Closing Stock, Opening Stock  Ascertainment and Valuation
Finding Value of Closing Stock from Sales
Cost of Goods Sold  =  Opening Stock + Purchases + Direct Expenses − Closing Stock − Stock Used for Non Trading purposes 
⇒ Closing Stock  =  Opening Stock + Purchases + Direct Expenses − Stock Used for Non Trading purposes − Cost of Goods Sold 
To use this relation to find the value of closing stock, we need to be in the know of the ascertained value of cost of goods sold. All other information can be obtained from the accounting records.
From Trading account, we can write
Opening Stock + Purchases + Direct Expenses + Gross Profit  =  Sales + Closing Stock + Stock Used for Non Trading purposes 
⇒ Closing Stock  =  Opening Stock + Purchases + Direct Expenses + Gross Profit − Sales − Stock Used for Non Trading purposes 
To use this relation to find the value of closing stock, we need to be in the know of gross profit. All other information can be obtained from the accounting records.
Since reflecting the value of cost of goods sold and thereby finding gross profit is the objective of preparation of the Trading a/c, we can say that this route for finding the value of closing stock is not a feasible idea unless there is a possibility of finding gross profit.
Can Gross Profit be calculated based on Sales Value
Fixed value for Gross Profit
The organisation may consider Gross profit at a fixed value for each item it sells.Sale price = Cost of goods sold + Fixed Gross Profit
Requirement : Cost of goods sold should be known for each sale.
Using a fixed value for Gross Profit is possible only if the organisation is in the know of the cost of goods sold for every sale.
If sale price is fixed
If the sale price is also a fixed value for each sale, then it amounts to the cost of goods sold also being a fixed value for each sale.Gross Profit = Cost of goods sold × Gross Profit as a % of cost
Fixed % for Gross Profit
The organisation may consider Gross profit at a fixed % of cost or sales.Gross Profit = Cost of goods sold × Gross Profit as a % of cost
Sale price = Cost of goods sold + Gross Profit
Requirement : Cost of goods sold should be known for each sale.
Using a fixed % (on cost/sale) for Gross Profit is also possible only if the organisation is in the know of the cost of goods sold for every sale.
Gross Profit may be ascertained without having to know the value of closing stock only if there is some way to ascertain the value of cost of goods sold and the gross profit is taken at fixed value or a fixed percentage of cost or sales.Knowing the cost of goods sold for each sale is a possibility in organisations which maintain cost accounting records or inventory records with values for all products they deal with.
Where such records are being maintained the value of closing stock will also be available readyhand in the same records and as such the need to calculate gross profit this way does not arise.
 if a fixed amount is being added up to cost as gross profit and that amount is known for each and every sale that has been made during the accounting period.
For this to be happening, apart from the fixed gross profit that the organisation intends to make from each sale, it should also be in the know of the cost of goods sold for each sale so as to add the gross profit to it and arrive at a selling price.
 if a fixed amount is being added up to cost as gross profit and that amount is known for each and every sale that has been made during the accounting period.
 Gross Profit = Sales × Gross Profit as a % of Sales
 Gross Profit = Cost of goods sold × Gross Profit as a % of Cost of Goods sold
Gross profit as a % of cost of goods sold can always be converted to Gross Profit as a % of sales. As such the first relation can be used even when Gross Profit is given as a % of cost of goods sold.
Limitations
