At any given time, businesses have to work on many operations and functions running simultaneously. This includes purchasing, inventory tracking, project management, financial reporting, accounting, logistics, and production. An important component of this is opening and closing stock balances. It forms the basis of financial reporting for a business by collecting inputs from every business vertical.
As a manufacturing business, you have to understand the difference between opening stock and closing stock. But, there are many small details to them that get missed out. Both of them have very different functions and are very important for inventory management.
With this blog post, we will learn to distinguish between opening stock and closing stock. We will also understand the details like opening stock vs closing stock formula and their impact on the trial balance & balance sheet for your manufacturing business.
What Is Opening Stock?
Opening stock refers to the inventory a business has in hand at the beginning date of the accounting period. The closing stock of the previous period carries forward to the opening stock of the most recent period. It helps in the calculation of the cost of goods sold to make a company’s profit and loss statement.
Opening stock includes:
a. Raw materials
b. Work-in-progress goods
c. Finished product
Formula of Opening stock:
Opening stock is not directly stated in the income statement but is part of the cost of goods sold (COGS). It is part of the COGS calculation as under:
Cost of sold goods = Value of opening stock + Purchases - Value of closing stock
Example of opening stock:
Let's take the example of ABC Inc., a machinery manufacturing business. Its opening stock includes the following items:
| Raw Material | |||
|---|---|---|---|
| Item | Units | Cost per unit (Rs) | Total cost (Rs) |
| Steel | 1000 kg | 60 | 60000 |
| Bolts | 5000 pieces | 5 | 25000 |
| Nuts | 5000 pieces | 4 | 20000 |
| Paint | 200 litres | 300 | 60000 |
| Work in Progress | |||
| Machinery in assembly | 50 units | 2000 | 90000 |
| Machinery in painting | 30 units | 1500 | 45000 |
| Finished Goods | |||
| Completed machinery | 80 units | 2500 | 200000 |
| Total opening stock | 500000 INR |
What Is Closing Stock?
Closing stock is the inventory that is unsold at the closing date of its accounting period. It includes raw materials, WIP, and finished goods. The value of the closing stock is counted at the end of the accounting period and is carried forward as the opening stock for the next period. The closing stock decreases the amount of COGS. The closing stock is important for finding out the gross profit and net profit calculations on the income statement.
Methods for calculating closing stock:
- First-in, First-out (FIFO) method
- Last-in, First-out (LIFO) method
- Average cost method
- Gross profit method
Closing stock formula:
Closing stock is a form of current asset reflected in the balance sheet of the item. It is accounted for in the COGS formula as:
Cost of sold goods = Value of opening stock + Purchases - Value of the closing stock.
Example of closing stock:
Let’s take the same example of XYZ Inc., a machinery manufacturing company. XYZ Inc. had produced 80 units of the final machinery part in April. As of 30th April, 60 parts were sold. Here’s how we can represent this:
| Specifications | Quantity |
|---|---|
| Produce | 80 |
| Sales | 60 |
| Closing stock as of 30th April | 20 |
Read Inventory Management: TCS vs. TranZact Automation Benefits
Difference Between Opening Stock and Closing Stock:
The difference between opening stock and closing stock is explained in the table below for your better understanding:
| No. | Criteria | Opening Stock | Closing Stock |
|---|---|---|---|
| 1 | Definition | Opening stock is the inventory of raw materials, work in progress (WIP), and finished goods at the start of the accounting year. | Closing stock is the inventory that remains at the end of the accounting year. |
| 2 | Time of Report | It is evaluated and reported at the start of the month and year. | This is evaluated and reported at the end of the accounting month or year. |
| 3 | Includes | Opening stock includes goods available for production or sale. | Closing stock consists of unsold goods in the inventory. |
| 4 | Accounting | It is carried forward from the previous accounting period. | It is carried forward as a current asset to the next accounting period. |
| 5 | Effect on COGS | The value of opening stock increases the COGS. | The value of closing stock decreases the COGS. |
| 6 | Balance Sheet | Opening stock is not directly stated in the balance sheet. | This is listed as a current asset on the balance sheet. |
| 7 | Valuation | Since it’s carried forward from the previous period, no separate valuation is done for it. | Usually valued using methods like LIFO, FIFO, gross profit, or average cost method. |
Read Inventory vs. Stock: What’s the Difference & Why It Doesn’t Really Matter.
Impact of Opening and Closing Stock
There is a huge impact of closing stock and opening stock changes in the stock valuation of a manufacturer. Let’s understand how these two elements influence the Trial Balance, Balance Sheet, and Profit and Loss Account:
1. Trial Balance
The opening and closing inventory in the trial balance is recorded at the start and end of the accounting period respectively. The difference between the opening and closing stock in the trial balance gives the cost of goods sold (COGS) during that period.
2. Profit and Loss Account
In the profit and loss account, the opening stock is added to the purchases made during the period, and the closing stock is subtracted. This gives the COGS after opening and closing stock in a profit and loss account.
3. Balance Sheet
The opening stock and closing stock in the balance sheet is an important factor. The closing stock is carried forward as a current asset whereas the opening stock is the closing stock from the previous accounting period. It is important to keep the opening and closing inventory in the balance sheet updated.
Read Best Inventory Management Software for Small Business.
Record Opening and Closing Stocks Accurately for Insightful Reports
Opening stock and closing stock are usually part of the same stock accounting procedure. From a business viewpoint, holding sufficient stock is important for a manufacturer to fulfil sales or production demand. Businesses should also apply the opening stock and closing stock formula properly while evaluating. It also gives them some idea of the risks of surplus stock like high carrying costs, damage, obsolescence risk, and loss.
A stock and inventory management software can help you to record data for opening and closing stocks. TranZact is a tool that solves all core business functions. It is easy to access and does not demand complicated training sessions for SMEs.
Understand How Does TranZact Help You Manage Inventory Efficiently?
It integrates with Tally and BUSY accounting platforms to make sure accurate and easy accounting entries. It also helps businesses to record inventory data easily and generate insightful reports for business growth.
FAQs
1. What is opening stock and closing stock in accounting?
In accounting, opening stock is the inventory a business has at the start of an accounting period. On the other hand, closing stock is the remaining inventory at the end of the accounting period. Both these terms are important for calculating the Cost of Goods Sold (COGS).
2. How to calculate closing stock?
The closing stock formula is = Opening Stock + Purchases - Cost of the Goods Sold.
3. 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.
4. 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.
5. 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.
