Closing Stock Meaning
Closing stock is referred to as the amount of unsold goods that remain with the business on a given date. In other words, it can be said that these are inventory which are in business and are waiting to be sold.
Inventory consists of products that are already processed or are in the process of getting processed. In accounting terms it involves the raw materials, work in progress and finished goods.
Closing Stock Formula
The formula for calculating closing stock is as follows:
Closing stock = (Opening Stock + Inward) – Outward or
Closing Stock = Opening Stock + Purchases – Cost of Goods Sold
Opening Stock = Unsold goods that are brought forward from the previous accounting period
Purchases = New purchases or goods produced
Cost of Goods sold = Sale or cost of goods that are produced.
Closing Stock Example
Methods of Calculating Closing Stock
Closing stock can be calculated by the following methods:
- FIFO Method or First In First Out Method: Here the goods that are purchased first become the goods that are sold first. The newest goods are kept unsold.
- LIFO Method or Last In First Out Method: In this method, the last item that is purchased and kept in inventory becomes the first to be sold.
- Average Cost Method: This method calculates the weighted average cost for the closing stock.
- Gross Profit Method: Gross profit method is used for determining the amount of ending inventory. It does so by applying the historical gross profit percentage of the company to the current period involving net sales and cost of goods that are available for sale.
Accounting treatment of Closing Stock
Closing stock is sometimes given in the trial balance, while at times it is shown as an adjustment at the end of the trial balance.
When it is given in trial balance there will be a single posting in the trial balance as assets, and when it is shown as an adjustment at the end of trial balance, it will have two postings, one as closing stock at the asset side of the balance sheet and on the other side, it will be shown as a credit side of the trading account.
This concludes the topic of Closing Stock, which is an important concept of Accountancy for Commerce students. For more such topics, stay tuned to BYJU’S.