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.
Opening stock + Purchases - Closing stock = Cost of goods sold
The opening stock for the next reporting 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:
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.
Closing stock is also known as ending inventory.