Stocks

Stocks (Inventory) are goods a business has on hand for sale or use in operations. Opening stock is inventory at the start of a period, while closing stock is what remains at the end. The difference shows what was sold or used during the period.

Quick Summary

Opening stock = goods available at start of trading period
Closing stock = unsold goods at end of trading period
Cost of goods sold = Opening stock + Purchases – Closing stock
Stock appears in both trading account and balance sheet
Proper stock valuation affects profit calculation directly

Understanding Stocks in Accounting

Every business that sells goods keeps inventory (stock). Think of a school bookshop at the start of term. The exercise books, pens, and rulers already on the shelves are the opening stock. During the term, the shop buys more supplies from wholesalers (purchases). At term end, unsold items remaining are the closing stock.

Stock is important because it helps calculate profit. If Mama Ngozi’s provisions store started January with N50,000 worth of goods (opening stock), bought N200,000 more goods during the month (purchases), but still has N40,000 worth unsold at month end (closing stock), then she actually sold N210,000 worth of goods. This is called the cost of goods sold.

Opening Stock

Opening stock is the value of goods a business has at the start of an accounting period. For new businesses, opening stock is zero because they just started. For existing businesses, the opening stock equals the previous period’s closing stock. If a trader closed December with N75,000 worth of goods, that N75,000 becomes January’s opening stock.

Opening stock includes all goods ready for sale, whether in the shop, warehouse, or store. It does not include fixed assets like vehicles or furniture, even if unused. Only goods meant for sale or raw materials for production count as stock.

Closing Stock

Closing stock is goods that remain unsold at the end of a trading period. A trader physically counts all items and values them to find closing stock. This stocktaking usually happens at year end, though some businesses check monthly or quarterly.

Closing stock appears in two places in financial statements. First, it reduces cost of goods sold in the trading account. Second, it appears as a current asset in the balance sheet because the business owns these goods and expects to sell them soon.

Stock Valuation Methods

Valuing stock correctly is critical. WAEC and NECO expect students to know the main rule: stock is valued at cost or net realizable value, whichever is lower. This follows the prudence concept in accounting.

Example: A phone dealer has 10 phones that cost N40,000 each. The market price dropped to N35,000 each. He values the stock at N35,000 × 10 = N350,000, not N400,000, because the lower value is more realistic.

If those same phones can now sell for N45,000 each, he still values them at cost (N40,000 each) because we don’t count profit until goods actually sell. This prevents businesses from overstating their wealth.

Stock in Trading Account

The trading account shows gross profit using this formula:

Sales – Cost of Goods Sold = Gross Profit
Cost of Goods Sold = Opening Stock + Purchases – Closing Stock

Let’s see a practical example with Adeola’s fabric shop in Aba:

Opening stock (1 Jan): N120,000
Purchases during year: N450,000
Closing stock (31 Dec): N95,000
Sales: N680,000

Cost of goods sold = N120,000 + N450,000 – N95,000 = N475,000
Gross profit = N680,000 – N475,000 = N205,000

Notice that higher closing stock reduces cost of goods sold and increases gross profit. This is why some dishonest traders inflate closing stock values to show better profits. Auditors check stock carefully to prevent this fraud.

Comparison: Opening vs Closing Stock

Aspect	Opening Stock	Closing Stock
When counted	Start of trading period	End of trading period
Source	Previous period’s closing stock	Physical count and valuation
Trading account	Added to purchases (increases cost)	Subtracted (reduces cost)
Balance sheet	Does not appear	Shown as current asset
New business	Zero (nil)	Value of unsold goods
Effect on profit	Higher opening stock = lower profit	Higher closing stock = higher profit

Common Exam Mistakes

WAEC Chief Examiners report these frequent errors:

Wrong placement in accounts: Students add closing stock to purchases instead of subtracting it. Remember: closing stock reduces cost of goods sold.
Confusing opening and closing stock: Some students use the same figure for both or swap them. Check the dates carefully. 1 January stock is opening; 31 December stock is closing.
Showing opening stock in balance sheet: Only closing stock appears in the balance sheet. Opening stock appears only in the trading account.
Wrong valuation: Students value stock at selling price instead of cost. Always use cost or net realizable value, whichever is lower.
Including non-trading items: Office supplies (paper, pens for office use) are not stock for trading. Only goods meant for sale count as stock in the trading account.
Poor explanation: When asked to “explain,” students just write “goods at the start” without saying why it matters or how it affects profit calculation.

Practice Questions

Multiple Choice Questions

1. A business started with stock valued at N80,000, purchased goods worth N300,000, and had closing stock of N60,000. What is the cost of goods sold?

a) N260,000
b) N320,000 ✓
c) N380,000
d) N440,000

2. Closing stock appears in the:

a) Profit and loss account only
b) Trading account only
c) Balance sheet only
d) Trading account and balance sheet ✓

3. Goods costing N50,000 can now sell for N45,000. At what value should they appear as closing stock?

a) N50,000
b) N45,000 ✓
c) N47,500 (average)
d) N55,000

4. For a newly established business, the opening stock is:

a) The same as purchases
b) Equal to closing stock
c) Zero (nil) ✓
d) Equal to sales

Essay Questions

1. Explain the difference between opening stock and closing stock. (6 marks)

Tip: Define each term, state when each is counted, explain how each affects the trading account, and mention that only closing stock appears in the balance sheet.

2. The following information relates to Bello’s business for the year ended 31 December 2024:

Opening stock: N140,000
Purchases: N520,000
Sales: N780,000
Closing stock: N110,000

Required:
(a) Calculate the cost of goods sold (3 marks)
(b) Calculate the gross profit (2 marks)
(c) State the value at which closing stock will appear in the balance sheet (1 mark)

Tip: Show all workings clearly. Remember the formula: Opening stock + Purchases – Closing stock = Cost of goods sold.

3. State four reasons why businesses conduct physical stocktaking at year end. (4 marks)

Tip: Think about detecting theft, preparing accurate accounts, insurance purposes, and identifying damaged goods.

Memory Aids

OPCL – Remember the order in trading account:
Opening stock (add)
Purchases (add)
Closing stock (subtract)
Leaves you with cost of goods sold

“Last Year’s End is This Year’s Start” – Closing stock becomes next period’s opening stock.

“Lower is Better” – For stock valuation, always use cost or net realizable value, whichever is lower.