Valuation of closing stock.
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
20 March 2015
Sir, why we include full amount of direct expenses like carriage inwards and wages etc. in COST OF GOODS SOLD. My point is that these expenses should be proportionately distributed among COST OF GOODS SOLD and CLOSING STOCK.
Thanks in anticipation.
Thanks in anticipation.
20 March 2015
because firstly cost of goods sole means ...related to goods which are sold...and closing stock are those which are yet to be sold....and we cannot distribute cost of goods sold to goods not sold...and we can only include those cost which are incurred for either buying or manufacturing the goods yet to be sold in closing stock
20 March 2015
CLOSING STOCK SHOULD BE VALUED ONLY AT LOWER OF COST PRICE OR NET REALISABLE VALUE. SO YOU CAN NOT APPORTION ANY OTHER COST .
Querist : Anonymous
Querist :
Anonymous
(Querist)
20 March 2015
Tushar Sir,
For example our purchases are Rs.100000 and freight inward is Rs.5000. Half of the goods are sold for Rs.62500. According to me calculation should be:
Sales Rs.62500
Cost of goods sold
(100000+5000)/2 Rs.52500
Profit Rs.10000
Closing stock Rs.52500
In my view transportation charges should be divided proportionately between Goods sold and closing stock as I have done above. This rule we follow in consignment questions also.
My point is in case of consignment stock we add proportionate share of all the non-recurring expenses incurred by either consignor or consignee.
For example our purchases are Rs.100000 and freight inward is Rs.5000. Half of the goods are sold for Rs.62500. According to me calculation should be:
Sales Rs.62500
Cost of goods sold
(100000+5000)/2 Rs.52500
Profit Rs.10000
Closing stock Rs.52500
In my view transportation charges should be divided proportionately between Goods sold and closing stock as I have done above. This rule we follow in consignment questions also.
My point is in case of consignment stock we add proportionate share of all the non-recurring expenses incurred by either consignor or consignee.
25 March 2015
The cost incurred to bringing goods in contributes to landed cost and evenly distributed over the quantity brought in.
The calculation of Cost of goods sold starts after the goods placed into the stock.
Please mark the query as resolved, if satisfied !
The calculation of Cost of goods sold starts after the goods placed into the stock.
Please mark the query as resolved, if satisfied !
Querist : Anonymous
Querist :
Anonymous
(Querist)
26 March 2015
Thanks Paliwal Sir, as you said 'cost incurred to bringing goods in contribute to landed cost and evenly distributed over the quantity brought in'. This means expenses like freight inward and wages etc. are debited in Trading A/c but closing stock is valued only at cost of purchase (excluding the proportionate expenses). Sir, please explain in the context of example I have given above.
02 August 2025
Great question about the **treatment of direct expenses like carriage inwards, freight, wages, etc., in valuing closing stock and cost of goods sold (COGS).**
Let’s break it down clearly with reference to your example and the accounting principles involved.
---
### 1. **Concept of Cost of Stock:**
* **Cost of goods purchased** includes:
Purchase price + Direct expenses necessary to bring goods to the place and condition for sale, such as freight inward (carriage inwards), insurance on goods during transit, handling charges, etc.
* These direct expenses are part of the **“landed cost”** of the goods.
---
### 2. **Valuation of Closing Stock:**
* As per **Accounting Standards (AS 2) and generally accepted accounting principles**, **closing stock is valued at the lower of cost or net realizable value (NRV).**
* The **cost of closing stock includes the cost of purchase plus proportionate direct expenses** related to bringing the goods to saleable condition.
---
### 3. **Treatment of Expenses in Financial Statements:**
* **Trading Account** records:
Opening stock + Purchases + Direct expenses (like carriage inwards, freight, wages on purchase) = Cost of goods available for sale.
* Then:
Cost of goods available for sale – Closing stock = Cost of goods sold (COGS).
* Therefore, **direct expenses like carriage inwards are not entirely charged to the COGS; instead, they form part of the cost of goods available for sale and get allocated between closing stock and COGS based on quantity sold vs. quantity on hand.**
---
### 4. **Your Example:**
| Particulars | Amount (Rs.) |
| ----------------------------- | ------------ |
| Purchases | 100,000 |
| Freight inward | 5,000 |
| Total cost of goods purchased | 105,000 |
* Suppose half the goods are sold, so:
* **Cost of goods sold = (105,000 / 2) = Rs. 52,500**
* **Closing stock = Rs. 52,500**
* Here, freight inward is part of the total cost and is **proportionately allocated** between sold goods and closing stock based on quantity.
