Why do we take Closing Stock in credit side of trading A/c ?
So, have you ever thought why Closing Stock is taken in the credit side of trading A/c.
Why because teacher has told us to treat the entry like that or we just remembered it from the book without knowing the reason.
Whatever the case, but the answer lies in the concept of accounting.(Matching concept)
So what is matching concept?
Matching concept requires that the expenses should be matched to the revenues for the appropriate accounting period. Hence only the expenses related to the revenue earned in a particular period should be taken into account
On the above criteria, in a accounting period:-
G.P = Sales- Cost of Goods sold(COGS)
Sales is the total amount of unit of goods sold.
COGS is the total cost of the units of goods which is sold.
But,
COGS= Purchases + Opening stock + Direct Expenses - closing stock
The closing stock value is deducted in the above because at the end of the year when final account is prepared, the remaining unsold goods laid down(Closing Stock) had not generated any revenue during the year. So when there is no revenue generated from certain unit of goods why should we consider the expenses incurred in those goods?
That's why it is deducted from COGS as it didn't generate any revenue during the year. To exclude this it is shown in the credit side of trading account.
One can either show it as a deduction from purchase+ opening stock in debit side or show it in the credit side.(format impression).
Another reason is closing entry.
At the year end the closing entry of closing stock is passed :
Closing inventory A/c. Dr. (Asset)
To Trading A/c.
