At the end of the trading period, some merchandise purchased earlier in the year may not have been sold, and are still on hand. The stock in hand at the end of the trading period is known as closing stock or ending inventory.

The closing stock should be evaluated carefully because the amount of closing stock or ending inventory materially affects the trading results of the business. In order to ensure that the income statement is correct, we must consider the value of the closing inventory of merchandise.

The value of merchandise remaining unsold at the end of the trading period represents an asset of the business.

Example

Suppose that a firm’s unsold stock at the end of the year is valued at $20,000.

Accounting Treatment

The unsold stock has the following aspects:

Firstly, the unsold stock is left out of the opening stock and purchases that have already been recorded on the debit side of the trading account.

Therefore, to match the cost price and sales revenue of the same number of units, the unsold stock is recorded on the credit side of the trading account.

Secondly, the unsold stock will be sold in the next year. That’s to say, its benefit will be available in the next year, which means that it should be treated as an asset of the current year. As a result, it is recorded on the assets side of the balance sheet.

To reduce the expense on the merchandise inventory, the income statement should receive credit and a corresponding debit should be made to an asset merchandise inventory.

Effect on Financial Statement

The amount of closing merchandise inventory is deducted from the cost of goods available for sale in the income statement. Also, the same amount is recorded as a current asset in the balance sheet. This adjustment affects the income statement and balance sheet as follows:

Adjusting Entry

Adjusting Entry for Closing Stock or Ending Inventory
Adjusting Entry for Trading Account
Adjusting Entry for Balance Sheet

Frequently Asked Questions

What is closing stock or ending inventory?

Closing stock or ending inventory is the stock of inventory which a business has left over at the end of its accounting period, and it includes merchandise that was received for sale but not sold during that period. It can be positive or negative depending on whether there is more merchandise than what had been sold in the accounting period. It is also known as stock in hand or stock on hand.

How is closing stock or ending inventory computed?

Closing stock is computed by taking the beginning inventory plus all of the purchases or goods that were received during the accounting period and subtracting out the items that have been sold during that same time frame. For example, if a company had 500 units in their inventory at january 1st with an opening balance of $10,000 dollars and they purchased 200 units at a cost of $30,000 during the year with an ending inventory value of $24,000 they would have a closing inventory balance of ($500 + 1000 - 300) = 900.

What are some examples where closing stock or ending inventory appears in accounting?

Closing stock is used in the balance sheet, income statement and Cash Flow statement of a company. It can appear on the balance sheet under "inventory" or "stock in trade" where it would be stated as what the companies current inventory is valued at. Also, if a business sells items that are not part of its normal operations then it may have inventory that is not normal for it to have, this would be considered closing stock. For example, if company xyz sells an item at the consumer level which they do not normally sell then this would be inventory that is not part of their normal operations and should be recorded as closing stock.

What are some ways excess closing stock or ending inventory can be reduced?

One way excess stock can be reduced is by making a markdown in the cost of goods sold section of the income statement so that less inventory needs to be recorded. This would remove some items from closing inventory and therefore reduce it. Another option is to pay attention when receiving goods so that they are recorded at an appropriate time so that they do not get lost and need to be counted as closing stock. A final way excess inventory can be removed is through returns or allowances of goods which then reduces closing inventory.

What is the formula for closing stock or ending inventory?

The calculation for closing stock or ending inventory is beginning balance plus any new purchases minus all sales through the end of the accounting period and without considering any adjustments that may arise.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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