Meaning of Closing Stock
Closing Stock is the amount of the unsold stock which is lying idle in the business on a given date, waiting to be sold. This is the inventory that is left after all the sales done by the business. This closing stock has various names– Raw materials, Work-in-progress, or also known as the finished goods.
At the closing period, that is at the end of a financial year, the inventory lying with the business is known as the Closing Stock or the Closing Inventory. This may include products that are not sold but then already processed by the company. The stock is determined in a physical amount which comprises the calculation of the raw materials, work-in-progress, or other such classes of Closing Stock.
Closing Stock Formula
As explained earlier, the closing stock at the end of a year or at the end of a reporting year is called the closing inventory or the closing stock. This stock still is in the hand of the business, which might be in any form– unprocessed or semi-processed, in the form of raw materials or WIP.
At the end of the year, a physical counting is done to ascertain the number of stocks remaining with the company. The number can also be determined with the help of various other methods as well, one of the popular methods is the perpetual inventory system. Also, the cycle counting method is enabled which keeps in the notice of the additional count that has been added to the current stock.
The formula for Closing Stock = Opening Stock + Purchases – Cost of the Goods Sold.
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There are quite a number of ways to calculate the closing stock. Among which popular are these:
First in, first-out method
Last in, first-out method
Retail Inventory Method
Weighted Average Method
These methods are in use in different organizations that serve different motives altogether. The calculation is again adjusted to another method which is known as the lower cost or market (LCM) rule, which states that those inventory items are to be recorded at the lowest cost or at their current market value. In reality, this LCM method is used only once in a single year. This is done in order to comply with the GAAP (Generally Accepted Accounting Principles).
Closing Stock in Balance Sheet
The Closing Stock is represented on the Asset Side of the Balance Sheet. While at times in the Trial Balance, this is adjusted with the purchase, which is given in the Opening Stock and Closing Stock are adjusted through purchases. Then both the Adjusted Purchases A/c and the Closing Stock Account appear in the Trial Balance.
The Adjusted Purchases amount may be taken to the debit side of the Trading Account and then the Closing Stock appears on the Asset side of the Balance Sheet. This is to be noted that under this circumstance, the Closing Stock will not appear in the Trading Account. In the following year, the Closing Stock turns to the next year’s Opening Stock.
Valuation of Closing Stock
Keeping in view the requirement of the company, the nature of stock, the valuation methods can be used to determine the value of the closing stock. These are popularly known as the inventory valuation methods.
Following are the Methods:
Average costing method
Weighted Average costing method
Moving Average costing method
FIFO costing method
LIFO costing method
Last purchase cost
Costing method
At zero Cost
The way and methods that are used to calculate the closing stock differ from each other. This has a direct impact on the profitability of the business. Thus, with this result, it is crucial for businesses to choose a method that is more relevant to the products that they deal with.
FAQs on Closing Stock Formula: Calculation and Use
1. What is the main formula used to calculate closing stock?
The primary formula to calculate the value of closing stock is based on the Cost of Goods Sold (COGS). The formula is:
Closing Stock = Opening Stock + Net Purchases + Direct Expenses – Cost of Goods Sold (COGS)
This formula helps determine the value of inventory that remains unsold at the end of an accounting period.
2. Can you explain the closing stock calculation with a simple example?
Of course. Imagine a small shop starts the year with ₹10,000 worth of goods (Opening Stock). During the year, it buys ₹50,000 more goods (Purchases). The cost of the goods it sold during the year (COGS) was ₹45,000.
Using the formula:
Closing Stock = ₹10,000 (Opening Stock) + ₹50,000 (Purchases) - ₹45,000 (COGS)
Closing Stock = ₹15,000
So, the shop has ₹15,000 worth of unsold inventory at the end of the year.
3. Where is closing stock shown in a company's final accounts?
Closing stock has a unique dual entry in the final accounts for the year 2025-26. It is shown in two places:
- On the credit side of the Trading Account to calculate the Gross Profit or Gross Loss.
- On the asset side of the Balance Sheet under the head 'Current Assets'.
4. Why is calculating closing stock so important for a business?
Correctly calculating closing stock is crucial because it directly impacts a company's profitability and financial position. If closing stock is valued incorrectly, it can lead to:
- Inaccurate Profits: An overstated closing stock will lead to an overstated gross profit, and vice versa.
- Misleading Financial Health: Since it's a significant asset on the Balance Sheet, an incorrect value gives a false picture of the company's financial strength.
5. What does the accounting principle 'cost or net realisable value, whichever is lower' mean for closing stock?
This is a fundamental rule of inventory valuation based on the principle of conservatism. It means you must value your closing stock at either its original purchase price (cost) or the price you could sell it for today (net realisable value), whichever amount is less. This prevents a business from overstating its assets and profits by ensuring inventory is not valued at more than it is currently worth.
6. How does 'Work-in-Progress' (WIP) affect the total closing stock calculation?
Work-in-Progress (WIP) refers to goods that are partially completed at the end of an accounting period. These goods are a part of the inventory and must be included in the value of closing stock. The total closing stock is therefore a sum of:
- Raw Materials: Unused materials.
- Work-in-Progress (WIP): Partially finished goods.
- Finished Goods: Completed products ready for sale.
7. Is there another way to find the closing stock if the Cost of Goods Sold (COGS) is not given?
Yes, if you know the company's Gross Profit, you can rearrange the Trading Account components to find the closing stock. The alternative approach uses this formula:
Closing Stock = (Opening Stock + Net Purchases + Direct Expenses) – (Sales – Gross Profit)
Here, '(Sales – Gross Profit)' is just another way to calculate the Cost of Goods Sold.
