Closing Stock, Opening Stock :: Recording Journal Entries

Recording the Value of Closing Stock

The valuation of closing stock and recording of the value of closing stock in the books are two different aspects. After ascertaining the value of the closing stock, it is to be brought into the books of accounts.
The basic purpose of accounting is derivation of information and the more information we need the more the accounting heads we need to maintain.

For each additional piece of information that we intend to derive from the books of accounts, we create and use an additional ledger account.

Thus, to derive the information relating to Closing Stock we maintain a real account by name Closing Stock. Closing Stock a/c gives the information relating to the value of the stock (as an asset) unsold at the end of the accounting period.

Recording the Value

The value of closing stock is not available ready hand in the books of accounts. It is ascertained at the end of the accounting period by physical verification of stock and its valuation at cost or market price whichever is lower or through the inventory records that it maintains.

By recording the journal entry, this value of Closing Stock is brought into books of accounts.

Debit : Closing Stock a/c

Assets are represented by real accounts. They carry a debit balance.

By recording the journal entry for bringing the value of closing stock into books, we create the asset by name Closing Stock a/c. For this we have to debit the Closing Stock a/c.

Closing Stock a/c

Asset

Real a/c

Debit
[Debit what comes in]

Credit :

There are three possible variations in the account to be credited for recording the value of closing stock.
  1. Trading a/c
  2. Cost of Goods Sold a/c
  3. Purchases a/c

The ledger account to be credited is dependent on which account is used to reflect the value of cost of goods sold as well as the time of recording the entry.

Recording Closing Stock - Crediting Trading a/c

Direct Incomes/Expenses transferred to Trading a/c

If the opening stock, current period purchases and related direct expenses are being transferred at the end of the accounting period to the Trading a/c , then the value of closing stock should also be adjusted through the Trading a/c itself so that the Trading a/c reflects the cost of goods sold.

Journal/Ledger

The Journal entry for recording the value of closing stock at the time of preparation of final accounts would be
Journal in the books of M/s ___ for the period from ____ to ____
Date V/R
No.
Particulars L/F Amount
(Dr)
Amount
(Cr)
31st Dec Closing Stock a/c
To Trading a/c
Dr
36,000
36,000
[For bringing the value of Closing Stock into the books.]
Trading a/c
DrCr
Particulars Amount Particulars Amount
To Opening Stock
To Purchases
To Direct Expenses
20,000
2,48,000
54,000
By Closing Stock
By Stock Used for
      Non Trading Purposes
By Cost of Goods Sold
36,000

14,000
2,72,000
  3,22,000   3,22,000
To Cost of Goods Sold
To Gross Profit
2,72,000
1,08,000
By Sales 3,80,000
  3,80,000   3,80,000

The cost of goods sold a/c is an intermediary account whose only purpose is to enable using appropriate terms in the Trading a/c.

Closing Stock a/c
DrCr
Particulars Amount Particulars Amount
To Trading a/c
36,000
By Balance c/d
36,000
  36,000   36,000

If the Trading a/c is made up without ascertaining the cost of goods sold, it would be as below.

Trading a/c
DrCr
Particulars Amount Particulars Amount
To Opening Stock
To Purchases
To Direct Expenses
To Gross Profit
20,000
2,48,000
54,000
1,08,000
By Sales
By Stock Used for
      Non Trading Purposes
By Closing Stock
3,80,000

14,000
36,000
  4,30,000   4,30,000

Recording Closing Stock - Crediting Cost of Goods Sold a/c

Where the organisation intends to segregate calculation of cost of goods sold and gross profit into two distinct ledger accounts, the cost of goods sold account is made to function as a full fledged ledger account instead of being just an intermediary account.

Direct Expenses transferred to Cost of Goods Sold a/c

In such a case, the opening stock, current period purchases and the direct expenses thereon are transferred to the Cost of Goods Sold a/c. The adjustments relating to closing stock and stock used for purposes other than trading are also be made through this account so that the final balance in this account would be the cost of goods sold.

