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Stock › Closing stock valuation
How to value closing stock
Why closing stock changes your profit, what counts as cost, and how weighted average and FIFO work, with one example done both ways.
Why the closing stock value matters
Profit is sales minus the cost of the goods you sold. Cost of goods sold = opening stock + purchases − closing stock. So every rupee you put on closing stock changes your profit by a rupee: too high a value shows profit you did not make, too low hides it.
The basic rule: cost or what it will fetch, whichever is lower
The accounting standard on inventories (AS 2, Valuation of Inventories, issued by ICAI) values stock at cost or net realisable value, whichever is lower. Net realisable value is the price you can expect to sell it for, less the cost of selling. Old, damaged or out-of-fashion goods may be worth less than they cost, and then they go in at the lower figure.
What counts as cost
- The purchase price after trade discount, plus freight and other costs of bringing the goods to your shop or godown.
- Without GST when you claim input tax credit on it (the GST comes back to you as credit). If you cannot claim credit, for example under composition, the GST paid is part of the cost.
Two common ways to work out cost
AS 2 allows first-in first-out (FIFO) or weighted average cost. This tool uses weighted average: (value of opening stock + value of purchases) ÷ (opening quantity + purchased quantity).
Worked example
Opening stock 10 bags at ₹1,000 = ₹10,000. Purchase 20 bags at ₹1,200 = ₹24,000. Average cost = ₹34,000 ÷ 30 = ₹1,133.33 a bag. With 9 bags left, the closing stock is 9 × ₹1,133.33 = ₹10,199.97.
By FIFO the 9 bags left are from the latest purchase, so they go in at ₹1,200: ₹10,800. Both are allowed; pick one method and use it every year, because switching methods changes profit.
When to use the figure
Take the stock summary on 31 March (set the dates From 1 April to 31 March) for the year's accounts. Banks often ask for a monthly stock statement against a cash credit limit; the same summary on the last day of the month is what they want, but check the format your bank asks for.