Closing stock journal entries is an important year-end accounting adjustment. It records the value of the business’s unsold inventory at the end of the accounting period. Every company that deals in goods will have some closing stock. To correctly calculate the gross profit, it is necessary to show the closing stock in the books.
We pass the journal entry for closing stock using the rule:
| Closing Stock A/c DrTo Trading A/c |
The Closing stock entry ensures that we include the correct value of stock in the trading account and also reflect it in the balance sheet as an asset. The closing stock is not a transaction but an adjustment, which means it only appears at the end of the financial period.
This entry also plays an important role in matching costs and revenues in the same period, which is a fundamental accounting principle. It is essential to treat closing stock properly to show the correct business performance in the financial statements.
What is Closing Stock?
Closing stock refers to all goods that remain unsold at the end of a financial year. These goods still belong to the business and hold monetary value. It includes raw materials, finished goods, and work-in-progress items, depending on the nature of the business.
This stock does not form part of the cost of goods sold, which is why we show it separately in accounts. Its value helps show the correct gross profit. For example, if a business manufactures shoes and has 100 unsold shoes on 31st March, their value becomes the closing stock for that year.
You must calculate the value of closing stock carefully, usually by physical verification and applying the lower cost or net realizable value rule. The conservatism principle of accounting says you should not show more profit than what is actually earned, which is why you choose the lower value.
Why Closing Stock Matters?
Closing stock is important for two reasons. First, it helps reduce the cost of goods sold. Second, it represents inventory that can generate revenue in the next period. Businesses also use this amount to prepare budgets and track operational efficiency.If you ignore closing stock or record it incorrectly, your gross profit will be incorrect, and your balance sheet will not show the real worth of current assets. Therefore, students must understand the importance and correct calculation of closing stock.
How to Pass the Closing Stock Journal Entry?
Each accounting year has the end-of-year closing stock journal entry, which should be recorded properly. For this, the inventory value has to be computed and recorded aptly in the books. Perform these steps for passing this entry.
Step 1: Perform Physical Stock Counting
Initially, there should be physical verification of the inventory. The process consists of taking stock of every single item left in stock because only then can actual and existing goods be considered. Usually, the company will hire an outside team for this work at the year-end.
Good counting will help avoid incorrect valuations. Thus, it will prevent the setting of fraudulent adjustments for an overstated value of inventory. In India, stocktaking is generally done on March 31.
Step 2: Valuate the Closing Stock
After counting, the value of the stock is based on the lower cost or market price. This means you choose the smaller price you paid or the current market price. This rule follows the principle of conservatism and protects against overstated profits.
Suppose the cost of an item is ₹500, but the market value is ₹450; then you must take ₹450 as the value. This rule is compulsory in accounting and is applied uniformly.
Step 3: Pass the Journal Entry
Now, record the value of the closing stock in your journal.
If The Closing Stock Is Not Adjusted, Pass The Following Entry:
| Closing Stock A/c Dr ₹XX To Trading A/c ₹XX |
This increases your assets and reflects the stock in the trading account to reduce the cost of goods sold.
If The Closing Stock Is Already Adjusted, Then Pass:
| Closing Stock A/c Dr ₹XX To Purchases A/c ₹XX |
This reduces the purchases and prevents duplication in the trading account. This is known as the closing stock adjustment entry.
Step 4: Post to Trading Account and Balance Sheet
After passing the closing stock journal entry, the next step is to post the values to the final accounts. This step ensures the financial statements reflect the correct picture of the business’s financial position and performance.
- You must show the closing stock on the credit side of the trading account if it is not already included in the trial balance. This will help calculate the gross profit by deducting it from the cost of goods sold. At the same time, you must show the closing stock in the balance sheet under current assets to display what the business still owns.
- Posting to these accounts completes the recording cycle of the closing stock accounting entry. When placed in the trading account, it increases profit, and when placed on the balance sheet, it adds to the value of assets. You must never forget to do both when the closing stock does not appear in the trial balance. If the closing stock appears inside the trial balance, post it only to the balance sheet and skip the trading account.
- This process is vital because wrong posting will result in either inflated or understated profits. Also, the balance sheet will not show the correct financial standing of the business. Hence, this step must be done with care and clarity.
Step 5: Check Trial Balance
Before finalizing your accounts, always look at the trial balance to see whether the closing stock is already included. This is a critical step in the process. If the stock appears in the trial balance, it means it has already been adjusted in purchases and included in the accounts. In this case, do not show the closing stock in the trading account again. Only post it in the balance sheet under current assets.
- Repeating the closing stock in both places when it is already adjusted will result in double counting, which will wrongly increase gross profit. This is a common mistake among students during exams or while doing practical bookkeeping. You must carefully check the trial balance to avoid this error.
- If the stock is not included in the trial balance, you must then record a closing stock entry and post it to the trading account and balance sheet. The presence or absence of stock in the trial balance decides whether you show it in one place or both.
