Closing Stock Formula
The Closing Stock or the closing inventory Formula is Opening Stock + Purchases – Cost of Goods Sold.
We need to add the cost of beginning inventory or the opening inventory to the cost of purchases during the period. This is the cost of goods which will be available for sale. Then, multiply the gross profit percentage by the sales to find the required cost of goods sold. After this, subtract the cost of goods available for sale from the cost of goods sold to get the ending or the closing inventory.
This Closing Stock is an amount of the unsold stock that is lying in your business on a given date. In simple words, it's the inventory that is still lying in your business. This closing stock is to be sold for a given period. The closing stock can be in various forms – raw materials, work-in-progress (WIP), or in the form of finished goods.
Closing Stock - Description
As mentioned earlier, Closing Stock is an amount of unsold stock that is lying in a business on a particular date. This inventory is to be sold by the business at a destined period of time.
Closing stock is the amount of inventory that a business has on hand at the end of an accounting year. The amount of closing stock is to be ascertained by physically counting the inventory. This can also be determined by the perpetual inventory system to arrive at the end record of the number of closing stock or inventory.
There are Ways to Calculate the Recorded Value of the Closing Stock, Including:
First in, first-out method
Last in, first-out method
Retail Inventory method
Weighted average method.
Closing Stock in Balance Sheet
Closing Stock is represented on the Asset Side of the Balance Sheet. Then, this is adjusted with the purchases amount which may be taken to the debit side of the Trading Account and the Closing Stock appears on the Asset side of the Balance Sheet.
Sometimes in the Trial Balance, this adjusted purchase is given and this means that the Opening Stock and Closing Stock are adjusted through this purchase. Then both these Adjusted Purchases A/c and the Closing Stock Account appear in the Trial Balance.
Valuation of Closing Stock
To calculate the closing inventory, the new purchases are added to the ending inventory, then minus the cost of goods sold is done. This helps to find out the final value of the inventory at the end of the accounting period.
The ending inventory is dependent on the market value or the lowest value of the goods that the business possesses in itself.
The most obvious way to calculate the closing inventory is by doing a physical count at the end of each month and then to value the inventory using a valuation method like the LIFO, FIFO, and the Weighted Average Method.
Generally, it’s not practical to carry out the physical count. Hence an estimation method is used for calculating this closing inventory.
Gross Profit Method
Retail Method
Using Gross Profit Method
We use the following steps to calculate the closing inventory by the gross profit method:
Add the cost of the beginning or opening inventory to the cost of purchases during the period. This will be the cost of goods that are available for sale.
We then Multiply the gross profit percentage by the number of sales to find the estimated cost of the goods sold.
Then subtract the cost of goods available for sale from the cost of goods sold to get the ending or the closing inventory.
Using Retail Method
This method is commonly used by retailers to calculate the ending inventory. This method uses the proportion of the retail price to cost in the prior periods. Following are the steps to calculate:
Computing the cost-to-retail percentage.
The formula for this is: Cost-To-Retail Percentage = Cost / Retail price
Then, calculate the cost of goods that are available for sale.
The formula is: Cost of Good Available for Sale = Cost of beginning inventory + Cost of purchases
Calculate the cost of sales that occurred during the period
The formula is: Cost of Sales = Sales x Cost-To-Retail Percentage
In order to calculate the ending inventory, use the formula as:
Ending Inventory = Cost of goods available for sale – Cost of sales during the period.
Methods for Valuing Stocks at the End of the Day
Any of the valuation methods can be used to determine the closing stock value, depending on the company's needs and the nature of the stock. Inventory valuation methods are what they are called.
Method of calculating the average cost
Costing technique based on the Weighted Average
Costing technique based on the Moving Average
The first-in, first-out (FIFO) technique of costing
The LIFO (last-in, first-out) technique of costing is
The price of the most recent purchase
Methodology for calculating costs
At zero cost
The methodologies and processes used to determine closing stock differ, and this has a direct impact on the business’s profitability. As a result, firms must select a strategy that is better appropriate for the products they deal with.
The Effect of the Pricing Method on the Closing Stock
The approach used by a corporation to price inflation has an impact on its financial situation and profitability. If the corporation chooses LIFO, the cost of products sold will be greater (assuming inflation continues to rise), lowering gross profit and lowering taxes. It is one of the main reasons why businesses choose LIFO accounting over FIFO accounting. Another good explanation is that utilizing FIFO will result in a bigger amount of closing stock in the balance sheet than using FIFO.
The manner of inventory management has an impact on ratios. When FIFO is employed, the current ratio (current assets / current liabilities) will be higher. The number of Current Assets will rise due to ending stock. If FIFO is used, however, the inventory turnover ratio (Sales / Average inventory) will be lower.
FAQs on Closing Stock
1. What are raw materials?
Raw materials are materials or substances used in the primary production of items or throughout their manufacture. Raw materials are commodities that are purchased and sold on international commodity exchanges. In the factor market, traders buy and sell raw commodities. These raw elements, like labour and capital, are referred to as factors of production.
A raw material, also known as feedstock, unprocessed material, or primary commodity, is the basic resource used to make goods, completed products, energy, or even intermediate components that are utilized as feedstock for future finished products.
These raw materials are materials or substances that are employed in the creation or manufacturing of things in their first stages. Raw materials are commodities that are purchased and sold on global commodity exchanges.
2. What is perpetual inventory?
Perpetual inventory is a technique of inventory accounting that uses computerized point-of-sale systems and enterprise asset management software to record the sale or purchase of inventory immediately. The perpetual inventory gives a highly thorough perspective of inventory changes, as well as immediate reporting of inventory in stock, and properly reflects the number of items on hand. A corporation does not make any effort to preserve precise inventory records of products on hand in this system; instead, purchases are recorded as a debit to the inventory database. Direct labour and materials costs, as well as direct factory overhead costs, are included in the cost of goods sold.
3. When this retail method is in use?
This method priorly works if the firm marks their products in the same consistency by the same percentage. This means that if there are a series of discounts for the stock clearance after the main selling season, this can change the outcome of this calculation.
4. What are the different types of raw materials?
Different Types of Raw Materials
Given the fact that all raw materials are obtained naturally, they can be classified into three groups based on their origin.
Plant/tree-based — Plants and trees provide resources such as vegetables, fruits, flowers, timber, resin, and latex.
Animal-based materials include leather, flesh, bones, milk, wool, and silk, all of which are derived from animals.
Minerals, Metals, crude oil, coal, and other resources are obtained by mining the earth.
5. What are the examples of an inventory costing system?
Companies can account for the cost of inventory held for sale in a variety of ways, but the overall inventory cost is the same regardless. The time when the inventory cost is recognized and the cost of inventory sold is reported to the cost of sales expense account differs between the techniques. The first-in, first-out (FIFO) technique assumes that the oldest units are sold first, whereas the last-in, first-out (LIFO) method records that the most recent units are sold first. A weighted average cost, or the total inventory cost divided by the number of units in inventory, can help businesses simplify the inventory costing process.
6. Where can I find notes and questions on closing stock?
You can find questions on the closing stock on Vedantu. It explains how it works and covers topics like raw materials, costs, and so on. Vedantu also offers study materials and a variety of competitive tests for students in grades 1 through 12. Notes, important topics and questions, revision notes, and other materials are among the contents. All of these resources are available for free on Vedantu. Students must first register on the Vedantu website to gain access to all of these tools. Vedantu's mobile app also allows you to register.