Closing Stock:

As stated above, the gross profit or gross loss is calculated by comparing the cost of goods sold with the sales. Hence, it is necessary to understand how the cost of goods sold is worked out. Let us take the case of a trader. If all the goods purchased have been sold out, the cost of goods sold will be equal to the cost of goods purchased. But, normally all the goods bought in a particular period are not completely sold out by the end of that period. Some goods may remain unsold known as closing stock. Hence. the cost of goods sold is usually arrived at by adjusting the cost of closing stock in the cost of goods purchased. 

For example, during 1986 a trader bought goods worth Rs. 2,50,000. At the end of 1986 he had a closing stock (unsold goods) for Rs. 50,000. The cost of goods sold will be worked out as under

As already stated, closing stock must be taken into account for determining the cost of goods sold. For finding out the amount of closing stock, each product lying unsold at the end of the year is physically counted and their complete list is prepared. Then each product is valued at cost price or the market price whichever is lower. 

üThus the total value of closing stock is worked out at the end of the accounting year for the purpose of preparing the final accounts. This is called stock taking. Remember that the closing stock does not appear in the Trial Balance. It is an item of an additional information which needs an adjustment at the time of preparing the final accounts. The closing stock is shown on the credit side of the Trading Account and also as an asset in the Balance Sheet. The following journal entry is passed in the Journal Proper to record the amount of closing stock.

Stock (closing) Account Dr.

To Trading Account (Being the value of closing stock brought into account)