Accounting for Closing Stock

by Dennis Hartman

Closing stock refers to the size and value of a business's inventory at the end of a predetermined period of time, such as a tax year or fiscal quarter. While a business can calculate its expected closing stock by subtracting sales from opening stock and adding in new production or purchases, events throughout the inventory system can alter these numbers, making it necessary to have more in-depth inventory management.

Purpose

Businesses account for closing stock for a number of reasons involving financial accounting, operational strategy and internal analysis. The value of a business's inventory stock is an asset that accountants must list on a balance sheet at the end of the fiscal period. Accounting for closing stock also allows a business to determine how well its inventory management system works and how much inventory it can write off as an income tax loss.

Process

To account for its closing stock, a business must first collect inventory data and then perform physical counts wherever it stores goods. For a large retailer, this means compiling return and theft data, sales figures and purchase orders from wholesalers. It also means mandating inventory count at individual retail locations as well as warehouses. Manufacturers perform a similar process by comparing their production figures to sales figures and manual counts of inventory in warehouses.

Turnover Ratio

Businesses that account for closing stock can also produce turnover ratios, which are valuable inventory metrics that help determine business strategy. A turnover ratio, also known as an inventory or stock turnover ratio, indicates how many times during a given period of time a business sells and replaces, or turns over, its inventory. In simplest terms, a turnover ratio is a business's revenue from goods sold divided by the average of its opening and closing stock values. Turnover ratios rely on the value of opening and closing stock, as well as sales figures, to produce a number that guides a business in future manufacturing or buying targets.

Outcome

By accounting for closing stock, a business can manage its inventory and plan its future spending more deliberately. If closing stock is significantly higher than opening stock, it indicates overproduction or excessive buying and an inventory that will cost additional money to store and secure if it continues to grow. Likewise, a low closing stock may indicate the need to increase production in order to be ready for business opportunities such as large purchase orders or spikes in demand. This is why closing stock is among the key figures that a business needs to take control of its inventory.

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