How to do adjustment entry for closing stock?

The value of inventory at the end of the financial year or balance sheet date is called closing stock. Closing stock includes:

• Raw Material
• Work-in-Progress
• Finished Goods

Example:

If the value of raw material is Rs 10,000, value of WIP is Rs 5,000 and value of Finished Goods is Rs 15,000 then value of Closing Stock will be Rs (10,000 + 5,000 + 15,000) = Rs 30,000

Adjustment entries are done on the accrual basis of accounting, that is, income is recorded when earned and not received and expenses are recorded when incurred and not paid. Adjustment entries are usually made before or after the preparation of the trial balance at the end of the accounting period.

If the entries are made after the preparation of the trial balance, then two adjustment entries are recorded while preparing Trading and Profit & Loss A/c.

Since closing stock is an item outside the trial balance, the double-entry would be:

The journal entry

• Trading and Profit & Loss A/c is credited because it is of profit to the company and hence will be shown on the credit side.
• Closing Stock is debited as an asset for the company and it will be recorded for the first time in accounting books, hence, will be debited.

The second adjustment would be to show closing stock on the balance sheet and since the closing stock is an asset it is shown under the head Current Assets.  

In case where adjustment for Closing Stock is to be done before preparation of Trial Balance, then it will be shown on the credit side of the Trial Balance, since it is an asset for the company and will have a credit brought down balance as shown in the image.

Later, while preparing Balance Sheet, Closing Stock will be shown on the Asset side of the Balance Sheet.