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 

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 being adjusted with the purchases amount which may be taken to the debit side of the Trading Account and the Closing Stock appear 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 being 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:

  1. 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.

  2. We then Multiply the gross profit percentage by the number of sales to find the estimated cost of the goods sold.

  3. Then subtract the cost of goods available for sold 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:

1. Computing the cost-to-retail percentage.

The formula for this is:

Cost-To-Retail Percentage = Cost / Retail price

2. 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

3. Calculate the cost of sales that occurred during the period

The formula is:

Cost of Sales = Sales x Cost-To-Retail Percentage

4. 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.

FAQs (Frequently Asked Questions)

1. What are Raw Materials?

Ans. Raw materials are materials or substances that are being used in the primary production or while manufacturing of goods. Raw materials are the commodities that are bought and sold on the commodities exchanged worldwide. Traders buy and sell the raw materials in the factor market. These raw materials are called the factors of production, like labour and capital.  

A raw material, also known as the feedstock, or the unprocessed material, or the primary commodity, which is the basic material that is used to produce the goods, finished products, energy, or even the intermediate materials that are feedstock for future finished products.

These Raw materials are materials or substances which are used in the primary production or manufacturing of goods. Raw materials are commodities that are bought and sold on commodities exchanges worldwide.

2. Explain Perpetual Inventory System.

Ans. This Perpetual inventory is a method of accounting for especially the closing inventory that records the sale or purchase of closing inventory. This is done immediately through the use of computerized point-of-sale systems and enterprise asset management software system.

The Purchases and returns are immediately recorded in these inventory accounts. For example, a stationery store may use a perpetual inventory system. Each time a product is scanned and purchased the system updates the current inventory levels in a database system.

3. When this Retail Method is in Use?

Ans. 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.