is greater than the debit side, it means the business has a gross profit, while if the debit side is less, the business has recorded a gross loss.
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Automate the Process of Closing Stock Calculation
Managing the closing stock manually in the register, Excel sheet, or any other traditional tool needs a lot of manual effort, and if any mistakes happen, resolving them is also significantly expensive.
So, to get a glimpse of inventories at a centralized place, it is always recommended to go with a well-engineered inventory and material management software like TranZact.
It helps you to oversee all the needful data with a click, saves you time, and helps you be ready to smoothly run your businesses by keeping an eye on profits, losses, remaining inventory, fast-selling items, and more activities on the go.
FAQs on Closing Stock
1. What is closing stock in accounting?
Closing stock in accounting refers to the value of unsold goods or stock items that remain with a business at the end of an accounting period. It represents the cost of inventory that remains in stock and is an important component in determining the cost of goods sold and calculating the company's profit.
2. How is closing stock valued?
Closing stock is typically valued using one of the recognized inventory valuation methods, such as the First-In, First-Out (FIFO) method, Last-In, First-Out (LIFO) method, or Weighted Average Cost method.
3. Is closing stock a current asset?
Yes, the closing stock is considered a current asset. It represents the value of inventory that a company holds at the end of an accounting period and is expected to be converted into cash or sold within the next operating cycle or year.
4. What are opening stock and closing stock?
Opening stock refers to the value of inventory held by a company at the beginning of an accounting period while closing stock refers to the value of inventory held by a company at the end of the accounting period.
5. What are the different types of closing stock?
The different types of closing stock include raw materials, work-in-progress (WIP), and finished goods. These types of closing stock reflect the different stages of the production cycle within a business.
6. What is closing stock?
Closing stock is the accounting of the remaining inventory of a business's stock on a yearly basis or the period as per its requirement.
7. What is the formula for calculating closing stock?
The simple Formula for Closing Stock = Opening Stock + Purchases – Cost of the Goods Sold.
8. What is the valuation of closing stock?
The calculation to evaluate unsold items from your last inventory based on market demand, competitor price, investment, and other parameters is known as the valuation of closing stock.
9. Where is closing stock recorded?
The closing stock journal entry is recorded on the credit side of the profit and loss account.
10. Can you see closing stock in the trial balance?
No, if the closing stock is added to the trial balance, then its accounting effect doubles, so it is managed in the credit section of the trading account. However, in some circumstances, the closing stock can be shown in the trial balance.
