Effectively managing closing stock is important for good financial health and operational efficiency. Mismanagement of closing stock can lead to inaccurate financial reporting, inflated costs, and potential tax implications. Without proper tracking, manufacturers might face difficulties in identifying obsolete inventory. This can lead to unnecessary storage costs and lost revenue opportunities.
In this blog post, we will understand the importance of accurately managing closing stock, the valuation of the closing stock, why closing stock is a current asset, and how to find closing stock.
Valuation of Closing Stock
Closing stock is the number of unsold products that are left after closing the balance sheet inventory. This directly impacts the balance sheet and profitability. There are a number of closing stock valuation methods. Here are the most important ones that you can use to calculate closing stock in trading account:
1. First-In, First-Out Method
First-in, first-out, also known as FIFO, is a valuation method used for the goods and inventories that are bought first and sold off first. This method closely matches the flow of actual goods and is considered a good evaluation method 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.
3. Retail Inventory Method
This accounting method is used to estimate the cost of goods sold in a specific period for the valuation of the closing stocks. The accountant takes the value of the opening inventory, adds the purchases, and subtracts the closing inventory.
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 inventories held for a long time.
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 find the right valuation of closing stocks.
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What Is Closing Stock in Balance Sheet?
Closing stock in the balance sheet is the amount of unsold stock that is reflected 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 a semi-finished state. All of these remaining items from closing stock become the current asset.
When preparing a trial balance, one might wonder if the closing stock is debit or credit in trial balance; this depends on the inventory valuation at the end of the accounting period. These unsold inventories contain specific valuations that are determined by the above 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.
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How to Calculate Closing Stock?
At the start of the financial year, you have to carry forward all goods from the closing stock of the previous financial year to the opening stock of the current year. Now you need to add the purchases and then subtract the cost of the goods sold (COGS) from it to get the correct calculation from the closing stock formula with gross profit.
Here is the formula for calculating closing stock:
Closing Stock = Opening Stock + Purchases – Cost of the Goods Sold
How to calculate closing stock without cost of goods sold?
If the Cost of Goods Sold (COGS) is not available, you can calculate the closing stock using the formula:
Closing Stock = Opening Stock + Purchases − Sales
This method assumes that all sales were made from the opening stock before the new purchases were sold.
Closing Stock Example
Let’s say a company started the year with an opening stock of Rs. 10,000. During the year, it purchased additional stock worth Rs. 5,000. At the end of the year, the company counted its inventory and found it had Rs. 6,000 worth of goods left. This Rs. 6,000 is the closing stock.
Closing Stock in Profit and Loss Account
Profit and loss accounting is the final calculation that includes debits and credits separated by two sections. 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 takes a lot of effort. But if you use inventory management software, you can automate your inventory, closing stock and opening stock. TranZact is one such software that helps SME manufacturers simplify their inventory management.
TranZact 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 etc. It is a tool that has been specially made for Indian manufacturing SMEs to simplify their operational tasks. It comes with other functionalities like production, planning, intelligence, sale, purchase etc.
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.
11. How to find closing stock in trading account?
In a trading account, the closing stock is usually listed on the credit side at the end of the trading account. It’s calculated as:
Closing Stock = Opening Stock + Purchases − COGS
