Glossary
What is stock valuation?
What stock valuation means, the methods Indian businesses use, and how the figure reaches your balance sheet and profit.
Updated
In short
Stock valuation is putting a rupee value on the goods you hold, using a costing method. SimpleERP values every product at weighted average cost and checks the total against the inventory account in the ledger.
Stock valuation is working out the rupee value of the goods a business holds, using a costing method such as weighted average or FIFO. The value appears as inventory on the balance sheet, and it decides cost of goods sold and therefore profit. Under Indian accounting standard AS 2, stock is valued at cost or net realisable value, whichever is lower.
Stock valuation: a worked example
| Product | On hand | Average cost | Value |
|---|---|---|---|
| Steel rack 4 shelf | 70 | ₹3,170 | ₹2,21,900 |
| Office chair mesh | 24 | ₹4,850 | ₹1,16,400 |
| LED panel 2×2 | 200 | ₹1,145.60 | ₹2,29,120 |
| Cable tray 3 m | 150 | ₹1,020 | ₹1,53,000 |
| Total stock value | ₹7,20,420 | ||
| Inventory account in the ledger | ₹7,20,420 | ||
| Difference | ₹0 |
Which stock valuation method should a small business use?
Weighted average suits most traders and small manufacturers that buy the same items often at changing prices. FIFO suits goods where age matters, such as food or medicines, and needs each purchase kept as a layer. Whatever you choose, use it every year.
FAQ
Questions, answered
What are the methods of stock valuation?
The common ones are weighted average cost, FIFO (first in, first out) and specific identification for unique items. LIFO is not allowed under Indian accounting standards. SimpleERP uses weighted average only.
Why does stock valuation affect profit?
Cost of goods sold equals opening stock plus purchases less closing stock. A higher closing stock value means a lower cost of goods sold and a higher profit, so an overvalued stock figure overstates profit and the tax on it.
What is net realisable value?
The price you could sell the goods for, less the cost of selling them. If 9 old racks would now sell for less than they cost, AS 2 says value them at that lower figure. The loss shows in this year's profit.
How do I get a stock valuation report from SimpleERP?
Open Stock on hand. It shows each product's quantity, average cost and value, grouped by product or by warehouse, with the total checked against the inventory account. Export it to CSV for your accountant or auditor.
Related
Keep reading
Weighted average cost
A stock valuation method where every unit carries the same cost: stock value divided by quantity, re-blended on each receipt.
Read moreClosing stock
The value of unsold goods at the end of a period: opening stock plus purchases, less the cost of goods sold.
Read moreWeighted average cost
How weighted average cost values stock and cost of goods sold, with the formula, a worked example and how it compares with FIFO.
Read more
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