Why is the difference between opening stock and closing stock an important parameter for SMEs? To understand this let's first look at the diverse functions existing within an SME, how they can be managed, and how every function contributes to the generation of opening and closing stock balances.
Small businesses have several key operations and functions running simultaneously such as purchasing, inventory tracking, project management, financial reporting, accounting, logistics, and production. Enterprise resource planning (ERP) is a software that supports these everyday business activities seamlessly. It enables business owners to plan, budget, estimate, and draft reports on time. Moreover, ERP systems connect many business procedures and maintain data flow between them. By gathering an organization's shared transactional data from numerous sources, ERP systems remove data replication and provide data integrity.
An important component of this shared data is opening and closing stock balances as it forms the basis of financial reporting for a business by collating inputs from every business vertical. This article will walk you through the details of these balances along with the opening stock and closing stock formula. Read to know more about it.
What Is Opening Stock?
Opening stock denotes the balance of every good with a unit on the beginning date of the accounting period. The opening stock of the most recent period will indicate the closing stock of the prior period.
Opening stock comprises of the following components:
a. Raw materials: Every input material and supply needed in the production procedure. b. Work-in-process (WIP): These goods are incomplete and not finished to sell but are at the production stage. They are also called goods in process or semi-finished goods. c. Finished goods: Goods that are fully produced and prepared for sale are called finished goods.
Formula of Opening stock:
Opening stock is not stated in the income statement but is part of the cost of goods sold (COGS). It is part of COGS calculation as under - Cost of sold goods = Value of opening stock + Purchases - Value of closing stock
Example of opening stock:
ABC Inc. is a denim manufacturing firm. Its opening stock includes the following items:
| Cost per unit(INR) | Total cost(INR) | |
|
Raw materials Thread - 100 reels Fabric - 1000 meters Buttons - 400 pieces Zips - 500 pieces |
41.33 per reel 413.3 per mtr 16.53 per piece 82.67 per piece |
4133 413300 6612 41335 |
| Work ongoing Denim pants in stitching procedure - 120 units Denim pants in pattern cutting procedure - 50 units |
992 826 |
119040 41300 |
| Finished goods: Denim pants - 150 pieces |
1653 | 247950 |
| Total opening stock | 873670 |
What Is Closing Stock?
Closing stock implies the balance of every good with an entity on the closing date of its accounting period. It constitutes three elements including raw material, WIP, and finished goods. Entities examine the total stock in hand and consider it as closing stock for their accounting motives at the end of the accounting year. The closing stock decreases the amount of COGS. Entities conduct a physical stock check to sync with the quantity according to books and the quantity accessible in store rooms.
There are four main methods used for evaluating closing stock:
- First-in, First-out (FIFO) method
- Average cost method
- Last-in, First-out (LIFO) method
- Gross profit method
Closing stock is a form of current asset reflected in the balance sheet of the entity. It is accounted for in the COGS formula in the following manner:
Closing stock formula:
Cost of sold goods = Value of opening stock + Purchases - Value of the closing stock.
Example of closing stock:
XYZ Enterprises is a mobile phone wholesaler that purchased 50 units of Ace A1 Plus smartphones in April. As of 30th April, 28 mobiles were sold.
| Specifications | Quantity |
|---|---|
| Purchase | 50 Numbers |
| Sales | 28 Numbers |
| Closing stock as of 30th April | 22 |
Herein, the closing stock on a stated date is 22 units. This aspect will carry forward to the following period or the subsequent day as an opening balance.
Difference Between Opening Stock and Closing Stock:
The difference between opening stock and closing stock is explained as follows:
1. Definition
Opening stock is the cost of inventory of raw materials, WIP, and finished goods that an entity has on the initial day of its accounting year. Closing stock is the cost of goods inventory that an entity has on the last day of its accounting year.
2. Time of report
Opening stock is evaluated and reported on the initial day of the accounting year. Closing stock is evaluated and reported on the final day of the accounting year.
3. Key inclusion
Opening stock signifies goods available for input in the production procedure or goods for sale. Closing stock signifies goods not used in the production procedure, finished and semi-finished goods that are not sold in the inventory.
4. Accounting management
Opening stock is brought forward from the prior accounting period and so is the opening balance of the stock amount. Closing stock decreases the price of goods sold and the balance gets shifted in the form of a present asset to the balance. It indicates the closing balance of the stock account.
5. Affect on the cost of goods sold
Opening stock worth raises the cost of goods sold. Closing stock worth decreases the cost of goods sold.
6. Revelation in balance sheet
Opening stock does not get placed in the balance sheet of the entity as an opening balance. Closing stock comprises a closing debit balance and is denoted as a current asset in the balance sheet.
7. Valuation
Since opening stock is a forward balance from the preceding accounting period, no individual valuation is done for it. Closing stock is usually valued via four processes LIFO, FIFO, gross profit, and average cost method.
8. Inventory check
Since opening stock is usually equivalent to a closing stock of the prior period, a physical stock-taking is not conducted. Physical stock-taking is usually done only for closing stock to settle stock according to books.
Record Opening and Closing Stocks Accurately for Insightful Reports
Opening stock and closing stock is usually part of the same stock accounting procedure. From a business viewpoint, holding sufficient stock is important for an entity to fulfill sales or production demand. Also, businesses must apply the opening stock and closing stock formula properly while evaluating.
On the contrary, entities should be aware of the risks in keeping surplus stock like high carrying costs, damage, obsolescence risk, and loss. Therefore, entities must keep the balance between these advantages and disadvantages when handling their stock at any time.
While ERP software can help you to record data for opening and closing stocks. how do you choose which software is cost-effective, has fast processing, real-time inventory, and high data security?
TranZact ticks all these boxes and offers expert, cloud-based ERP solutions to manage all core business functions. It is easy to access and does not demand complicated training sessions for SMEs. It integrates with Tally and BUSY accounting platforms to ensure accurate and easy accounting entries, along with opening and closing stock workflows. It also enables businesses to record inventory data easily, and generate insightful reports for business growth.
FAQs on Difference Between Opening Stock and Closing Stock
1. How to calculate closing stock?
The closing stock formula is = Opening Stock + Purchases - Cost of the Goods Sold.
2. What if opening stock is less than closing stock?
If the opening stock is less than the closing stock, marginal costing will have less net profit than the absorption costing method in the income statement. If the opening stock is more than the closing stock, the absorption costing method will show less net profit than marginal costing in the income statement.
3. Does closing or opening stock go in the balance sheet?
Closing stock is shown on the asset section of the balance sheet. Then, it is adjusted with the purchase amount which is shifted to the debit section of the closing stock and the trading account that is on the asset side of the balance sheet.
4. Can opening and closing stock be similar?
The closing stock is the inventory that is pending in your business to be sold at a certain time. The opening stock for the upcoming reporting period can be similar to the closing stock from the previous period, only if no inventory was sold in the accounting period, which is an unlikely scenario.
