At the end of the accounting period, when the accountants begin to close off accounts
in preparation for the financial statements, there are a few important tasks to do first.
The first of which is to calculate the closing stock of the period, to prepare the
Trading, Profit & Loss Account, Bank Reconciliation, etc.
On the bases of the accruals concept, revenues should be matched with their relevant
cost as per the corresponding period. As such, any stock that remains unsold at the
end of the accounting period isn’t included as a part of the cost of sales for that
period. Get it? Well, it’s like a prepayment, u don’t actually account for it during the
current period, because it is relevant only to the following period.
Well, for this reason, the company should find out how much stock it has on hand at
the end of the accounting period, this stock is called closing stock, and the process of
finding out how much you have of it is called stocktaking.
This process is easy if the company is a relatively small where it could actually
physically count each item of stock. Yet as the business grows larger the quantity of
stock held becomes harder to determine.
Therefore a business may wish to close down for a short period for a stock take, or a
business may prefer to keep a detailed record of stock movements whilst baring the
large related costs and headaches!
In more complicated cases, a business may wish to maintain continuous stock re