Opening Stock vs Closing Stock- A Complete Guide

A vital component of running a business is Inventory Management. The terms Opening Stock and Closing Stock are essential in this procedure. We'll go over opening stock, closing stock, its components, the formula that determines it, and a practical example to help you grasp it all in this blog post.

What is opening stock?

Opening stock, often called beginning inventory or initial stock, is the entire amount of supplies, materials, or finished items that a company has on hand at the start of a financial year. This figure is the beginning point for inventory management and financial reporting as it reflects the stock carried over from the prior period.

What are the components of opening stock?

Finished Goods:

1. Products that have reached the end of their production process and are prepared for retail sale are known as finished goods. These products are in their finished state, packaged, labeled, and have undergone quality control, manufacturing, and any other processing procedures that were required.
2. Finished goods can include things like apparel, gadgets, and packaged foods in a retail context. For producers, they are finished products that are prepared for delivery.
3. For instance, shirts, slacks, and jackets set for show and sale can be included in the initial stock of completed products at a clothing store.

Raw Materials:

1. The fundamental resources and parts needed in the manufacturing process to produce completed items are known as raw materials. These materials haven't been processed yet and are in their most raw state.
2. Typical examples of raw materials are steel for automakers, fabric for apparel manufacturers, and wood for furniture makers.
3. For example, timber, fasteners, and upholstery fabric may be included in a furniture manufacturer's opening stock of raw materials, which are utilized to construct different furniture components.

Work-In-Progress:

1. Work-in-progress, or WIP for short, is the term used to describe goods that are being created but are not yet finished and available for distribution. Although some manufacturing or processing has been done on these products, more work is still needed to transform them into completed goods.
2. Products at different phases of production, such as those that are partially assembled, awaiting quality inspections, or requiring extra processing, are included in WIP.
3. When it comes to an automobile manufacturer, the opening stock of work-in-progress (WIP) can include cars that are in the process of being constructed but still need a few more parts before they are ready to be sold to consumers.

Obsolete Stock:

1. Items in the opening stock that are no longer useful or for sale are known as obsolete stocks. Overstocking, damage, fashion changes, and technological developments are some of the causes of obsolescence.
2. To avoid financial losses, effective management is necessary.
3. Imagine a clothes store that specialized in offering apparel from the past. They featured an assortment of 1970s bell-bottom jeans in their initial stock. These jeans eventually went out of style as thin jeans became the new style. Fashion changes meant that even in perfect condition, the bell-bottom jeans were no longer marketable, a prime example of outmoded goods.

Supplies:

1. The opening stock consists of materials that are necessary for the day-to-day operations of the firm. These supplies might include gasoline, office supplies, cleaning supplies, maintenance tools, and safety equipment.
2. When they are utilized, their expenditures are documented as expenses, and they are regarded as assets that are gradually depleted.
3. Think about an ordinary office setting. Printer toner cartridges were an overabundance of the office supply inventory when it opened. Although these toner cartridges are necessary for day-to-day operations, staff printing of papers rapidly depletes them. These toner cartridges' worth is expensed as they are used up over the accounting period and are recorded as an asset in the opening stock.

#3 What is the formula of opening stock?

It is simple and quick to calculate opening stock and manage opening stock in the trial balance. Depending on the available facts, it can be computed in various methods. Here are a few formulae to help you calculate it:

Case 1: When different types of opening stocks are mentioned: Opening Stock = Raw Material Cost + Work in Progress Values + Finished Product Cost

Case 2: When sales, cost of goods sold, gross profit, and current year closing stock statistics are given together: Opening Stock = (Sales - Gross Profit - Cost of Goods Sold) + Closing Stocks

Example of Opening Stock

Let's look at an example: Assume that on the 1st of January each year, your bakery's fiscal year starts. Your closing stock, which included flour, sugar, and baked products, was valued at Rs.50,000 on the 31st of December the previous year.

The value of this stock becomes your starting stock for the year when 1st of January arrives. Now that you have Rs.50,000 to start your bakery operations for the year, you may buy wheat, sugar, and baked items.

Inventory management, cost containment, and financial reporting all heavily depend on opening stock. Throughout the accounting period, it offers a clear starting point for monitoring variations in inventory levels, calculating expenses, and making defensible choices on pricing and restocking. Recognizing and precisely computing opening stock is significant for all types of businesses irrespective of their size.

What is closing stock?

Closing stock, also known as "ending inventory" or "ending stock," is the entire amount of supplies, materials, or finished items that a company has on hand after an accounting period, such as a fiscal year or a financial reporting period. This figure represents the inventory that is still available and is the foundation for carrying forward inventory into the subsequent accounting period.

What are the main methods for evaluating closing stock?

Average costing method:

By averaging the expenses of every unit in stock, the average costing approach determines the cost of inventory.

Let's say a toy store has one hundred identical automobiles. They had bought 50 automobiles for Rs. 50 apiece and another 50 cars for Rs. 60 each at the start of the year. The formula to get the average cost of a hundred toy cars is Average Cost = (Rs. 2500 + Rs. 3000) / 100 vehicles = Rs. 550 for each car.

Weighted Average Costing Method:

The average costing technique and the weighted average costing method are comparable; however, the weighted average costing approach bases each unit's cost on the quantity purchased at each price. When the units are different, it works best.

Example: The weighted average cost is determined using the number and cost of each batch of 50 toy cars at the same toy store, provided that the first batch is not identical to the second batch.

Moving Average Costing Method:

Every time a new transaction is made, the moving average costing approach modifies the average cost. When inventory costs change regularly, it's very helpful.

