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 is 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 of cost or market (LCM) rule, which states that those inventory items is 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 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
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
1. What is a Reporting Year?
Ans. Reporting means providing information about the work that is going on under your concern. So “reporting year” indicates the year in which all the works and function is required to be reported to the top-level managers. This is the report in which the important activity belongs. Most firms operate on a calendar year basis, and for these firms, the reporting year is equivalent to the year of their activity date. For instance, if the activity date is on 1st September 2020, then the reporting year would also be 2020.
This is the time span in which a company reports its financial performance and its financial position. A company can choose to use the traditional calendar year of 12 months or adopt a 12-month fiscal year.
2. What is the Full Form of WIP?
Ans. The full-term is work-in-progress (WIP). This is a production and supply chain management term, which describes the partially finished goods which are waiting for completion.
WIP includes raw materials, labor, and the overhead costs that are incurred for the products at various stages of the production process. WIP is an important component of the inventory asset account on the balance sheet. After the completion, these costs are subsequently transferred to the finished goods account and eventually to the cost of sales.
3. How Does Cycle Counting Work?
Ans. Cycle counting is a wide-known inventory counting solution that allows businesses to count a varied number of items in areas of business within the warehouse without having the need to count the entire inventory. Cycle counting is a type of sampling technique where the count of a certain number of items infers actually the count for the whole warehouse.