Why Closing Stock is not Shown in Trial Balance ?

WHAT IS TRIAL BALANCE ?

A trial balance is a report that lists the balances of all general ledger accounts of a company at a certain point in time. Generally, it is prepared at the end of each accounting year; however, it can be prepared at the end of each month, quarter or at the end of any chosen period.

 

The total of debit balance in trial balance should match with a total of credit balance, only then it is said to be arithmetically accurate.

 

It  records only those transactions which have a two way effect for example, Purchases where goods are bought against cash or credit and sales where goods are sold against cash or credit.

 

WHY CLOSING STOCK IS NOT INCLUDED IN TRIAL BALANCE ?

Closing stock is referred to as the amount of unsold goods that remain with the business on a given date. In other words, it can be said that these are inventory which are in business and are waiting to be sold.

The formula for calculating closing stock is :-

Closing Stock = Opening Stock + Purchases – Cost of Goods Sold

Where,

Opening Stock = Unsold goods that are brought forward from the previous accounting period

Purchases = New purchases or goods produced

Cost of Goods sold = Sale or cost of goods that are produced.

 

Whether closing stock is to be included in trial balance or not depends upon if the closing stock has been adjusted against purchases or not .

 

WHEN CLOSING STOCK IS NOT ADJUSTED AGAINST PURCHASES :-

The Trial Balance contains Purchase and Opening Stock accounts which discloses the purchases that  have been made during the year and the stock brought forward during the year respectively. In addition to that, the Trial Balance discloses the summary of Sales Account which gives the Credit effect.

Since, Total purchases are already included in the trial balance, Hence closing stock should not be included in the trial balance again. If it is included, the effect will be doubled.

For example, Total purchases made during the year inside a trial balance is of Rs 10,000.

Closing stock at the end of the year is Rs 3,000.

In the above case, closing stock is already included in purchases. If both the amounts are shown in trial balance there will be a mismatch of Rs 3,000 as the effect will be doubled in the trial balance.

 

WHEN CLOSING STOCK IS ADJUSTED AGAINST PURCHASES :-

In some cases, the closing stock may already been adjusted against purchases by passing the following journal entry :-

 

Closing Stock A/c  (Dr )     xxxx

   To Purchases A/c   (Cr)         xxxx

 

This entry will nullify the double effect . So the closing stock will be reflected  in the trial balance.

Accounting & Finance for Banking

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