Closing stock
Closing stock is one of the types of calculating value of stock, the second one is opening stock. The closing stock value is goods that were unsold at the end of financial period. The value should be shown in credit side in trading account and as an asset in the balance sheet[1].
Methods of calculating the closing stock
Choosing the method of calculating closing stock is used later on in financial statements. It should not be changed without strong reason and be part of the financial policy. It has influence on calculations of profits and values in the balance sheet. There are two methods, first if FIFO (first in, first out) and second is AVCO (average). The company may choose one method for one type of stock and second one for different products. In long period of time results of both FIFO and AVCO will be the same as closing stock of one period stands for opening stock of next period. Method of calculation does not influence psychical movement of products or cash generated. The only difference is that profit is allocated differently (to different periods) depending on the method. Closing stock value is generally calculated as below[2][3]:
Opening stock + receipts (purchases) - issues (sales) = Closing stock
FIFO method for closing stock (first in, first out)
Stock value is based on the recent costs of goods received[4]:
- Advantages are:
- realistic method (issuing goods in order of receipts),
- easy calculations,
- valuation of stock takes actual costs (buying costs),
- acceptable for tax purposes.
- Disadvantages are:
- calculations of cost are not necessarily based on the latest prices,
- calculations might not represent current prices,
- When prices are rising:
AVCO method for closing stock (average cost)
Stock value is based on average costs[5]:
- Advantages are:
- profits are smoothed out in all periods (both high and low profits),
- purchase costs are smoothed out,
- cost per unit do not vary greatly,
- logical method (cost of unit is the same no matter of time),
- stock value is similar as current market value,
- calculations possible to be computerised so job is much easier,
- acceptable for tax purposes.
- Disadvantages are:
- new average has to be calculated immediately, after each receipt with accuracy to several decimal places,
- due to using average values, stock values are at costs level that has never existed,
- when prices will increase, average will be shown inaccurate prices.
- When prices are rising:
- AVCO method will report lower profit,
- there is less tax to pay in specific period of time,
- will result in lower value of closing stock,
- reported cost of sales are higher.
Examples of Closing stock
- Retailers: Closing stock for a retailer is the value of the merchandise that is left in the store and is unsold at the end of the financial period. This could include items like clothing, shoes, toys, electronics, and other items that have not been sold.
- Manufacturers: Closing stock for a manufacturer is the value of the finished goods that are unsold at the end of the financial period. This could include items such as automobiles, furniture, electronics, toys, and other items that haven’t been sold.
- Wholesalers: Closing stock for a wholesaler is the value of the merchandise that is unsold at the end of the financial period. This could include items such as food, beverages, clothing, toys, electronics, and other items that have not been sold.
- Restaurants: Closing stock for a restaurant is the value of the food, beverages, and other items that have not been sold at the end of the financial period. This could include items such as meats, vegetables, fruits, beverages, and other items that have not been sold.
Advantages of Closing stock
Closing stock has a number of advantages for a business. These include:
- Accurate financial reporting - Closing stock provides a clear picture of the amount of stock held at the end of a financial period, allowing for accurate financial reporting.
- Increased efficiency - Knowing the exact amount of stock held at the end of a financial period allows the business to plan more efficiently for the next financial period.
- Improved customer service - Accurate information on the amount of stock held helps to ensure that customers can be served quickly and accurately.
- Reduced inventory costs - Knowing the exact amount of stock held helps businesses identify any excess stock and take action to reduce costs.
- Improved forecasting - Accurate information on closing stock allows businesses to more accurately forecast future demand and plan accordingly.
Limitations of Closing stock
The limitations of closing stock include:
- Inaccurate valuation: Closing stock is valued at the cost price or market price, whichever is lower. This can lead to an inaccurate valuation of the stock, as cost price does not always reflect the true value of the stock.
- Difficult to compare: Closing stock can be difficult to compare across different financial periods, unless there is a standardised method of valuation used by all companies.
- Fluctuations in market prices: Closing stock values can be affected by fluctuations in the market prices. This can make it difficult to accurately assess the value of closing stock.
- Overstocking: Closing stock can be used to hide overstocking, which can lead to an artificially high value of closing stock.
A Closing stock is just one of the methods of calculating stock value. Other approaches include:
- FIFO (First in First Out) - this approach involves taking the oldest stock first when calculating stock value.
- LIFO (Last in First Out) - this approach involves taking the latest stock first when calculating stock value.
- Weighted Average - this approach involves calculating stock value using the average cost of all the goods in the inventory.
- Specific Identification - this approach involves calculating stock value based on the exact cost of the goods.
Overall, the Closing stock approach is just one of many methods used to calculate the value of stock. Other approaches include FIFO, LIFO, Weighted Average, and Specific Identification.
Footnotes
| Closing stock — recommended articles |
| Inventory value — Stock register — LIFO Liquidation — Opening stock — Weighted average method — Going price — Joint demand — Retail inventory method — Maximum stock level |
References
- Cox D., Fardon M. (2009), A2 Accounting for AQA (Accounting & Finance), Paperback
- Chaffey A-L. (2018), Synopsis Tax today, PWC
- Kelly J. E., Barrow P., Epstein L. (2016), Bookkeeping For Dummies, John Wiley & Sons
- Reddy M. K., Saraswathi S. (2007), Managerial economics and financial accounting, PHI Learning Pvt
- Singh U. P. (2007), Accounting and Financial Management. For IT professionals., New Age International Publishers, New Delhi
Author: Anna Bodura
