Why is closing stock recorded on the credit side of trading account?
Andrew Campbell
Updated on February 01, 2026
Reason for recording closing stock on credit side of trading account – The application of matching concept. To find out gross profit or gross loss direct expenses are matched with the direct revenues. It is recorded on credit side of Trading Account due to the application of “Matching Concept” only.
Why is closing stock debited in trading?
closing stock minus opening stock gives you the cost of goods used from the stock in hand. That’s why opening stock is debited and closing stock is credited – To give effect to how much stock is used during the year for the sales.
What comes in credit side of trading account?
Trading involves buying and selling activities. Items included on the debit side are opening stock, purchases, and direct expenses and on the credit side are sales and closing stock. The resultant figure is either gross profit or gross loss.
How is closing stock treated in trading account?
Adjustment of Closing Stock in the Final Accounts
- Closing Stocks as shown on the Credit Side of Trading Account.
- Closing Stocks as shown on the Asset Side of Balance Sheet.
What happens when closing stock decreases?
Closing inventory When a closing stock is wrongly calculated say overstated it lowers the cost of goods sold and increases gross profit for the year. Another impact of inventory on the cost of sale is their physical obsolescence, deterioration, theft, shortage or decline in prices.
Is trading stock a debit or credit?
Closing stock or as it is also named as closing inventory is definitely an asset. But trading account is not the same as Inventory account. Inventory, being an asset, should have a debit balance in Inventory account. Trading account is a distinct account and both must not be mixed up together.
Does rent come in trading account?
Items of expenditure (Dr.) All direct expenses like Carriage inward & Freight expenses, Rent for godown or factory, Electricity and Power expenses, wages of workers and supervisors, Packing expenses, etc.
Why is closing stock written on the credit side of?
Trading account is a distinct account and both must not be mixed up together. The answer to the question “why closing stock is written on the credit side of the trading account” lies in understanding two points:
How is closing stock valued in trading account?
Closing Stock is valued either at cost price or at market price whichever is lower. Closing Stock is not shown in the Trial balance and are shown in the credit side of Trading Account as well as on the asset side of the Balance Sheet. Purchases are the goods which are bought for resale .
Which is shown on the credit side of a trading account?
Activities which generate revenue for the business such as Sales of Services or Goods, Closing Stock are shown on the credit side (Right) whereas activities which are a part of the Cost of Goods Sold such as the purchase of raw material, opening stock, direct expenses, etc. are shown on the debit side (Left).
Why does closing inventory appear on the credit side of?
Second, in order to account for the inventory at the year end in the trading account, closing entry is passed and due to this closing entry closing stock appears at the credit side of trading account. This is the accounting reason for having it on the credit side. The closing entry is as follows: Debit: Inventory account. Credit: Trading account.
