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Opening stock

Opening stock refers to goods lying unsold with the entity at the end of the previous accounting period, which is brought forward through an opening entry in the current accounting period. This is shown on the debit side of Trading Account.


Purchases refer to goods purchased during the year for resale. Assets purchased for permanent use in the business, such as purchase of plant, furniture etc., are not included in the purchase of goods. It includes both cash and credit purchases. The following items are to be deducted from purchases at last price:

  • Purchase returns or return outwards
  • Goods distributed as free samples
  • Goods given as charity
  • Goods withdrawn for personal use

Direct expenses

Direct expenses refer to all those expenses which are incurred from the stage of purchase till the stage of bringing the goods to saleable condition. In other words, these are those expenses which are directly connected to the production or purchase of goods.

Examples of direct expenses include wages, freight inwards, carriage inwards, power and fuel, factory lighting, water expenses, Octroi, customs duty etc.


Sales refer to the sale of goods in which the organization deals. It includes both, sales in cash as well as on credit. Sale of furniture by a furniture dealer will be regarded as sales as it is his stock in trade. Sale of furniture by a trader dealing in stationeries cannot be considered as a sale, as furniture is not his stock in trade. The following items are deducted from sales:

  • Sales returns or return inwards
  • Sales tax/VAT (if the tax amount is included in sales)

Note: Only the sale of stock in trade is considered as a sale and not sale of capital assets.

Closing stock

It refers to the goods lying unsold with the entity at the end of the current accounting period which will be carried forward to the next accounting period through a closing entry. Closing stock is shown on the credit side of trading account and also on the asset side of the Balance Sheet.

According to the concept of conservatism, stock is valued at cost or net realizable value, whichever is lower.

Adjusted purchases

When closing stock appears in the trial balance it means it is already adjusted against purchases. In such case it is called as adjusted purchases. In this situation closing stock will appear in the Balance Sheet asset side only. Normally in case of adjusted purchase, both opening and closing stocks are adjusted against purchases.

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