For a business that holds goods, closing stock is often the single biggest judgement in the year-end accounts. Every pound of stock overstated is a pound of profit overstated, and corporation tax paid on it. Valuing stock at the year end comes down to four steps: count it, cut it off, cost it and test it.
1. Count what is there
Even if your software tracks stock levels, a physical count at or close to the year end is the evidence that the quantities are real.
- Plan before the date. Agree who counts which area, freeze movements during the count if you can, and print count sheets (or use scanners) without expected quantities, so counters record what they see.
- Count in pairs: one counts, one records, and a second team re-counts a sample.
- Note condition: damaged, obsolete, returned or near-expiry items are recorded separately, because they are valued differently.
- Include stock you own but do not hold (goods in transit, items at a customer on sale or return, stock in a third-party warehouse) and exclude stock you hold but do not own (customer goods awaiting collection, consignment stock from suppliers).
If the count is a few days before or after the year end, adjust it for the movements in between.
2. Get the cut-off right
Cut-off means each delivery belongs to the same side of the year end in both the stock count and the books.
| Situation at the year end | Stock count | Books |
|---|---|---|
| Goods received 30 December, supplier invoice dated 4 January | Included | Accrue the purchase in December |
| Goods despatched to a customer 31 December, invoiced 2 January | Excluded | Sales invoice or accrued income in December |
| Goods invoiced by supplier 29 December, not delivered until 5 January | Excluded, unless ownership has passed (goods in transit) | Purchase in December; include as goods in transit if you own them |
Record the last delivery note numbers in and out before the count starts. Most stock valuation errors are really cut-off errors.
3. Cost each line
Under FRS 102 Section 13, stock is measured at cost. Cost includes the purchase price, import duties and inward carriage, less trade discounts, plus (for goods you make) materials, direct labour and a share of production overheads. It excludes selling costs, storage after production, and general administration.
When identical items are bought at different prices, use one of the permitted cost formulas consistently:
- FIFO (first in, first out): remaining stock is valued at the most recent purchase prices.
- Weighted average cost: each unit carries the average cost of all units held.
LIFO (last in, first out) is not permitted under FRS 102. Items that are not interchangeable, such as individual vehicles or bespoke goods, are valued at their specific actual cost.
4. Test for net realisable value
Stock is shown at the lower of cost and estimated selling price less costs to complete and sell (often called net realisable value). Do this line by line, or for groups of similar items, not for the stock as a whole.
| Item | Quantity | Cost each | Expected selling price | Costs to sell | Value each | Total |
|---|---|---|---|---|---|---|
| Garden chairs, current range | 120 | £38 | £79 | £6 | £38 (cost) | £4,560 |
| Garden chairs, discontinued colour | 40 | £38 | £30 | £6 | £24 (NRV) | £960 |
| Damaged chairs | 6 | £38 | £10 | £2 | £8 (NRV) | £48 |
The two lower rows produce a write-down of £628 against cost. Look specifically at:
- items that have not sold for six or twelve months;
- discontinued lines and old packaging;
- perishable or dated stock near expiry;
- products whose selling price has fallen after the year end.
The closing stock journal
If you keep stock on a periodic basis (purchases go straight to cost of sales during the year), the year-end journal replaces last year’s stock figure with this year’s:
| Entry | Debit | Credit |
|---|---|---|
| Remove opening stock | Cost of sales (opening stock) | Stock |
| Bring in closing stock | Stock | Cost of sales (closing stock) |
If your system keeps a perpetual record, stock moves with every sale, and the year end only needs an adjustment for count differences and write-downs. How the accounts are structured is covered in inventory accounts in the chart of accounts.
Keep the evidence
File the count sheets, the cut-off note, the costing calculation, the NRV review and the journal together. Valuation should follow the same method each year; if you change it, tell your accountant, because it affects comparability and possibly tax. For the rest of the year-end tasks, see the year-end checklist.