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For anyone who is not familiar with the term ‘closing stock’, in brief, it refers to the unsold goods held at the end of the financial year. To ascertain the true financial position of a company it is necessary to adjust the closing stock at the end of an accounting year.
Adjustment entry of closing stock
The closing stock generally does not appear in the trial balance and is seen as an adjustment entry. We need to pass an adjusting entry before the preparation of final accounts. It is important to note that an adjustment entry is always recorded twice in the books of accounts therefore, the two ways of recording the same for closing stock are as follows:
1. Credit side of the trading account.
2. The asset side of the balance sheet.
The closing stock of ABC Ltd. amounts to 40,000. The journal entries in the books of the company are as follows;
|Closing stock a/c
|To Trading a/c
(being closing stock adjusted)
Placement of closing stock in the trading a/c
Placement of closing stock in the balance sheet
Note: Sometimes, adjusted purchases are given in the trial balance which indicates that the opening as well the closing stock have been adjusted through purchases. It is important to note here that the closing stock will only be recorded on the asset side of the balance sheet and will not appear in the trading a/c.
Hope this helps.