Journal/Ledger

The Journal entry for recording the value of closing stock at the time of preparation of final accounts would be
Journal in the books of M/s ___ for the period from ____ to ____
Date V/R
No.
Particulars L/F Amount
(Dr)
Amount
(Cr)
31st Dec Closing Stock a/c
To Cost of Goods Sold a/c
Dr
36,000
36,000
[For bringing the value of Closing Stock into the books.]
Cost of Goods Sold a/c
DrCr
Particulars Amount Particulars Amount
To Opening Stock
To Purchases
To Direct Expenses
20,000
2,48,000
54,000
By Stock Used for
      Non Trading Purposes
By Closing Stock
By Trading a/c

14,000
36,000
2,72,000
  3,22,000   3,22,000

The balance of the cost of goods sold a/c is transferred to the Trading a/c which would ultimately reveal the gross profit.

Trading a/c
DrCr
Particulars Amount Particulars Amount
To Cost of Goods Sold
To Gross Profit
2,72,000
1,08,000
By Sales 3,80,000
  3,80,000   3,80,000
Closing Stock a/c
DrCr
Particulars Amount Particulars Amount
To Trading a/c
36,000
By Balance c/d
36,000
  36,000   36,000

Recording Closing Stock - Crediting Purchases a/c

Where the following conditions exist, we can credit Purchases a/c with the value of closing stock.
  • Closing stock is physically relatable to the stock that has been purchased during the current period.

    This would be the case where FIFO method is adopted for physical usage of stock.

  • There are no direct expenses in relation to the stock purchased during the current period

    (Or)

    The value of closing stock does not include the direct expenses incurred during the current period

This much amount of the stock purchased has not yet been sold. If this method is adopted, the purchases account balance that is transferred to the Trading a/c or the Cost of Goods a/c represents the current year purchases which have been disposed off.

Journal/Ledger

The Journal entry for recording the value of closing stock in the books would be
Journal in the books of M/s ___ for the period from ____ to ____
Date V/R
No.
Particulars L/F Amount
(Dr)
Amount
(Cr)
31st Dec Closing Stock a/c
To Purchases a/c
Dr
36,000
36,000
[For bringing the value of Closing Stock into books.]
Purchases a/c
DrCr
Date Particulars Amount Date Particulars Amount
1st-31st To Cash/Bank/Crs 2,48,000 31/12/_5
31/12/_5
By Closing Stock
By Trading a/c
36,000
2,12,000
    2,48,000     2,48,000
Trading a/c
DrCr
Particulars Amount Particulars Amount
To Opening Stock
To Purchases
To Direct Expenses
20,000
2,12,000
54,000
By Stock Used for
      Non Trading Purposes
By Cost of Goods Sold

14,000
2,72,000
  2,86,000   2,86,000
To Cost of Goods Sold
To Gross Profit
2,72,000
1,08,000
By Sales 3,80,000
  3,80,000   3,80,000
Theoretically we can credit the value of closing stock to Purchases a/c only when the above conditions are satisfied. However it conventionally is used in other situations also.

Recording Closing Stock before preparation of final accounts

We credit the Trading a/c or Cost of Goods Sold a/c for bringing the value of closing stock into books only if we are recording the value of closing stock at the time of preparation of final accounts.

Since the valuation of closing stock is something that can be and normally will be completed immediately after the last day of the accounting period and final accounting is something that is carried on some days after the end of the accounting period, we need not wait till the final accounts are prepared to bring the closing stock into the books of accounts. In such cases we credit the Purchases a/c in the journal entry for recording the value of closing stock.

If closing stock is being handled as an adjustment, we assume that closing stock is being recorded at the time of preparation of final accounts.

Closing Stock a/c : Opening Stock a/c

The Closing Stock a/c at the end of an accounting period and the Opening Stock a/c at the beginning of the subsequent accounting period represent the same account.

