What is the journal entry to record the closing stock at the end of the year?a)Debit Closing Stock Account, Credit Trading Accountb)Debit Trading Account, Credit Closing Stock Accountc)Debit Purchases Account, Credit Closing Stock Accountd)Debit Closing Stock Account, Credit Purchases AccountCorrect answer is option 'A'. Can you explain this answer?

Question

Answer

Understanding the Closing Stock Journal Entry
At the end of the accounting year, businesses need to account for their closing stock, which is the inventory that remains unsold. The journal entry for recording closing stock directly impacts the Trading Account.
Correct Journal Entry
The correct entry to record closing stock is:
- Debit Closing Stock Account
- Credit Trading Account
This is represented as:
- Debit: Closing Stock Account
- Credit: Trading Account
Why This Entry is Made
- Reflects Inventory Value: Closing stock represents the value of unsold goods, which is an asset. By debiting the Closing Stock Account, we acknowledge this asset on the balance sheet.
- Impact on Trading Account: Credit to the Trading Account reduces the cost of goods sold (COGS) for the year. This adjustment ensures that the profit/loss reflects only the actual goods sold during the period.
Alternative Options Explained
- Option B (Debit Trading Account, Credit Closing Stock): This would incorrectly increase COGS and not accurately represent the closing stock as an asset.
- Option C (Debit Purchases Account, Credit Closing Stock): This does not make sense as purchases are recorded during the period, not at year-end.
- Option D (Debit Closing Stock, Credit Purchases Account): This entry mixes concepts as purchases are separate from closing stock evaluation.
Conclusion
The proper journal entry helps maintain accurate financial statements, ensuring stakeholders have a clear view of the company’s financial position. Always remember, the closing stock impacts both the balance sheet and the trading results of a business.

Answer

The journal entry to record the closing stock at the end of the year is to debit the Closing Stock Account and credit the Trading Account. This entry reflects the value of unsold stock as an asset at the end of the year.

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