Inventory or closing stock means the value of unsold product, lying with the company on a particular point of time. When the profit and loss account and balance sheet are prepared, the cost of closing stock plays very significant role. Without considering the value of closing stock, it will be incorrect figures of profit or loss. Inventories are the current asset of the company. We call it closing stock because the valuation of unsold stock is done on the last date of financial year whenever the final accounts are prepared. Inventories include finished products, raw material and work in progress. To show the actual profitability of the firm, proper value of stock must be shown in profit and loss account and balance sheet.
Treatment of Closing Stock in Final Accounts
Closing stock is shown in two places in final accounts: (1) credit side of trading account and (2) in asset side of balance sheet. Basically, there are two methods of valuation of inventories:-
a) Cost basis:- on basis of cost the following methods can be adopted for valuation of inventories:-
- First in first out method (FIFO)
- Last in first out (LIFO)
- Highest in first out (HIFO)
- Specific Identification price
- Average Price
- Latest Purchase price etc.
(b) The lower of cost or market value:- Traditionally, the inventories are valued on the basis of the rule ‘cost or market price which ever is less’. It is the right method also because the realizable value of the stock is shown in the final accounts and the loss of the stock relating to current year is absorbed in the same year.
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