---
### 5. **Why is this approach correct?**
* Because the expenses like freight inward are **costs incurred to bring the goods into stock**, they must be part of the **cost of the goods, whether sold or still in stock**.
* If you charged the entire freight expense to the trading account as an expense, your closing stock would be undervalued, and profits would be misstated.
---
### 6. **Common Misconception:**
* Sometimes, people wrongly debit the entire freight inward to the trading account **without adjusting closing stock**, which distorts cost of goods sold and stock valuation.
---
### **Summary:**
| Point | Treatment |
| --------------------------------------- | ------------------------------------------------------ |
| Freight inward & direct expenses | Added to purchase cost (landed cost) |
| Allocation between COGS & Closing stock | Proportionate based on quantities sold vs stock |
| Closing stock valuation | Includes purchase cost + proportionate direct expenses |
| Profit & loss impact | Correct allocation ensures accurate profit |
---
### **In brief:**
Your approach of proportionately distributing freight inward between COGS and closing stock is **correct and complies with accounting principles** and standards.
---
If you'd like, I can prepare a detailed note or journal entries for this example. Would that help?
Let’s break it down clearly with reference to your example and the accounting principles involved.
---
### 1. **Concept of Cost of Stock:**
* **Cost of goods purchased** includes:
Purchase price + Direct expenses necessary to bring goods to the place and condition for sale, such as freight inward (carriage inwards), insurance on goods during transit, handling charges, etc.
* These direct expenses are part of the **“landed cost”** of the goods.
---
### 2. **Valuation of Closing Stock:**
* As per **Accounting Standards (AS 2) and generally accepted accounting principles**, **closing stock is valued at the lower of cost or net realizable value (NRV).**
* The **cost of closing stock includes the cost of purchase plus proportionate direct expenses** related to bringing the goods to saleable condition.
---
### 3. **Treatment of Expenses in Financial Statements:**
* **Trading Account** records:
Opening stock + Purchases + Direct expenses (like carriage inwards, freight, wages on purchase) = Cost of goods available for sale.
* Then:
Cost of goods available for sale – Closing stock = Cost of goods sold (COGS).
* Therefore, **direct expenses like carriage inwards are not entirely charged to the COGS; instead, they form part of the cost of goods available for sale and get allocated between closing stock and COGS based on quantity sold vs. quantity on hand.**
---
### 4. **Your Example:**
| Particulars | Amount (Rs.) |
| ----------------------------- | ------------ |
| Purchases | 100,000 |
| Freight inward | 5,000 |
| Total cost of goods purchased | 105,000 |
* Suppose half the goods are sold, so:
* **Cost of goods sold = (105,000 / 2) = Rs. 52,500**
* **Closing stock = Rs. 52,500**
* Here, freight inward is part of the total cost and is **proportionately allocated** between sold goods and closing stock based on quantity.
---
### 5. **Why is this approach correct?**
* Because the expenses like freight inward are **costs incurred to bring the goods into stock**, they must be part of the **cost of the goods, whether sold or still in stock**.
* If you charged the entire freight expense to the trading account as an expense, your closing stock would be undervalued, and profits would be misstated.
---
### 6. **Common Misconception:**
* Sometimes, people wrongly debit the entire freight inward to the trading account **without adjusting closing stock**, which distorts cost of goods sold and stock valuation.
---
### **Summary:**
| Point | Treatment |
| --------------------------------------- | ------------------------------------------------------ |
| Freight inward & direct expenses | Added to purchase cost (landed cost) |
| Allocation between COGS & Closing stock | Proportionate based on quantities sold vs stock |
| Closing stock valuation | Includes purchase cost + proportionate direct expenses |
| Profit & loss impact | Correct allocation ensures accurate profit |
---
### **In brief:**
Your approach of proportionately distributing freight inward between COGS and closing stock is **correct and complies with accounting principles** and standards.
---
If you'd like, I can prepare a detailed note or journal entries for this example. Would that help?
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