Accounting Treatment of Closing Inventory (Stock).

What is Closing Stock?

Closing Stock is the balance amount of inventory i.e inventory on hand at the end of a reporting period. Inventory consists of raw materials, work-in-process, and finished goods. The closing stock amount can be ascertained by the physical count of the inventory. This stock can also be determined by using the perpetual inventory method and periodic inventory method to adjust inventory records to arrive at ending balances.
In a periodic inventory method, the amount of closing stock is used to calculate the cost of goods sold. Following   calculation can be used:
Opening Stock + Purchase – Closing Stock = Cost of goods sold

Recording the value of Closing Stock

The value of Closing Stock can be ascertained at the end of the accounting period by physical verification of stock. As per IAS 2, the Closing stock is valued at cost or market value whichever is lower. The value of closing stock is shown on the credit side of a Trading Account and the asset side of a Balance Sheet. The journal entry of the closing stock is posted at the end of an accounting year.

The value of the closing stock may be shown inside or outside a trial balance. Most often this stock is excluded in Trial Balance. Closing stock is the most important item to calculate gross profit/loss.

Journal Entry for Closing Stock

When Closing tock is not shown in the Trial Balance:

This is the most common practice where the closing stock is not shown in the trial balance. This is shown in the Trading Account & Balance Sheet. The Journal Entry for the closing stock is as follows:

Closing Stock A/cDR
Trading A/cCR

(Closing Stock brought in the books of accounts)

When Closing Stock is shown inside the Trial Balance:

This is a very rare practice where closing stock adjusted against purchases. Below is the journal entry for closing stock when it is reduced from purchases.

Closing Stock A/cDR
Purchase A/cCR

It will be shown in the balance sheet but not in the trading account.

Why Closing Stock is Not Shown in Trial Balance?

Closing Stock is the remaining balance of total purchased goods during an accounting period. As total purchase is already included in the trial balance, closing stock is avoided considering the fact, the effect will be doubled. Hence, the closing stock should not be included in the Trial Balance again.

Example: Suppose, XYZ Ltd purchased 10,000 MT Billet @ $ 375 to produce M.S. Rod. The total value of this purchase is (10,000 x 375) = $ 37,50,000. At the end of the Accounting period, XYZ used 8,500 MT Billet. Here, Closing Stock is 1,500 MT. XYZ already showed 10,000 MT Billet as Purchase. If 1,500 MT again shown as closing stock, it will be double treatment.

If both Purchase and the Closing stock is shown in the Trial Balance, there will be a mismatch of  1,500 MT (1,500 MT x 375) = $ 562,500 because the effect has been doubled in the Trial Balance.

Again, no separate account is needed to open for closing stock inside the general ledger. Hence, this stock is not to be shown in the trial balance.

*** Exception of this rule:

When closing stock is adjusted against purchases, the above rule will not be applicable. Following Journal entry to be passed in this case:

Closing Stock A/cDR
Purchase A/cCR