If the toy store buys 20 more cars for Rs.550 each, the new average cost becomes New Average Cost = (Rs.2500 + Rs.3000 + Rs.11000) / 120 cars = Rs.137.5 per car

FIFO Costing method:

The oldest inventory is assumed to be sold first via FIFO. The closing stock is valued at the cost of the most recent acquisitions.

For instance, if the toy business uses the first-in-first-out (FIFO) method and sells thirty cars, it will be assumed that the first thirty vehicles, which were bought for Rs.50 each, were sold. The closing stock will be evaluated at the second-in, second-out cost (Rs.60 per car).

LIFO Costing method:

The newest inventory is assumed to be sold first via LIFO. The closing stock is valued at the price of the earliest acquisitions.

As an illustration, if the toy business employs LIFO and sells thirty cars, it is assumed that the final thirty vehicles from the second batch—which were bought at Rs.60 each—were sold. The closing stock is therefore valued at the cost of the first batch Rs.50 per car.

Last Purchase Cost:

The closing stock is valued using this approach at the cost of the most recent acquisition.

For instance, if the toy business sells 30 cars and values the closing stock using the cost of the most recent acquisition, it would be valued at Rs.60 per vehicle.

At zero Cost:

When a company wants to display a zero value for the closing stock, they employ this strategy. It implies that the inventory goods are worthless and of no cost.

For example, when it comes to products like samples, giveaways, or charitable donations that have no residual market worth, a company may decide to apply the zero-cost technique.

What is the formula of closing stock?

The closing stock formula is determined by the inventory valuation technique that is used. Here are the formulas for LIFO, FIFO, and Weighted Average Cost:

1. Average Cost & Moving Average Cost (MAC): (Total Cost of Inventory / Total Quantity of Inventory)

2. FIFO: Closing Stock = Total Quantity in Inventory - Quantity Sold x Cost of Oldest Inventory

3. LIFO: Closing Stock: = Total Quantity in Inventory - Quantity Sold x Cost of Most Recent Inventory

4. Weighted Average Cost: Closing Stock = Total Cost of Goods in Inventory / Total Quantity in Inventory

How to calculate the closing stock of any item?

Let's use a real-world example to demonstrate how closing stock is calculated:

Let's say a small electronics retailer assesses its closing stock of smartphones using the FIFO approach. It possessed 50 cell phones at the start of the accounting period, each costing Rs.3000 to buy. It sold 30 of these cell phones during the year.

We utilize the FIFO formula to determine the closing stock:

Closing Stock is calculated as follows: **Total Inventory - Sold Quantity x Cost of Oldest Inventory (50-30) X Rs.3000 20 X Rs.3000 = Closing Stock

Rs.60,000 is the closing stock.

Thus, after the accounting period, the closing stock value of smartphones is Rs.60,000.

For organizations, closing stock is a crucial number since it impacts profitability, tax obligations, and financial reporting. Making wise company decisions and preserving the integrity of financial accounts depend on accurate calculation. The assessment technique selected should be in line with the demands and nature of the business.

What is the difference between opening stock & closing stock?

Here's the comparison between opening stock and closing stock, considering multiple parameters and aspects: 1. Definition:

Opening Stock - The value of inventory at the beginning of an accounting period. Closing Stock - The value of inventory at the end of an accounting period.

2. Timing:

Opening Stock - Represents the initial inventory available at the start of the accounting period. Closing Stock - Represents the remaining inventory after the accounting period.

3. Purpose:

Opening Stock - Serves as the starting point for inventory management and financial reporting. Closing Stock - Determines the value of inventory remaining after sales and usage.

4. Components:

Opening Stock - Comprises finished goods, raw materials, and work-in-progress (WIP). Closing Stock - Includes products, materials, or goods that are still on hand.

5. Calculation Formula:

Opening Stock - Closing Stock of the Previous Period. Closing Stock - Various methods such as FIFO, LIFO, or Weighted Average Cost are used to calculate closing stock.

6. Financial Reporting Impact:

Opening Stock - Affects the balance sheet at the beginning of the accounting period. Closing Stock - Impacts the balance sheet at the end of the accounting period.

7. Cost Allocation:

Opening Stock - Influences the initial cost allocation for inventory items. Closing Stock - Determines the cost allocation of inventory items remaining in stock.

8. Decision-Making Role:

Opening Stock - Helps plan production, procurement, and pricing strategies for the accounting period. Closing Stock - Guides decisions related to restocking, pricing, and resource allocation.

9. Inventory Management:

Opening Stock - Sets the stage for inventory control and tracking during the accounting period. Closing Stock - Reflects the outcome of inventory management practices during the accounting period.

10. Example:

Opening Stock - At the start of the year, a retail store has Rs.10,000 worth of clothing, Rs.5,000 worth of raw materials, and Rs.2,000 worth of partially assembled furniture. Closing Stock - At the end of the year, the retail store has Rs.15,000 worth of clothing, Rs.2,000 worth of raw materials, and Rs.3,000 worth of completed furniture.

The above comparison highlights the key differences between opening and closing stock in terms of their definitions, timing, components, calculation methods, and their roles in financial reporting and decision-making. Opening stock provides the starting point for inventory management while closing stock reflects the outcome of inventory control efforts at the end of the accounting period.

As promised, in this blog post we deep-dived into concepts like opening stock and closing stock their components, formulas, main methods that are used to calculate them, and real-life examples.

I hope you thoroughly enjoyed reading this blog.

Thank you for reading!