What it means
Closing stock goes straight into profit: overvalue it and profit is overstated. Accounting Standard 2 says inventories are valued at the lower of cost and net realisable value (NRV). Cost includes purchase price, freight in and other costs to bring goods to their present place and condition, but not GST you can claim as credit. NRV is the expected selling price less costs to sell.
Example
Shree Lakshmi Hardware’s closing stock on 31 Mar 2027:
| Item group | Cost | NRV | Value taken |
|---|---|---|---|
| Taps and valves | ₹4,60,000 | ₹6,10,000 | ₹4,60,000 |
| Paint, normal stock | ₹2,45,000 | ₹3,20,000 | ₹2,45,000 |
| Paint, water-damaged lot | ₹1,35,000 | ₹1,00,000 | ₹1,00,000 |
| Total | ₹8,40,000 | ₹8,05,000 |
The ₹35,000 write-down is a loss of the year.
Common mistakes
- Adding claimable GST to the cost of stock.
- Valuing slow or damaged stock at cost.
- A stock register that does not agree with the stock account in the books.
In MyRecords
Stock is valued on every movement using each item’s method (FIFO or moving average), or batch by batch. Stock balance shows quantity and value per warehouse, and the Stock vs account value report checks that the stock ledger value equals the stock accounts in the general ledger. Write-downs are passed with a stock reconciliation or journal entry.