The short version
- Cost of goods sold = opening stock + purchases − closing stock. Overstate closing stock and you overstate profit by the same amount.
- Value stock at cost or net realisable value, whichever is lower.
- FIFO and weighted average are both acceptable. Pick one and stay with it.
- Cost includes what it took to bring the goods in, and excludes GST you can claim as credit.
- Count the shelf at least once a year, and record the difference as an adjustment rather than quietly changing the books.
Why it matters
Profit for a trading business starts with one formula:
Opening stockplus purchasesminus closing stock= cost of goods sold
Sales minus cost of goods sold is your gross profit. So closing stock does not sit quietly on the balance sheet: it moves profit directly. Value it ₹50,000 too high and your profit is ₹50,000 too high, your tax is computed on it, and next year opens with the error built in.
FIFO and weighted average
You bought the same item at different prices through the year. Which cost applies to what is left?
- FIFO, first in first out: the oldest stock is treated as sold first, so what remains is valued at the most recent purchase prices. In a rising market this gives a higher closing stock and a higher profit.
- Weighted average: total cost divided by total quantity, recomputed as purchases come in. Smoother, and easier to defend when prices move a lot.
Both are acceptable. What is not acceptable is switching between them to suit the year, because the comparison between years stops meaning anything. Pick the one that matches how your trade actually works and stay with it.
What goes into cost
Cost is what it took to bring the goods to their present location and condition:
- Purchase price after trade discounts
- Inward freight and cartage
- Loading, unloading and other handling to bring the goods in
- Duties that are not recoverable
It does not include GST you can claim as input tax credit, because that is recoverable and not a cost to you. It also excludes selling costs, and general office overheads that have nothing to do with getting the goods in.
Cost or net realisable value
Stock is carried at cost or net realisable value, whichever is lower. Net realisable value is what you expect to sell it for, less what it will cost to sell. If a line has gone out of fashion, been superseded, or is damaged, its cost is no longer what it is worth, and holding it at cost inflates both your stock and your profit.
This is the rule that makes you look honestly at the boxes at the back of the godown once a year.
Running a count
- Pick a moment with no movement: before opening, after closing, or on a holiday.
- Count by location, shelf by shelf, and mark what has been counted.
- Two people on high-value lines, one counting and one recording.
- Write down what you counted, not what you expected.
- Investigate the big differences before adjusting: an unrecorded sale, a delivery not entered, goods sent on approval, or a return that never came back into stock.
Then record the difference as an adjustment. Overwriting the book quantity to match the shelf without recording why is how a shrinkage problem stays invisible for years.
Shrinkage, damage and dead stock
Three different problems that look the same in a count. Damage and expiry are a cost you book as a stock loss. Shrinkage is a control question: a persistent unexplained gap in one category usually has a cause you can find. Dead stock is a pricing decision, and the longer it is deferred the more it costs. Note that input tax credit has to be reversed on goods lost, written off or given away.
Stock that moves with the sale
In AawazAI, stock moves when the transaction does: a confirmed sale takes it out, a purchase puts it in, a customer return puts it back at cost, and damage is booked as a stock loss rather than quietly disappearing. Cost of goods sold in the profit and loss comes from those movements rather than from an estimate. When you count the shelf, a stock audit records the difference as an adjustment you approved, so the gap is visible instead of absorbed.
A stock figure you did not have to guess
Every sale, purchase, return and damage entry moves stock in AawazAI, and a stock audit records what you counted as an approved adjustment.
Frequently asked questions
How is closing stock valued?
At cost or net realisable value, whichever is lower. Cost includes the purchase price after trade discounts plus inward freight and handling, and excludes GST recoverable as input tax credit.
Which is better, FIFO or weighted average?
Both are acceptable. FIFO values the remaining stock at recent prices, which raises profit in a rising market. Weighted average smooths price movement. Consistency matters more than the choice, because switching makes years incomparable.
How does closing stock affect profit?
Directly. Cost of goods sold is opening stock plus purchases minus closing stock, so overstating closing stock understates cost and overstates profit by the same amount.
How often should I count stock?
At least once a year, at the year end, and more often for high-value or fast-moving lines. Frequent partial counts of a few categories catch problems while the cause can still be traced.
What do I do with damaged or expired stock?
Write it down or write it off, book the loss, and reverse the input tax credit on goods destroyed or written off. Carrying damaged stock at cost overstates both your assets and your profit.