Calculating gross profit from sales and Gross profit as a % of sales is theoretically possible if the Gross profit % is known for every single sale made, which is rarely the case. Gross profit percentages are generally fixed based on historical cost data or based on policy decisions and are maintained for a substantial period of time. Just knowing the gross profit percentage that the organisation intends to make To be able to ascertain gross profit for every single sale, the data Gross Profit = Sales  Cost of Goods Sold
For Gross Profit to be consistent
Gross Profit is generally NonUniform
Variety of Products being Sold
The organisation may be selling a number of products with different selling prices and different rates of gross profits.In such cases, if the gross profit figure is to be ascertained from the sales figure, sales records should be maintained so as to give the sales details relating to each product with a distinct Gross Profit %. This would involve a lot of work and would be impractical, more so where there are a large number of products being dealt with.
Variations in Sale Prices
The prices charged to customers are dependent on a number of factors like the market conditions, the immediate competition existing in the market, the loyalty of the customers etc.Depending on the market conditions, some times the prices may be varied instantaneously.
Depending on the customer to whom the product is being sold, the prices may be varied (a discount may be given to loyal customers) etc.
In such a situations there would not be uniformity in the Gross profit percentage and it would be near to impossible to ascertain the gross profit made using the sales figures.
Since using the figure of gross profit to ascertain the value of closing stock available in the organisation is not a feasible idea, we look at other methods for finding out the value of closing stock.
Gross Profit Ratios  Math
Ratio : Percentage
Ratio is the relationship between two quantities of the same units expressed in the form a : b or $\frac{a}{b}$ where a and b do not have a common factor.Percentage = Ratio × 100
Gross Profit Ratio
Gross Profit Ratio is the ratio of Gross Profit to Net Sales or Cost of Goods Sold.to Sales
Gross Profit Ratio = Gross Profit Net Sales Gross Profit as a % of Sales =
× 100Gross Profit Net Sales (Or) = Gross Profit Ratio (to Sales) × 100 to Cost of Goods Sold
Gross Profit Ratio = Gross Profit Cost of Goods Sold Gross Profit as a % of Cost of Goods Sold =
× 100Gross Profit Cost of Goods Sold (Or) = Gross Profit Ratio (to Cost) × 100
The data relating to the Gross Profit as a % of Sales (or Cost of Goods sold) may be given in any of the three different forms and can be converted from one form to another.
1 Scale
The value is either in decimals or as a fraction.
 Ratio of Gross Profit to sales is 0.4.
To convert to 100 scale, multiply with 100.
Gross Profit as a % of sales = Gross Profit Ratio × 100. = 0.4 × 100 = 40%  Gross Profit is 0.4 of sales.
 Gross Profit is ${\frac{3}{8}}^{th}$ of cost.
To convert to 100 scale, multiply with 100.
Gross Profit as a % of cost = Gross Profit Ratio × 100. = $\frac{3}{8}$ × 100 = 27.5%
 Ratio of Gross Profit to sales is 0.4.
100 Scale
The % value without considering the % (denominator 100).Gross Profit is 15% of sales. It is taken as 15 in calculations.
To convert to 1 scale, divide with 100.
Gross Profit Ratio = $\frac{\mathrm{Gross\; Profit\; as\; a\; \%\; of\; Sales}}{100}$ = $\frac{15}{100}$ = $\frac{3}{20}$ or = 0.15 a ratio with numerator 1
The value is also a fraction and can be considered to be on 1 scale. Specific methodology can be adopted in calculations if the numerator is 1, so this is identified as another data type.Gross Profit is ${\frac{1}{6}}^{th}$ of Cost
Gross Profit Ratio to Sales ⇔ Gross Profit Ratio to Cost of Goods Sold
The Gross Profit Ratio (to Sales) and Gross Profit Ratio (to Cost of Goods Sold) are interrelated and one can be obtained if the other is known.The formula used for conversion depends on the form of the data considered.
