Closing inventory is recorded at the end of an accounting period to determine the cost of goods sold (COGS) and the ending inventory value. This process involves adjusting the inventory and recording the changes in the financial statements.
Explanation
At the end of the period, you transfer the opening inventory and purchases to the cost of goods sold account and then adjust for the closing inventory. The closing inventory becomes the opening inventory for the next period.
Journal Entry Example
Assume your business has a closing inventory valued at ₹80,000 at the end of the period.
Date: [End of Accounting Period Date]
Particulars:
| Account Title | Debit (₹) | Credit (₹) |
|---|---|---|
| Inventory | 80,000 | |
| Cost of Goods Sold | 80,000 |
Explanation:
- Inventory: This account is debited to reflect the value of the closing inventory.
- Cost of Goods Sold (COGS): This account is credited to adjust for the closing inventory.
Adjusting Opening Inventory and Purchases
If we consider the full cycle, including opening inventory and purchases:
Transfer Opening Inventory and Purchases to COGS
Let's assume the opening inventory is ₹50,000 and purchases during the period are ₹200,000.
Date: [End of Accounting Period Date]
Particulars:Account Title Debit (₹) Credit (₹) Cost of Goods Sold 250,000 Inventory (Opening) 50,000 Purchases 200,000 Explanation:
- Cost of Goods Sold (COGS): Debited to accumulate the total cost of goods available for sale.
- Inventory (Opening): Credited to transfer the opening inventory value.
- Purchases: Credited to transfer the total purchases during the period.
Adjust for Closing Inventory
Date: [End of Accounting Period Date]
Particulars:Account Title Debit (₹) Credit (₹) Inventory (Closing) 80,000 Cost of Goods Sold 80,000 Explanation:
- Inventory (Closing): Debited to reflect the value of the closing inventory.
- Cost of Goods Sold (COGS): Credited to adjust for the closing inventory.
Summary of COGS Calculation
To summarize the cost of goods sold for the period:
