Stock in a small company’s accounts: counting, valuing and writing down

Closing stock changes your profit, your balance sheet and your Corporation Tax. Count what you hold at the year end, value each item at what it cost or what you’ll get for it if that’s less, and keep the count sheets.

Last checked against GOV.UK on 31 October 2026.

A4O Accounts files your accounts and CT600 from the same figures. Get started free, no card required.

What counts as stock

Stock is what the company holds to sell, or to use in making what it sells: goods bought for resale, raw materials, part-finished work and finished goods. Equipment the company keeps and uses is a fixed asset, not stock.

A service business can have stock too, as work in progress. It’s valued at the cost of the staff directly doing the work plus attributable overheads, with no profit added.

On the balance sheet, stock is the first line under current assets. See what’s on a small company balance sheet.

Why the figure matters

Closing stock is taken off opening stock plus the year’s purchases to get the cost of what you actually sold. So a higher closing stock means a lower cost of sales and a higher profit, and a lower closing stock does the opposite.

Figures are invented. This year’s closing stock becomes next year’s opening stock, so an error in one year carries into the next.

Counting it

The records a company must keep include what stock it holds at the end of each financial year and the stocktakings used to work out that figure, if it deals in goods. A count is how most small companies get there.

• Pick the date. Count on the year-end date if you can. If you can’t, count as close to it as you can and adjust for what came in and went out in between, keeping a note of the adjustments.
• Count everything you own, wherever it is. That includes stock in a van, in storage or at another site. Leave out goods you hold for someone else.
• Write down the state it’s in. Note anything damaged, out of date or unlikely to sell, because that’s what you’ll need for the write-down.
• Match the paperwork to the goods. Goods in the count should have their bill in the books, or an accrual if the bill hasn’t arrived. Goods you’ve sold and invoiced shouldn’t be in the count.
• Keep the sheets. Records must be kept for 6 years from the end of the last financial year they relate to.

Valuing it

Stock goes in the accounts at the lower of cost and net realisable value. FRS 102 and FRS 105 both require this. HMRC accepts one other basis for tax, mark to market, but FRS 102 only allows that for stock sold in an active market at published prices, and FRS 105 doesn’t offer it.

Cost

Cost is everything spent bringing the stock to where it is and the state it’s in.

Take trade discounts and rebates off the purchase price.

Which cost to use

Items that aren’t interchangeable, or that are made for a specific job, go in at their own actual cost. For anything else, you usually can’t tell which of many identical items you’re holding, so you use a method. Use the same one for all stock of a similar nature and use.

• First in, first out (FIFO) assumes you sell the oldest first, so what’s left is valued at the most recent prices.
• Weighted average values each item at the average cost of what you hold.
• Last in, first out (LIFO) is in the 2008 regulations, but FRS 102 and FRS 105 both prohibit it and HMRC doesn’t allow it for tax. Don’t use it.

For example, you buy 100 units at £10 and later 100 at £12, then sell 100. FIFO values the 100 left at £1,200. A weighted average values them at £1,100. Shortcuts such as standard cost, the retail method or the most recent purchase price are allowed if the result is close to cost.

Net realisable value

This is what you expect to sell the stock for in your normal market, less the further costs of getting it sold, such as repairs or sales commission. Don’t assume a forced sale on the year-end date.

Writing stock down

If net realisable value is below cost, the lower figure goes in the accounts, and the difference is a cost in this year.

For example, 10 units cost £40 each. They’re damaged, and you expect to sell them for £30 each after a £5 repair. Net realisable value is £25 each, so you write them down by £15 each, £150 in total. The quantity stays at 10, and only the value falls.

• Do it item by item. Groups of similar items can be considered together.
• Have a reason. Damage, going out of date and falling demand can all mean you’ll get less than cost.
• Slow-moving isn’t enough. HMRC says slow-moving stock isn’t in itself a reason to go below cost. What matters is whether you expect to sell it for less than it cost.
• Formulas are allowed, if realistic. Writing stock down by age is acceptable if the formula reflects what you’ll really get. Check each year that it still does.
• Look at what happened after the year end. If you cut the price after the year end but before the accounts are approved, that’s evidence of what the stock was worth.
• Reverse it if things change. If the reason for a write-down no longer applies, reverse it, but only up to the amount originally written down.

Stock and Corporation Tax

Because stock is in the profit, it’s in the tax. HMRC accepts the valuation in your accounts where it correctly follows accounting standards and pays enough regard to the facts. The tax computation then starts from that profit.

At the year end

Count stock after you’ve caught up on bills and before you check the trial balance. The year-end checklist gives the full order. On micro-entity accounts stock is included in the one current assets figure, but you still need the count and the valuation behind it.

Stock in A4O Accounts

A4O Accounts has a Stock module that keeps a weighted average cost for each item, records stock-takes and posts them to the books, and writes an item’s value down without changing its quantity. The write-down goes to cost of sales. Stock is off until you need it. A company’s Manager turns it on under Overview → Modules.