- Always treat this step as a cross-check to maintain the accuracy of final accounts. A single wrong posting due to missing this step can lead to incorrect profit figures and non-compliance with accounting standards.
Treatment of Closing Stock in Final Accounts
The treatment of closing stock in final accounts depends on whether it is already recorded in the books or not. This stock affects both the trading account and the balance sheet. If not treated properly, it can lead to major errors in financial statements. Students should remember the difference between adjusted and unadjusted closing stock.
If the closing stock has not yet been adjusted, it must be shown in both the trading account and balance sheet. If it has already been adjusted, then it is only shown on the balance sheet. These differences play a big role during the preparation of final accounts.
Case 1: Closing Stock Not in Trial Balance
In this case, the business has not yet recorded the closing stock in the books. This means the value is not adjusted for purchases or any other accounts. This is a very common scenario in exam problems and real-life accounting. Here, you must pass the closing stock journal entry as:
| Closing Stock A/c Dr To Trading A/c |
After passing this entry, the treatment of closing stock in final accounts will be as follows:
- Show closing stock on the credit side of the trading account. This helps increase gross profit by lowering the cost of goods sold.
- Show the same value in the balance sheet under current assets to reflect the value of unsold goods.
This double treatment is required because the stock was not previously included anywhere in the books. Showing the closing stock in both places ensures that financial statements reflect the actual picture of inventory and profit.
If you miss either part, it will either understate your profit or miss an asset on the balance sheet. Therefore, this treatment is not optional but mandatory for correct accounting.
Case 2: Closing Stock in Trial Balance
In this case, the closing stock is already shown in the trial balance, which means the necessary adjustment has already been made in the ledger. You do not need to pass any journal entries again. The purchases have already been reduced to reflect this value, or a closing stock adjustment entry has already been passed.
- Here, your job is simpler. You only need to show the closing stock in the balance sheet under current assets. Do not include it in the trading account because it has already been adjusted, and doing so again will overstate the profit.
- This method simplifies the final accounting process. It avoids confusion and ensures there is no duplication. It also reduces errors, especially in large businesses that adjust entries automatically.
- Such cases are very common in system-generated trial balances or computerized accounting software. Always check whether a closing stock is present in the trial balance before deciding on the treatment.
Trading Account Presentation
The trading account shows all income and expenses related to the purchase and sale of goods. It is used to calculate the gross profit or loss during a financial year. When the closing stock is not adjusted, it is shown on the credit side of the trading account.
| Particulars | Amount |
| By Closing Stock | ₹XX |
This figure increases the total credit side, reducing the difference between purchases and sales. It helps calculate the gross profit by removing the cost of unsold goods from the expenses.
If you forget to show closing stock here when required, your profit will be underreported. This leads to misinterpretation of the business’s performance. So, including the correct closing stock entry in the trading account is essential when it is not already in the trial balance.
Balance Sheet Presentation
In the balance sheet, the closing stock is always shown on the assets side, under the heading Current Assets. This is because closing stock represents goods that the business owns at year-end and will likely sell in the next period.
| Assets | Amount |
| Current Assets: – Closing Stock | |
| ₹XX |
This placement shows the value of unsold inventory that still holds economic value. It also helps stakeholders understand the company’s liquidity and asset strength.
No matter whether the closing stock is adjusted or unadjusted, it must be shown in the balance sheet. However, the value shown must be lower in cost or market value as per accounting principles. This ensures accuracy and compliance with financial standards.
Closing Stock Journal Entry with Example
Let’s look at a detailed closing stock example to understand how it is treated in journals and final accounts. Practical examples are very useful for students learning how to record closing stock correctly.
Example 1: Stock Not Adjusted in Trial Balance
A company has ₹1,20,000 worth of unsold goods on 31st March, and this value is not included in the trial balance.
Journal Entry
Closing Stock A/c Dr ₹1,20,000
To Trading A/c ₹1,20,000
Trading Account
| Particulars | Amount |
| By Closing Stock | ₹1,20,000 |
Balance Sheet
| Current Assets: | Amount |
| Closing Stock | ₹1,20,000 |
Since the closing stock is unadjusted, it must be shown in both the trading account and the balance sheet.
Example 2: Stock Already Adjusted in Trial Balance
The same company is now preparing the final accounts for next year. This time, the closing stock of ₹1,20,000 is already shown in the trial balance.
Journal Entry:
Closing Stock A/c Dr ₹1,20,000
To Purchases A/c ₹1,20,000
Balance Sheet
| Current Assets: | Amount |
| Closing Stock | ₹1,20,000 |
This time, since the stock has already been adjusted, it is only shown on the balance sheet. It is not shown in the trading account to avoid double counting.
Relevance to ACCA Syllabus
Since financial reporting is a core part of the ACCA syllabus, understanding how to treat closing stock (inventory) through journal entries ensures accurate preparation of financial statements in compliance with international accounting standards (IAS 2). This knowledge supports more complex topics such as consolidation, financial analysis, and performance evaluation.
