Closing Stock Accounting

a)     Traditional Method (Purchase-Based Accounting)

In the traditional method, all purchases made during the year are treated as direct expenses in the Trading Account. Closing stock is valued at year-end and recorded through an adjustment entry, credited to the Trading Account and shown as a current asset in the Balance Sheet. This method suits manual accounting systems without integrated inventory control.

✅ Key Significance

• ✅ All purchases are treated as expenses, not inventory.
• ❌ Closing stock isn’t recorded during the year, only adjusted at year-end.
• ✅ Stock value is based on physical verification and valuation.
• ✅ Closing stock is credited to Trading A/c, debited to asset account.
• ✅ Commonly used with T-format, but also suits vertical format.
• ❌ Doesn’t track consumption separately, but allows it to be derived.

Sample Entries:

Sl.No.	Particulars		Debit ₹	Credit ₹
1	Purchase A/c	Dr	1,00,000
	To Bank / Supplier A/c			1,00,000
	(being purchase of materials)
3	Customer A/c		95000
	To Sales A/c			95,000
	(Being goods sold to customer)
2	Closing Stock A/c		25,000
	To Trading A/c			25,000
	(being closing stock valued as on date/month/year)

 

1. i) Consumption Calculation – T Format

In the T-format Trading Account, items like Opening Stock, Purchases, and Closing Stock are shown as separate line items. The value of consumption (cost of goods sold) is not shown directly but is implied through the balancing of the account.

• The format does not display a direct formula or calculation line for COGS.
• Consumption is understood as the net of stock movement and purchases, leading to gross profit.

Format & Example:

Trading Account
Particulars	Amount ₹	Particulars	Amount ₹
To Opening Stock	10,000	By Sales Accounts	90,000
To Purchases Accounts	1,00,000	By Closing Stock	25,000
Gross Profit	5,000
Total	1,15,000	Total	1,15,000

 

1. ii) Consumption Calculation – Vertical Format

In the vertical format, only the net consumption (COGS) is shown directly in the Profit & Loss Statement. The internal calculation is based on stock movement, but only the final consumption figure appears in the report.

• Formula Used: COGS / Consumption = Opening Stock + Purchases – Closing Stock

Format & Example:

Trading and Profit & Loss A/c
Particulars	Amount ₹	Amount ₹
Sales Income		90,000
Cost of Sales:
Opening Stock	10,000
Add: Purchase	1,00,000
Less: Closing Stock	-25,000	85,000
Gross Profit		5,000

b)     Inventory-Ledger Method

In this method, all purchases are recorded as inventory under Current Assets, not as direct expenses. At the end of the period, only the consumed portion is transferred to the Trading Account, while the unconsumed stock remains as closing inventory.

✅ Key Significance (Mixed):

• ✅ Better matches actual usage with revenue recognition
• ✅ Continuously updates the stock ledger and balances accurately
• ❌ Requires inventory tracking system or integrated stock module
• ❌ Consumption must be separately calculated and journalized manually

Sample Entries:

Sl.No.	Particulars		Debit ₹	Credit ₹
1	Stock A/c	Dr	1,00,000
	To Bank / Supplier A/c			1,00,000
	(Being purchase of materials recorded as inventory)
2	Consumption A/c		85,000
	To Stock A/c			85,000
	(Being value of goods consumed during the year)

(* ₹ 25,000 remains in Stock A/c as closing inventory *)

c)     Impact of Change in Closing Stock Value

Change in Stock Value	Impact on Profit	Impact on Assets	Impact on Consumption / Cost of Sales
Increase in Closing Stock	Gross Profit ↑, Net Profit ↑	Current Assets ↑	COGS ↓, Consumption ↓
Decrease in Closing Stock	Gross Profit ↓, Net Profit ↓	Current Assets ↓	COGS ↑, Consumption ↑
Overvaluation (by mistake)	Profit overstated	Assets overstated	COGS understated, Consumption understated
Undervaluation (by mistake)	Profit understated	Assets understated	COGS overstated, Consumption overstated