Closing Stock is the number of goods that remained unsold at the end of an accounting period. Closing Stock is always valued at the end of the year. Therefore, it is generally given outside the Trial Balance.
Treatment of Closing Stock in the financial statements
Firstly, it is recorded with the given amount on the Credit side of the Trading Account and
Secondly, being an asset, it is shown on the Assets side of the Balance Sheet under the head Current Assets.
When both ‘Cost Price’ and ‘Market Price’ of Closing Stock is given
Sometimes, it may happen that the two values of closing stock i.e. ‘Cost’ and ‘Market Price’ are given in the question. In such a case, the closing stock is recorded in the books by following the accounting convention of ‘Conservatism’. As per this, the closing stock is valued at its ‘Cost’ or ‘Market Price’, whichever is less. That is, if, at the end of the year, the market price of the closing stock becomes lower than its cost, then closing stock will be recorded in the books at its market price and vice versa. It is done in order to provide for the anticipated loss in the value of the stock. Conservatism Principle states that “One shall not anticipate a profit but shall always provide for all prospective losses”. This makes sure that the assets and incomes are not overstated, while the liabilities and losses are not understated.
For example, some goods were purchased at a cost of Rs 15,000. At the end of the year, its realizable value in the market is Rs 18,000. In this case, the closing stock will be valued at Rs 15,000 and not at Rs 18,000.
In case Closing Stock is given Inside the Trial Balance
There may be a situation when the value of the closing stock is not given outside the Trial Balance. Rather, it is given inside the Trial Balance. This implies that closing stock is already adjusted in the purchases and purchases given in the Trial Balance represent the Net Adjusted Purchases.
Algebraically, Net Adjusted Purchases can be written in the following form:
Net Adjusted Purchases = Purchases + Opening Stock – Closing Stock
From the above equation, it can be inferred that purchases given in the Trial Balance, are adjusted with both- opening as well as closing stock.
As we know, that adjustments given inside the Trial Balance are recorded only in one place. As in this case, Closing Stock is given inside the Trial Balance, so, it is shown only in the Balance Sheet and not in the Trading Account.
Also, Read
What is Operating Profit?
Operating Profit can be defined as the profit earned by carrying the normal business activities. It is computed by subtracting the operating expenses from the gross profit.
Balance Sheet
The balance sheet is the last financial statement that is prepared by any organization. This statement helps to ascertain the true financial position of an enterprise at the end of an accounting period
Profit and Loss Account
A profit and Loss Account is the second financial statement prepared by an organization. This account is prepared to ascertain the net results of a firm in form of net profit earned or net loss incurred during an accounting period.
What are Adjusting Entries?
In order to incorporate adjustments in the financial statements, we pass the required Journal entries, which are termed as adjusting entries.
Difference between Trading and Profit and Loss Account
Similar to the Trading Account, the Profit and Loss Account is also a nominal account in which all the expenses or losses are debited and all the incomes or gains are credited.
Difference between Balance Sheet and Trial Balance
The given below are points of distinction between the Balance Sheet and Trial Balance. The balance sheet represents the financial position at the end of an accounting year.
Difference between Profit and Loss and Balance Sheet
The given below are points of distinction between Profit and Loss Account and Balance Sheet. A profit and Loss Account is the second financial statement prepared by an organization.
Difference between Tangible and Intangible assets
Tangible assets have physical existence which can be seen or touched. But Intangible assets do not have any physical existence which cannot be seen or touched.
Difference between Fixed assets and Current assets
Difference between Fixed assets and Current assets: Fixed assets are the assets that are acquired for use in the business for a long period of time,