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Profit and Loss › Closing stock
Closing stock valuation
The rule for valuing stock at the year end, a worked example, why it changes your profit, and how to count stock.
The rule: cost or net realisable value, whichever is lower
Under AS 2 (Valuation of Inventories), closing stock is valued at cost or net realisable value, whichever is lower, item by item. For income tax, ICDS II gives the same rule.
- Cost is the purchase price plus freight and other costs of bringing the goods to the shop, less trade discounts, without GST you can claim as input credit.
- Net realisable value is the price you can sell it for now, less the cost of selling it. Damaged, old or out-of-fashion goods are often worth less than they cost.
- Cost is worked out by FIFO (first in, first out) or the weighted average. LIFO is not allowed. Use the same method every year.
Worked example: weighted average
| Step | Working | Result |
|---|---|---|
| Bought 100 units at ₹50 and 200 units at ₹56 | (5,000 + 11,200) ÷ 300 | ₹54 a unit |
| Sold 180 units, 120 left | 120 × 54 | ₹6,480 at cost |
| Selling price fell to ₹52, selling cost ₹2 | 120 × (52 − 2) | ₹6,000 net realisable value |
| Value in the books | lower of 6,480 and 6,000 | ₹6,000 |
Why it matters
Closing stock reduces the cost of goods sold, so every rupee of closing stock is a rupee of profit. Stock valued too high shows a profit that does not exist (and tax on it); too low hides profit. This year's closing stock is next year's opening stock, so a mistake moves into the next year too.
Counting the stock
- Count every item on the last day of the year (31 March), before the shop opens on 1 April.
- Set aside damaged, expired or slow items and value them at what they can be sold for.
- Compare the count with the stock register and record the shortage or excess with a reason.
- Keep the count sheet signed and dated: your CA and, for a bank loan, the bank may ask for it.
From the stock register. The Nivesh Sahayak stock register (stock.niveshsahayak.in) keeps quantities from your bills and values them at the weighted average cost. The profit and loss tool uses that value unless you type your own after the count, for example after marking items down to net realisable value.
See your profit for this year.Open the tool