To use this relation to find the value of closing stock, we need to be in the know of the ascertained value of cost of goods sold. All other information can be obtained from the accounting records. To use this relation to find the value of closing stock, we need to be in the know of gross profit. Using a fixed value for Gross Profit is possible only if the organisation is in the know of the cost of goods sold for every sale. Knowing the cost of goods sold for each sale is a possibility in organisations which maintain cost accounting records or inventory records with values for all products they deal with.

Where such records are being maintained the value of closing stock will also be available readyhand in the same records and as such the need to calculate gross profit this way does not arise.

For this to be happening, apart from the fixed gross profit that the organisation intends to make from each sale, it should also be in the know of the cost of goods sold for each sale so as to add the gross profit to it and arrive at a selling price.

This would involve a lot of work and would be impractical, more so where there are a large number of products being dealt with. Depending on the customer to whom the product is being sold, the prices may be varied a discount may be given to loyal customers etc.

In such a situations there would not be uniformity in the Gross profit percentage and it would be near to impossible to ascertain the gross profit made using the sales figures.

Since using the figure of gross profit to ascertain the value of closing stock available in the organisation is not a feasible idea, we look at other methods for finding out the value of closing stock. Gross Profit is 1 6 t h of Cost. The value of closing stock is available ready hand only if inventory records are being maintained that too along with the value details. This may be possible if the organisation maintains cost accounting records. The information relating to the value of closing stock is not regularly required by the organisation.

It is required at the end of the accounting period for preparation of final accounts, both in ascertaining gross profit or cost of goods sold and for being included in the assets in the balance sheet.

Therefore, in considering the Market Price to be used for valuation, care should be taken to ensure that such expenses are deducted from the sales price to ascertain the net realisable value of stock.

Batch M and N are regularly sold at 50 and 40 per unit respectively. The current stock of Batch M is an outdated model of the product and the market conditions would enable the stock to be sold only at a price of 30 per unit.

Reducing a credit will have the same effect as increasing a debit. Thus reduction in value of closing stock can also be interpreted as taking up an additional debit which will result in a lower profit. We may consider such a loss a certainty in cases where the stock is required to be sold at the lower price on account of it becoming obsolete, losing demand etc.

Bu where the lower market rate is on account of normal market fluctuation and if the rates go up in the subsequent period and the product can be sold at a higher price, this loss may not have to be incurred. Like other nominal accounts it is closed at the end of the accounting period.

Academy Almanac Exam Papers News Blog Contact. Closing Stock, Opening Stock - Ascertainment and Valuation. We will be able to ascertain what is left out if we know what has been sold. This logic may be applied in finding the value of closing stock. Fixed value for Gross Profit The organisation may consider Gross profit at a fixed value for each item it sells. Cost of goods sold should be known for each sale. If sale price is fixed If the sale price is also a fixed value for each sale, then it amounts to the cost of goods sold also being a fixed value for each sale.

Gross Profit may be ascertained without having to know the value of closing stock only if there is some way to ascertain the value of cost of goods sold and the gross profit is taken at fixed value or a fixed percentage of cost or sales.

Gross profit percentages are generally fixed based on historical cost data or based on policy decisions and are maintained for a substantial period of time.

The gross profit earned by an organisation is in almost all cases not a figure that can be easily derived without the availability of the value of closing stock. Deriving the value of closing stock would be far easier than deriving the value of gross profit made based on sales. Variety of Products being Sold The organisation may be selling a number of products with different selling prices and different rates of gross profits.

Variations in Sale Prices The prices charged to customers are dependent on a number of factors like the market conditions, the immediate competition existing in the market, the loyalty of the customers etc.

Depending on the market conditions, some times the prices may be varied instantaneously. Percentage Ratio is the relationship between two quantities of the same units expressed in the form a: Ratio of Gross Profit to sales is 0. To convert to scale, multiply with Gross Profit is 3 8 t h of cost. It is taken as 15 in calculations. To convert to 1 scale, divide with Specific methodology can be adopted in calculations if the numerator is 1, so this is identified as another data type.

The formula used for conversion depends on the form of the data considered. Data on 1 Scale Ratio has to be taken in the decimal form.

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Quantity of Stock The quantitative details of stock would be readily available with the organisation only if the inventory records are being maintained by the organisation, like in the case of an organisation maintaining cost accounting records or specific inventory records. In other cases the quantity of stock would have to be ascertained by physical stock taking.

Value of stock There is no specific ledger account in financial accounting that would give us the information relating to the value of closing stock ready hand. The value of Closing Stock is ascertained by Physical Verification of Stock on the last day of the accounting period and its valuation at Cost or Market Price Net Realisable Value whichever is lesser.

Convention of Conservatism asks us to take into consideration all those expenses and losses of which we are aware, even if they relate to the subsequent accounting periods. By the principle of credit in relation to nominal accounts Credit all Incomes and Gains , we can assume the value to indicate a gain. The convention of conservatism asks us to take into consideration all those expenses and losses relating to the subsequent periods of which we are aware. Therefore, the value of the closing stock at the end of the accounting period and the opening stock at the beginning of the subsequent accounting period are the same.

It represents Stock as an asset. Note The value of Opening and Closing stocks relating to a particular accounting period do not mean the same.

Closing Stock, Opening Stock - Ascertainment and Valuation

They may or may not have the same values. To Opening Stock To Purchases To Direct Expenses To Gross Profit. Cost Net Realisable Regular Price Net Realisable Current Price.