Closing Stock Journal Entry ACCA Questions
Q1: What is the correct journal entry to record closing stock at the end of an accounting period? A) Debit Inventory, Credit Purchases
B) Debit Cost of Sales, Credit Inventory
C) Debit Inventory, Credit Cost of Sales
D) Debit Purchases, Credit Inventory
Ans: C) Debit Inventory, Credit Cost of Sales
Q2: Under IAS 2, inventories should be measured at:
A) Cost
B) Net Realizable Value
C) Cost or Net Realizable Value, whichever is higher
D) Cost or Net Realizable Value, whichever is lower
Ans: D) Cost or Net Realizable Value, whichever is lower
Q3: Which of the following financial statements does the closing stock appear on?
A) Income Statement only
B) Balance Sheet only
C) Both Income Statement and Balance Sheet
D) Cash Flow Statement
Ans: C) Both Income Statement and Balance Sheet
Q4: Failure to include closing stock in financial statements will:
A) Overstate gross profit
B) Understate net income
C) Overstate assets
D) Understate liabilities
Ans: B) Understate net income
Q5: Which of the following is not a method of inventory valuation under IAS 2?
A) FIFO
B) LIFO
C) Weighted Average
D) Specific Identification
Ans: B) LIFO
Relevance to US CMA Syllabus
The Certified Management Accountant (CMA) syllabus includes costing and financial decision-making. Understanding the treatment of inventory and its impact on the cost of goods sold is essential for preparing internal management reports and financial analysis, especially in manufacturing and trading organizations.
Closing Stock Journal Entry CMA Questions
Q1: How does closing stock affect the cost of goods sold in managerial accounting?
A) It increases it
B) It decreases it
C) It has no impact
D) It is reported separately
Ans: B) It decreases it
Q2: What journal entry is used to record the closing stock in management accounting?
A) Debit Inventory, Credit COGS
B) Debit COGS, Credit Inventory
C) Debit Inventory, Credit Revenue
D) No entry is required
Ans: A) Debit Inventory, Credit COGS
Q3: If ending inventory is overstated, the result will be:
A) Understated gross profit
B) Overstated expenses
C) Overstated net income
D) Understated equity
Ans: C) Overstated net income
Q4: In a manufacturing setup, closing stock of finished goods is:
A) Expensed in the period
B) Not recorded
C) Included in the cost of sales
D) Carried as an asset
Ans: D) Carried as an asset
Q5: The perpetual inventory system records inventory:
A) Annually
B) When physically counted
C) Continuously
D) Only at the end of the year
Ans: C) Continuously
Relevance to US CPA Syllabus
The CPA syllabus emphasizes GAAP-based financial reporting. The proper accounting of closing stock ensures accurate profit reporting and balance sheet preparation. Inventory valuation and recognition are key aspects of CPA exam sections such as FAR and AUD.
Closing Stock Journal Entry CPA Questions
Q1: What journal entry records end up in the inventory under US GAAP?
A) Debit COGS, Credit Inventory
B) Debit Inventory, Credit COGS
C) Debit Purchases, Credit Inventory
D) No entry is recorded
Ans: B) Debit Inventory, Credit COGS
Q2: Overstating closing stock results in:
A) Understated assets
B) Overstated cost of goods sold
C) Understated profit
D) Overstated net income
Ans: D) Overstated net income
Q3: Which accounting principle ensures inventory is not overstated?
A) Conservatism
B) Matching
C) Consistency
D) Full Disclosure
Ans: A) Conservatism
Q4: Closing inventory is classified in the balance sheet under:
A) Current liabilities
B) Current assets
C) Non-current assets
D) Equity
Ans: B) Current assets
Q5: Which method is not acceptable under US GAAP?
A) FIFO
B) LIFO
C) Weighted Average
D) Replacement Cost
Ans: D) Replacement Cost
Relevance to CFA Syllabus
The CFA curriculum includes financial reporting and analysis. Analysts must understand how inventory valuation impacts financial ratios, profitability, and decision-making. It’s essential in evaluating company performance and forecasting future earnings.
Closing Stock Journal Entry CFA Questions
Q1: How does ending inventory affect gross profit?
A) Increases it
B) Decreases it
C) No impact
D) Only affects the balance sheet
Ans: A) Increases it
Q2: In financial analysis, inventory is considered:
A) Non-current asset
B) Intangible asset
C) Current asset
D) Deferred expense
Ans: C) Current asset
Q3: Which method can lead to the lowest taxable income in times of rising prices?
A) FIFO
B) LIFO
C) Specific Identification
D) Weighted Average
Ans: B) LIFO
Q4: Which of the following impacts the current ratio directly?
A) Retained earnings
B) Inventory
C) Depreciation
D) Equity
Ans: B) Inventory
Q5: Which financial metric is directly influenced by closing stock?
A) Return on Equity
B) Net Present Value
C) Gross Margin
D) Price to Earnings Ratio
Ans: C) Gross Margin
