Term Closing stock under Indian Tax

Posted on 22 April 2023 Category : Indian Tax Terms

What is Closing stock under Indian Tax

In this article, the information about Closing stock is explained

Closing stock

Closing stock is the amount of inventory that a business still has on hand at the end of a reporting period. This includes raw materials, work-in-process, and finished goods inventory. The amount of closing stock can be ascertained with a physical count of the inventory. It can also be determined by using a perpetual inventory system and cycle counting to continually adjust inventory records to arrive at ending balances.

The amount of closing stock (properly valued) is used to arrive at the cost of goods sold in a periodic inventory system with the following calculation:

Opening stock + Purchases - Closing stock = Cost of goods sold

The opening stock for the next accounting period is the same as the closing stock from the immediately preceding period.

There are a variety of methods available for calculating the recorded value of closing stock, including:

i. First in, first out method

ii. Last in, first out method

iii. Retail inventory method

iv. Weighted average method

After one of these methods has been used to calculate the value of closing stock, it may be further adjusted due to the lower of cost or market (LCM) rule, which states that an inventory item must be recorded at the lower of its cost or its current market value. From a practical perspective, the LCM rule is followed perhaps once a year, in order to be in compliance with Generally Accepted Accounting Principles (GAAP) for the annual audit. During most months, LCM is not an issue.

Certain items charged to expense as incurred, such as production supplies, are not considered to be part of closing stock.

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