Notations used
Gross Profit Ratio as a % of Sales ⇒ GP(S)
Gross Profit Ratio as a % of Cost ⇒ GP(C)
GP Ratio (to Cost) from GP Ratio (to Sales)
Data on 1 Scale
Ratio has to be taken in the decimal form.GP(C) = $\frac{\mathrm{GP(S)}}{\mathrm{1\; \; GP(S)}}$ Example
Gross Profit Ratio (to Sales) is 0.2 ⇒ GP(S) = 0.2
GP(C) = $\frac{\mathrm{GP(S)}}{\mathrm{1\; \; GP(S)}}$ = $\frac{0.2}{\mathrm{1\; \; 0.2}}$ = $\frac{0.2}{0.8}$ = $\frac{1}{4}$ or = 0.25 Proof
Consider the following data:
 Sales = x
 Gross Profit Ratio (to Sales) = y (one scale)
Gross Profit = Sales × Gross Profit Ratio (to Sales) = x × y = xy Cost of Goods Sold = Sales − Gross Profit = x − xy = x (1 − y) Gross Profit Ratio (to Cost) = Gross Profit Cost of Goods Sold = xy x (1 − y) = y (1 − y) Data on 100 Scale
Data has to be expressed as a % without the denominator.GP(C) = $\frac{\mathrm{GP(S)}}{\mathrm{100\; \; GP(S)}}\times 100$ Example
Gross Profit is 50% of Sales ⇒ GP(S) = 50
GP(C) = $\frac{\mathrm{GP(S)}}{\mathrm{100\; \; GP(S)}}\times 100$ = $\frac{50}{\mathrm{100\; \; 50}}\times 100$ = $\frac{50}{50}\times 100$ = 100% Proof
Let the data on 100 scale be represented by 'm'. ⇒ y = m 100 Substituting this value for 'y' in the formula for fractional data we get,
Gross Profit Ratio (as a % of Cost) = y (1 − y) × 100 = $\frac{\frac{m}{100}}{\left(1\frac{m}{100}\right)}\times 100$ = $\frac{\frac{m}{100}}{\frac{100m}{100}}\times 100$ =
×m 100
× 100100 100 − m = m 100 − m × 100 Data as a ratio with numerator 1
Where 'a' represents the denominator of the fraction representing the ratio.GP(C) = 1 a − 1 Example
Gross Profit is ${\frac{1}{5}}^{th}$ of Sales ⇒ a = 5
GP(C) = 1 a − 1 = 1 5 − 1 = 1 4 Proof
Let the ratio be
⇒ y =1 a 1 a Substituting this value for 'y' in the formula for fractional data we get,
Gross Profit Ratio (to Cost) = y (1 − y) = $\frac{\frac{1}{a}}{\left(1\frac{1}{a}\right)}$ = $\frac{\frac{1}{a}}{\frac{a1}{a}}$ =
×1 a a a − 1 = 1 a − 1
GP Ratio (to Sales) from GP Ratio (to Cost)
Data on 1 Scale
Ratio has to be taken in the decimal form.GP(S) = $\frac{\mathrm{GP(C)}}{\mathrm{1\; \; GP(C)}}$ Example
Gross Profit Ratio (to Cost) is 0.25 ⇒ GP(C) = 0.25
GP(S) = $\frac{\mathrm{GP(C)}}{\mathrm{1\; +\; GP(C)}}$ = $\frac{0.25}{\mathrm{1\; +\; 0.25}}$ = $\frac{0.25}{1.25}$ = $\frac{1}{5}$ or = 0.2 Proof
Consider the following data:
 Cost of Goods Sold = p
 Gross Profit Ratio (to Cost) = q (one scale)
Gross Profit = Cost of Goods Sold × Gross Profit Ratio (to Cost of Goods Sold) = p × q = pq Sales = Cost of Goods Sold + Gross Profit = p − pq = p (1 + q) Gross Profit Ratio (to Sales) = Gross Profit Net Sales = pq p (1 + q) = q (1 + q) Data on 100 Scale
Data has to be expressed as a % without the denominator.GP(S) = $\frac{\mathrm{GP(C)}}{\mathrm{100\; +\; GP(C)}}\times 100$ Example
Gross Profit is 100% of Cost ⇒ GP(C) = 100
GP(S) = $\frac{\mathrm{GP(C)}}{\mathrm{100\; +\; GP(C)}}\times 100$ = $\frac{100}{\mathrm{100\; +\; 100}}\times 100$ = $\frac{100}{200}\times 100$ = 50% Proof
Let the data on 100 scale be represented by 'n'. ⇒ q = n 100 Substituting this value for 'q' in the formula for fractional data we get,
Gross Profit Ratio (as a % of Sales) = q (1 + q) × 100 = $\frac{\frac{n}{100}}{\left(1+\frac{n}{100}\right)}\times 100$ = $\frac{\frac{n}{100}}{\frac{100+n}{100}}\times 100$ =
×n 100
× 100100 100 + n =
× 100n 100 + n Data as a ratio with numerator 1
Where 'b' represents the denominator of the fraction representing the ratio.GP(S) = 1 b + 1 Example
Gross Profit is ${\frac{1}{4}}^{th}$ of Cost ⇒ b = 4
GP(S) = 1 b + 1 = 1 4 + 1 = 1 5 Proof
Let the ratio be
⇒ q =1 b 1 b Substituting this value for 'q' in the formula for fractional data we get,
Gross Profit Ratio (to Sales) = q (1 + q) = $\frac{\frac{1}{b}}{\left(1+\frac{1}{b}\right)}$ = $\frac{\frac{1}{b}}{\frac{b+1}{b}}$ =
×1 b b b + 1 = 1 b + 1
Frequently used conversions
As a % of Cost  1 scale  0.2  0.25  0.333  0.5  0.666  1  