At the end of an Accounting Period

The closing balances in all the ledger accounts are carried forward to the subsequent accounting periods.

Every ledger posting should have a journal support.

Closing Entry

The journal entry recorded at the end of the accounting period for closing the books of accounts supports the carry forward of balances in ledger accounts and is called the Closing entry.
Journal in the books of M/s ___ for the period from ____ to ____
Date V/R
No.
Particulars L/F Amount
(Dr)
Amount
(Cr)
31st Dec Creditors a/c
Bank Loan a/c
Profit & Loss Appropriation a/c
Capital a/c
To Closing Stock a/c
To Cash a/c
To Debtors a/c
To Furniture a/c
Dr
Dr
Dr
Dr








48,000
63,000
54,000
1,00,000




36,000
42,000
1,26,000
61,000
[For the balances in the ledger accounts carried forward to the subsequent accounting period.]

Closing Balance Sheet

The closing Balance Sheet is a statement of balances that are carried forward to the subsequent accounting periods.
Balance Sheet of M/s ______ as on the Last Day
Liabilities Amount Assets Amount
Capital
Profit & Loss Appropriation
Creditors
Bank Loan
1,00,000
54,000
48,000
63,000
Cash
Closing Stock
Debtors
Furniture
42,000
36,000
1,26,000
61,000
  2,65,000   2,65,000

At the beginning of the subsequent Accounting Period

All the ledger accounts that have been brought forward from the prior accounting priod would show an opening balance equal to the amount of balance brought forward.

Opening Balance Sheet

The opening Balance Sheet is a statement of balances that are brought forward from the prior accounting periods.

The opening balance sheet of an accounting period and the closing balance sheet of the prior accounting period are the same.

Balance Sheet of M/s ______ as on the First Day
Liabilities Amount Assets Amount
Capital
Profit & Loss Appropriation
Creditors
Bank Loan
1,00,000
54,000
48,000
63,000
Cash
Closing Stock
Debtors
Furniture
42,000
36,000
1,26,000
61,000
  2,65,000   2,65,000

Every ledger posting should have a journal support.

Opening Entry

The journal entry recorded at the beginning of the accounting period for opening the books of accounts supports the bringing forward of balances in ledger accounts and is called the Opening entry.

The opening entry is based on the opening balance sheet.

Journal in the books of M/s ___ for the period from ____ to ____
Date V/R
No.
Particulars L/F Amount
(Dr)
Amount
(Cr)
31st Dec Cash a/c
Opening Stock a/c
Debtors a/c
Furniture a/c
To Capital a/c
To Profit & Loss Appropriation a/c
To Bank Loan a/c
To Creditors a/c
Dr
Dr
Dr
Dr








42,000
36,000
1,26,000
61,000




1,00,000
54,000
63,000
48,000
[For the opening balances in the various ledger accounts brought forward into the books of accounts from the previous accounting period.]

In the Opening Entry, the phrase Closing Stock is replaced by the phrase Opening Stock.

Closing Stock - Adjustment during Final Accounting

The value of closing stock is ascertained through physical verification of the stock and its valuation at cost or market price whichever is lesser.

Thus recording the entries for bringing in the value of closing stock into books may not be complete by the time trial balance is drawn up.

If the value of closing stock is not available (or is not recorded) by the time of making up the trial balance at the end of the accounting period, it would appear as a part of the transactions appended to the trial balance which are to be adjusted.

Adjustment is bringing in the effect of the transactions through mathematical operations of addition and subtraction. The adjustments to be made can be found out by ascertained the net effect of the journal entries to be recorded.

Where nothing is mentioned as to the account to be credited in recording closing stock, we assume the Trading a/c or Purchases a/c to have been credited.

