Opening stock is the value of goods available for sale in the beginning of an accounting period. Closing stock is the value of goods unsold at the end of the accounting period. Opening stock is always the closing stock of previous period. Closing stock of one year is opening stock of another, it means if valuation in one year is wrong it can cause another incorrect calculations in upcoming year (K.Ivens 2005, 50).
Closing stock rarely is valued at the last day of the financial year. Usually it takes earlier or later which means there should be made certain adjustments in order to correct figure for closing stock. In case or earlier closing stock valuation adjustments should correct the figure of closing stock and include all important and relevant transactions. The adjustment should include adding purchases (credit and cash), sales returns at cost price and lessening sales at cost price(sold during period between valuation and ending on financial year will not be on hand) and purchases returns (they have been returned so they must be included in closing stock) Stocks valued after the end of financial year also need adjustments. In this case to stock on hand we should add sales at cost price and purchases returns and lessen purchases and sales returns (cost price)(F. Thompson-Hosein 2000, 149).
When we calculate the gross profit for the period it is obligatory to create allowance for the closing stock. This calculation will match the sales revenue earned with cost of goods sold and not the cost of goods purchased during that period. It requires checking the quantity of stock that we have on hand at the end of accounting period and put valuation on it (J.R. Dyson 2007, 79).
There are 4 methods of valuing closing stock (J.R. Dyson 2007, 295):
- Unit cost. It's simply cost of purchasing stock that are easily identifiable. In any case when we can identify cost of materials used in production we can use this method of valuing.
- FIFO, First-in, first-out. This method adopts only the first price of purchased goods. This method's advantage is logicality and the fact that value of closing stock is closer to current economic value.
- Standard cost. This method consist of estimating price of goods in future.
- Average cost AVCO. This method calculates the average value of stock at every stage and it helps to obtain value of goods and value of remaining balance sheet. The average cost of stock is calculated at the point of addition of new stock as well as the removal (B. Ryan 2004, 120).
Accounting methods(B.K. Banerjee 2010, 810):
- Separate books - each departament can have their own book that will keep accounting records analitycally although this method is expensive.
- Columnar form. Method generally usd by smaller companies. Each departament keeps record of purchases, sales and stock and also expenses. Full-fledged double entry is not followed in this method. In this technique loss & protif account as well as a trading one is openened in columnar form and marked for each departament.
Company's accounting policy determine which one will be used. Accounting policy also states how policy had been selected (R. Narayanaswamy 2017, 35). Choosing accounting method also depends of company's experience to decide which method works better for them and is better portraying their financial position of the company. Method can be changed any time although it needs involvement of company's auditors, their concurrence and disclosure (D. Ordelheide 2016, 3123).
Closing stock in final balance
Gross profit is calculated based on closing stock figure. It is also a current asset and any situation of incorrect calculation can cause net and gross profit to be incorrect on the balance sheet. When closing stock is incorrectly valued and is understated cost of goods can be overstated and the gross profit can be overstated. Closing stock is the second category of the credit side of trading account. Closing stock is also the name for good that were not sold during fixed period. Since it can be valued before or after the end of financial year it is not shown in the trial balance. Valuation of closing stock cause problems such as market price or cost price. However stock is always valued at market or cost price whichever less (V.K. Goyal 2006, 137).
At the beginning you must get to know if you are entitled to further deduction. It can turns out that you have to add back some trading stock value as income. This procedure helps to prevent from owners purchasing large amounts of stock to claim early deduction. Second calculation requires deducting the cost of goods sold from receipts. It can be determined by the value of opening and closing stock. Opening stock value is the same as the closing stock from previous tax year. If closing stock value exceed the value of opening stock it means that excess will be added to your assessable income. If the value of closing stock is lower than value of opening stock it means you can claim an additional tax deduction. Lost or destroyed stocks does not apply for additional deduction and will not be part of closing stock. Spare parts kept for repair are not classed as trading stock (L. Tyler 2007, 40).
- Banerjee B.K (2010), Financial Accounting : Concepts, Analyses, Methods And Uses, 1/e, PHI Learning Private Limited, 810
- Dyson J.R. (2007), Accounting for Non-accounting Students, Pearson Education Limited, England, 79,295
- Goyal V.K. (2006), Financial Accounting, Excel books, Delhi, 137
- Ivens K. (2005), Running QuickBooks in Nonprofits , CPA911 Publishing, Philadelphia, 49-50
- Narayanaswamy R.(2017), Financial accounting: a manageral perspective, 6th edition, Eastern Economy Edition, 35
- Ordelheide D. (2016), Transnational Accounting, Macmillan, 3123
- Ryan B. (2004), Finance and Accounting for Business, Thomson Learning, 120
- Thompson-Hosein F. (2000), Principles of Accounts (Cxc), Heinemann Educational Publisher, Oxford, 149
- Tyler L. (2007), Small Business and Tax, Pascal Press, Australia, 40
Author: Jolanta Jańczy