100 scale  20  25 
 50 
 100  
Inverse 




 
As a % of Sales  Inverse 




 
100 scale 
 20  25  33
 40  50  
1 scale  0.166  0.20  0.25  0.333  0.4  0.5 
How is the Quantity and value of Closing Stock ascertained?
Quantity of Stock
The quantitative details of stock would be readily available with the organisation only if the inventory records are being maintained by the organisation, like in the case of an organisation maintaining cost accounting records or specific inventory records. In other cases the quantity of stock would have to be ascertained by physical stock taking.Value of stock
There is no specific ledger account in financial accounting that would give us the information relating to the value of closing stock ready hand.The value of closing stock is available ready hand only if inventory records are being maintained that too along with the value details. This may be possible if the organisation maintains cost accounting records.
The information relating to the value of closing stock is not regularly required by the organisation. It is required at the end of the accounting period for preparation of final accounts, both in ascertaining gross profit (or cost of goods sold) and for being included in the assets in the balance sheet.
Net Realisable Value of Stock
Net Realisable Value of stock is the net sale realisation excluding all the expenses directly and exclusively relatable to the sale (Sale commission, Brokerage etc).For the purpose of Valuation of closing Stock, Market Price implies Net Realisable Value/Rate and not the Selling Price. Therefore, in considering the Market Price to be used for valuation, care should be taken to ensure that such expenses are deducted from the sales price to ascertain the net realisable value of stock.
Convention of Conservatism
The act of valuing closing stock at cost or market price is based on the Convention of Conservatism.Convention of Conservatism : Valuation of Closing Stock : Illustration
DrCr  

Particulars  Amount  Particulars  Amount 
To Opening Stock To Purchases To Direct Expenses To Gross Profit  20,000 2,48,000 54,000 94,000  By Sales By Closing Stock  3,80,000 36,000 
4,16,000  4,16,000 
Closing Stock
Batch M  Batch N  Total  

Qty Units  Rate/unit  Value  Qty Units  Rate/unit  Value  Value  
Stock (at cost)  600  36  21,600  600  24  14,400  36,000 
Value of stock includes cost and direct expenses
Batch M and N are regularly sold at 50 and 40 per unit respectively. The current stock of Batch M is an outdated model of the product and the market conditions would enable the stock to be sold only at a price of 30 per unit.
All sales are made through a dealer who would charge a commission of 10% of the sale proceeds.
Batch M  Batch N  

Rate/unit  Rate/unit  
a) Regular Selling Price b) Selling Commission @10% of Sale Price  50 5  40 4 
1) Net Realisable Price (Regular) (a) − (b)  45  36 
p) Current Selling Price q) Selling Commission @10% of Sale Price  30 3  
2) Net Realisable Price (Current) (p) − (q)  27 
Net Realisable Price  =  Selling Price − Expenses directly relatable to sales 
Selling commission is the expense directly relatable to sales here.
Net Realisable values of Closing Stock
Batch M  Batch N  