Where closing stock is recorded by crediting its value to the

  • Trading a/c

    Working notes for adjustments
    Net Entry Adjustment Side Where
    Dr. Closing Stock a/c
    Cr. Trading a/c
    1. () as Closing Stock
    2. () as Closing Stock
    Assets
    Credit
    B/S
    Trdg

    Read as

    1. Show as Closing Stock on the Assets side of the Balance Sheet
    2. Show as Closing Stock on the Credit side of the Trading a/c
  • Cost of Goods Sold a/c

    Working notes for adjustments
    Net Entry Adjustment Side Where
    Dr. Closing Stock a/c
    Cr. Cost of Goods sold a/c
    1. () as Closing Stock
    2. () as Closing Stock
    Assets
    Credit
    B/S
    CGS

    Read as

    1. Show as Closing Stock on the Assets side of the Balance Sheet
    2. Show as Closing Stock on the Credit side of the Cost of Goods sold a/c

    Use of Cost of Goods sold account is not assumed unless there is a specific indication indicating the same.

  • Purchases a/c

    Working notes for adjustments
    Net Entry Adjustment Side Where
    Dr. Closing Stock a/c
    Cr. Purchases a/c
    1. () as Closing Stock
    2. () from Purchases
    Assets
    Debit
    B/S
    Trdg

    Read as

    1. Show as Closing Stock on the Assets side of the Balance Sheet
    2. Deduct from Purchases on the Debit side of the Trading a/c

Closing Stock in Trial Balance - Interpretation

Where Closing Stock a/c is present in the Trial Balance, it is an indication that the Journal entry for recording the value of closing stock has already been recorded.

Dealing with Closing Stock a/c in the Trial Balance

The Closing Stock balance shown in the trial balance represents an asset and thus the Closing Stock a/c is a Real account.

An item appearing in the Trial Balance has to be considered only once in final accounting. Thus, based on its nature, the Closing Stock a/c appearing in the trial balance, being a real account, is shown on the assets side of the Balance Sheet.

What was the Journal Entry used?

The Journal entry used for recording the value can be assessed based on what ledger accounts are present in the Trial Balance

Trading a/c appears in the Trial Balance

Trial Balance of M/s ___ as on 30th June 20_5
Particulars L/F Amount
(Dr)
Amount
(Cr)
Opening Stock
Purchases

Closing Stock

Trading








20,000
2,48,000

36,000



 




36,000

Total  

Because the Closing Stock a/c and Trading a/c both appear in the Trial balance, we may assume that the Closing Stock has been recorded by crediting the Trading a/c.

Journal
Particulars
Closing Stock a/c
To Trading a/c
Dr

We cannot rule out the possibility of the closing stock being recorded by crediting the Purchases a/c just because Trading a/c appears in the Trial balance.

Closing Stock a/c, Purchases a/c appear but Trading a/c does not

Trial Balance of M/s ___ as on 30th June 20_5
Particulars L/F Amount
(Dr)
Amount
(Cr)
Opening Stock a/c
Purchases a/c

Closing Stock a/c










20,000
2,12,000

36,000



 






Total  

Because the Closing Stock a/c and Purchases a/c both appear but the Trading a/c does not appear in the Trial balance, we may assume that the Closing Stock has been recorded by crediting the Purchases a/c.

Journal
Particulars
Closing Stock a/c
To Purchases a/c
Dr

Closing Stock a/c appears but Trading a/c and Purchases a/c do not

Trial Balance of M/s ___ as on 30th June 20_5
Particulars L/F Amount
(Dr)
Amount
(Cr)

Goods Consumed

Closing Stock a/c











2,32,000

36,000



 






Total  

Because the Closing Stock a/c appears but both the Purchases a/c and the Trading a/c do not appear in the Trial balance, we may assume that the Closing Stock has been recorded by crediting an account that was used to ascertain the cost of goods sold like the Cost of Goods Sold a/c.

Journal
Particulars
Closing Stock a/c
To Cost of Goods Sold a/c
Dr

If not cost of goods sold, there would be an account with some similar name in use that represents the account used for ascertaining the cost of goods sold.