Closing stock or as it is also named as closing inventory is definitely an asset. But trading account is not the same as Inventory account. Inventory, being an asset, should have a debit balance in Inventory account. Trading account is a distinct account and both must not be mixed up together.
The answer to the question “why closing stock is written on the credit side of the trading account” lies in understanding two points:
First, Cost of sales must be matched up with current year’s revenue and as the inventory at the end of the period has not been sold and thus should not be accounted against sales revenue, therefore it must be deducted from cost of sales. That is the conceptual reason why we deduct closing stock from the total of opening inventory and purchases.
Second, in order to account for the inventory at the year end in the trading account, closing entry is passed and due to this closing entry closing stock appears at the credit side of trading account. This is the accounting reason for having it on the credit side. The closing entry is as follows:
Debit: Inventory account
Credit: Trading account
Inventory account is debited as inventory is still with the entity at the end of the period and is an asset so asset will be raised by debiting the inventory account.
Students must understand that at the end of the period this asset is raised because usually it is not known how much stock is still with the entity until stock count and it was all treated as part of cost of sales i.e. trading expense against this period sales.
But as it has not been traded that’s why trading accounting in which cost of sales has been recorded it will be credited to give the correct information of the total inventory consumed in making current period’s sales which is Opening Inventory + Purchases – Closing Inventory.
why closing stock is written in the trading account and in assets side of balance sheet?
please reply!
why opening inventory have a effect on balance sheet ?
am preparing accounts in ca firm where my client could not provide relevant documents from where i can get proper information . so i am trying to solve by only giving closing inventory in IS considering Openig inventory 0 (Zero)but if any opening inventory include its not matching . BS is not matching .
can you provide explanation why BS also have effect of opening inventory ?
Comment:why opening stock being an asset is shown on thedr. side of trading account ?
Thank you for asking Shaweta.
As the year starts and manufacturing resumes, the units available with the entity will be consumed in the production activity. Now that we assume they have already been consumed therefore, they are taken as expenditure or cost or “expense” and forms part of cost of sales calculation.
Well explained. Be blessed where ever you are
Yo said correctly
i need more clarification on this. i was running a report on trial balance and there is stock on credit side of the TB. i asked the accountant why is it showing negative. he said sometime they need to adjust for the figure of stock in store because the quantity of the stock at hand and the one in the system are not tally. for example the system may b showing 7psc of candles and physically there is none. sometimes they will post item that are not in the system which will result into credit balance
what is the treatment for this? i need your swift response.
I don’t agree with the explanation .
we put direct expenses and direct incomes in the trading account and CLOSING STOCK IS AN ASSET. then why we put closing stock, an asset in the trading account?
Technically it is a credit to trading account meaning its a deduction from cost of goods purchased/manufactured to give us a net amount of cost of sales. In short, it is deducted or credited in trading account to determine cost of sales amount of the particular period.
Hope this helps
very well explained