Closing stock in a trading account is the value of unsold inventory at the end of the accounting period, calculated and recognized to ensure accurate gross profit and a true-and-fair view of current assets under the lower of cost or net realizable value rule.
What is closing stock
Closing stock (ending inventory) represents goods remaining unsold on the closing date, including raw materials, work-in-progress, and finished goods depending on the business model. It is determined after stocktake at period-end and is fundamental to computing cost of goods sold and gross profit in the trading account. Proper recognition also ensures the balance sheet reflects inventory as a current asset and prevents misstated profitability.
Where it appears
In final accounts, closing stock affects both the Trading Account and the Balance Sheet, but placement depends on whether it is adjusted in the trial balance. If not included in the trial balance, it appears on the credit side of the Trading Account and under Current Assets in the Balance Sheet; if already adjusted, show it only as a Balance Sheet current asset. This treatment avoids double counting and aligns with the matching principle.
Core formulas
Two equivalent formulations are commonly used in periodic systems to reconcile inventory movement and sales.
- Closing Stock = Opening Stock + Purchases (and other inward) − Goods sold/used (outward).
- Cost of Sales identity: COGS = Opening Stock + Purchases − Closing Stock, rearranged to Closing Stock = Opening Stock + Purchases − COGS. These formulations ensure the unsold portion of available goods is measured consistently at period end.
Valuation principles
Closing stock is valued at the lower of cost or net realizable value (NRV) to uphold conservatism and avoid overstating profit and assets. Cost can be assigned using accepted methods—FIFO, weighted average, specific identification—applied consistently to reflect economic reality and enable comparability. The NRV comparison ensures write-downs when market value falls below accumulated cost, a key safeguard in inventory accounting.
Inventory costing methods
- FIFO: Oldest costs flow to COGS first, leaving newer costs in ending inventory; in rising prices, this tends to increase closing stock and gross profit.
- Weighted Average: Applies an average per-unit cost across units sold and remaining, smoothing price volatility for valuation and reporting.
- Specific Identification: Assigns item-level historical costs for unique, high-value items, providing precise closing stock valuation where feasible. Method choice affects gross profit and tax but must be consistent period to period unless justified.
Journal entries and adjustments
When closing stock is not in the trial balance (unadjusted), record: Closing Stock A/c Dr To Trading A/c; this recognizes inventory as an asset and credits the Trading Account to reduce COGS. When closing stock is already in the trial balance (adjusted), record: Closing Stock A/c Dr To Purchases A/c; this prevents duplication in the Trading Account and correctly nets purchases. Correct posting across Trading Account and Balance Sheet based on trial balance status is essential to avoid misstated gross profit.
Step-by-step calculation
- Physical count: Conduct stocktake to ascertain quantities on hand at period end; reliable counts underpin accurate valuation and compliance.
- Compile costs: Determine per-unit cost by method (FIFO/Weighted Average/Specific) and include appropriate costs to bring items to their present condition and location.
- Compare with NRV: Determine expected selling price less costs to complete and sell; apply lower of cost or NRV item-wise or by product group.
- Compute and post: Calculate closing stock value, post the appropriate journal entry depending on trial balance adjustment, and present in final accounts accordingly.
Numerical illustrations
- Formula-based example: If Opening Stock = ₹100,000, Purchases = ₹350,000, and COGS = ₹360,000, then Closing Stock = ₹100,000 + ₹350,000 − ₹360,000 = ₹90,000, credited in the Trading Account if unadjusted and shown as a current asset; ensure lower of cost or NRV is applied before finalizing.
- Movement example: Using the periodic identity, Closing Stock = (Opening + Inward) − Outward; with Opening 500 units, Purchases 300 units, and Sales 650 units, closing units = 500 + 300 − 650 = 150 units to be valued by chosen method and compared to NRV. Each unit’s valuation will differ under FIFO versus Weighted Average, impacting the monetary closing stock reported.
Trading account presentation
The Trading Account typically shows on the debit side: Opening Stock and Purchases (net of returns/adjustments), and on the credit side: Sales and Closing Stock (if unadjusted), with the balancing figure as Gross Profit or Loss. When closing stock is already included in the trial balance, exclude it from the Trading Account and display only in current assets to prevent overstating profit. This presentation links directly into the Profit and Loss Account via the gross profit carried down.
Common mistakes to avoid
- Double counting: Showing adjusted closing stock both in the Trading Account and Balance Sheet inflates gross profit; check the trial balance before posting.
- Ignoring NRV: Valuing solely at cost when market value is lower overstates assets and profit, breaching conservatism.
- Inconsistent methods: Switching between FIFO and Weighted Average without disclosure reduces comparability and may mislead readers of accounts.
- Incomplete costs: Omitting freight-in or applicable handling costs from cost undervalues inventory and distorts COGS.
Practical workflow for month/year-end
- Plan and conduct stocktake with clear cut-off procedures for receipts and dispatches to ensure completeness and accuracy.
- Reconcile physical counts with inventory records; investigate variances and adjust records where justified.
- Compute valuation by chosen method and perform NRV test; document assumptions and price sources for audit trail.
- Pass the correct journal entry, verify trial balance presentation, and ensure Trading Account and Balance Sheet reflect the appropriate treatment.
Special notes for service and hybrid businesses
Service entities with incidental inventories still need to value closing stock appropriately where materials or merchandise are held for sale or use in delivery of services. Hybrid models should segment inventories by type, applying suitable costing and NRV assessments to each category for accurate reporting. Even small businesses benefit from standardized month-end checklists to reduce errors and ensure consistency over time.
Quick checklist
- Is the physical quantity verified and reconciled? Yes → proceed; No → perform stocktake and reconciliation first.
- Is the costing method documented and consistently applied? Yes → proceed; No → adopt and apply FIFO or Weighted Average consistently.
- Has NRV been tested and applied item-wise or by category? Yes → proceed; No → compute NRV and adjust to the lower value.
- Has the correct journal entry been passed based on trial balance status? Yes → finalize; No → choose between Trading A/c credit or Purchases A/c credit as appropriate.
- Are Trading Account and Balance Sheet presentations aligned with adjustments? Yes → close accounts; No → correct to avoid double counting.
Example entry and presentation
- Unadjusted closing stock: Entry—Closing Stock A/c Dr To Trading A/c; show on Trading Account credit and Balance Sheet Current Assets.
- Adjusted closing stock: Entry—Closing Stock A/c Dr To Purchases A/c; show only in Balance Sheet Current Assets, not in Trading Account. These entries maintain the matching principle and yield correct gross profit in final accounts.
Final takeaway
To calculate and present closing stock in a trading account, determine quantities via stocktake, value at lower of cost or NRV using a consistent method (FIFO, Weighted Average, or Specific Identification), and place it on the Trading Account credit only when unadjusted in the trial balance, always recognizing it as a current asset on the Balance Sheet. Use the identities Closing Stock = Opening + Purchases − COGS and COGS = Opening + Purchases − Closing Stock to reconcile figures, applying the correct journal entry to avoid double counting and to ensure accurate gross profit.
Disclaimer
This content is for education only, not financial, accounting, tax, or legal advice; consult a qualified professional. No advisor‑client relationship or liability for losses. Past performance isn’t a guarantee; use information at your own risk.