Qty Units  Rate/unit  Value  Qty Units  Rate/unit  Value  
@ Regular Price @ Current Price  600 600  45 27  27,000 16,200  600  36  21,600 
Closing stock is valued at cost or Market (Net realisable) value whichever is lesser.
Batch M  Batch N  

Value  Value  
@ Cost @ Net Realisable (Regular) Price @ Net Realisable (Current) Price  21,600 ✔ 16,200  ✔ 14,400 21,600 
In following the convention of conservatism, each kind of stock is to be assessed distinctly.
The total value of stock at cost would be 36,000 and following the convention of conservatism it would be 30,600 (16,200 + 14,400)
Trading a/c
If value of Closing Stock is taken based on the Convention of Conservatism, the Trading a/c would beDrCr  

Particulars  Amount  Particulars  Amount 
To Opening Stock To Purchases To Direct Expenses To Gross Profit  20,000 2,48,000 54,000 88,600  By Sales By Closing Stock  3,80,000 30,600 
4,10,600  4,10,600 
Lower valuation of closing stock ⇒ Loss
The value of closing stock is credited to the Trading a/c. By the principle of credit in relation to nominal accounts (Credit all Incomes and Gains), we can assume the value to indicate a gain.Reducing the value of closing stock would therefore amount to reducing the credit made to the Trading a/c, which would be reducing the gain.
Reducing a credit will have the same effect as increasing a debit. Thus reduction in value of closing stock can also be interpreted as taking up an additional debit which will result in a lower profit.
The Gross profit has gone down by 5,400 (94,000 − 88,600) as closing stock is considered at a value lesser by 5,400 (36,000 − 30,600).
Role of Convention of Conservatism
Future Losses
Where the Net realisable value of stock is less than its cost, the organisation may incur a loss.In the above case, the organisation may have to incur a loss of 5,400 [ 21,600 (cost) − 16,200 (net realisable value)] as and when it sells the stock of Batch M at the net realisable rate.
When?
Since it is the end of the accounting period, such a sale at such a price, if at all it takes place, would be in the subsequent accounting period.Thus, the organisation may have to incur this loss in the future.
Is the loss for sure?
The loss may have to be incurred in the future only if the stock has to be sold at 30 per unit (which gives a net realisation of 27 per unit).We may consider such a loss a certainty in cases where the stock is required to be sold at the lower price on account of it becoming obsolete, losing demand etc.
Bu where the lower market rate is on account of normal market fluctuation and if the rates go up in the subsequent period and the product can be sold at a higher price, this loss may not have to be incurred.
Future Loss Absorbed now
The loss that may have to be incurred in the subsequent accounting periods as and when the stock is disposed at the net realisable price is absorbed in the current accounting period by reducing the value of closing stock.Closing Stock of a period is Opening Stock of the Subsequent Period
Closing Stock a/c
The Closing Stock a/c is a real account and is created at the last moment of the accounting period. It represents Stock as an asset.The balance in the Closing Stock a/c is carried forward to the subsequent accounting periods through the closing entry.
Opening Stock a/c
The Closing Stock a/c is renamed Opening Stock a/c at the beginning of the subsequent accounting period into which it is carried forward, while bringing the values of assets and liabilities into the books of accounts through the Opening Entry.Opening Stock a/c is treated as an equivalent of a Nominal account.
Like other nominal accounts it is closed at the end of the accounting period. It is closed by transfer to the Trading a/c since it goes into the value of cost of goods sold.
Note
The value of Opening and Closing stocks relating to a particular accounting period do not mean the same. They are two indicated by distinct ledger accounts  Opening stock by Opening Stock a/c which is a nominal account and Closing stock by Closing Stock a/c which is a Real account.They may or may not have the same values.