Accountancy · Ch 9 — Financial Statements - II
Closing Stock
Closing Stock
Closing Stock
Closing stock is the cost of goods that remain unsold at the end of an accounting period. These goods are still lying in the store, and their value must be brought into the books to correctly calculate the gross profit or loss for the period.
Why an Adjustment is Needed
In a typical trial balance, closing stock does not appear as a separate item. It is given as additional information outside the trial balance. This means two things must be done:
- The closing stock must be credited to the Trading Account (because it reduces the cost of goods sold, thereby increasing gross profit).
- It must be shown as a current asset on the Balance Sheet.
The Journal Entry for Closing Stock
The standard adjustment entry is:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Closing Stock A/c Dr. | 15,000 | |||
| To Trading A/c | 15,000 |
Why this entry? Closing stock is an asset, so it is debited. The credit goes to the Trading Account because the value of unsold goods is effectively a gain that reduces the cost of purchases and expenses charged to the Trading Account.
Presentation in the Final Accounts
When this entry is passed, the Trading Account shows closing stock on the credit side, and the Balance Sheet shows it under Current Assets.
Trading and Profit and Loss Account of Ankit for the year ended March 31, 2017
| Dr. | Cr. | |||
|---|---|---|---|---|
| Expenses/Losses | Amount (₹) | Revenues/Gains | Amount (₹) | |
| Purchases | 75,000 | Sales | 1,25,000 | |
| Wages | 8,000 | Closing stock | 15,000 | |
| Gross profit c/d | 57,000 | |||
| 1,40,000 | 1,40,000 | |||
| Salaries | 25,000 | Gross profit b/d | 57,000 | |
| Rent of building | 13,000 | Commission received | 5,000 | |
| Bad debts | 4,500 | |||
| Net profit (transferred to Ankit's capital account) | 19,500 | |||
| 62,000 | 62,000 |
Balance Sheet of Ankit as at March 31, 2017
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Owners funds | Non-Current Assets | ||
| Capital | 12,000 | Furniture | 15,000 |
| Add Net profit | 19,500 | 31,500 | |
| Non-Current Liabilities | Current Assets | ||
| Long-term loan | 5,000 | Debtors | 15,500 |
| Current Liabilities | Bank | 5,000 | |
| Creditors | 15,000 | Cash | 1,000 |
| Closing stock | 15,000 | ||
| 51,500 | 51,500 |
The closing stock of the current year becomes the opening stock of the next year. Therefore, in the next year's trial balance, opening stock will appear as a debit balance (since it is an expense-like item charged to the Trading Account).
Alternative Treatment: Adjustment Through Purchases Account
Sometimes, instead of crediting the Trading Account directly, the closing stock is adjusted through the Purchases Account. This method is used when the business wants to show only the cost of goods actually sold during the year.
The entry recorded is:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Closing Stock A/c Dr. | 15,000 | |||
| To Purchases A/c | 15,000 |
Effect of this entry: The Purchases Account balance is reduced by the amount of closing stock. The resulting figure is called Adjusted Purchases (Purchases − Closing Stock). This adjusted figure is shown on the debit side of the Trading Account.
When closing stock is adjusted through the Purchases Account, closing stock is NOT shown on the credit side of the Trading Account. It has already been accounted for by reducing purchases. The closing stock still appears as an asset on the Balance Sheet.
Treatment of Opening Stock in This Method
If the opening and closing stocks are both adjusted through the Purchases Account, the opening stock is also eliminated from the Trading Account by recording:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Purchases A/c Dr. | (Opening stock amount) |