Stock valuation determines the value of inventory held at a point in time and the cost charged when goods are sold. The chosen method — commonly FIFO or weighted average in Indian SMEs — affects both COGS in the P&L and closing stock on the balance sheet.
Consistent valuation is important for comparable accounts and is expected by auditors and tax authorities.
Valuation starts with defining cost: the purchase price plus non-creditable duties, freight inward and other expenses of bringing goods to their present location and condition, minus trade discounts. GST for which input credit is claimed stays out. Accounting standards then require stock to be carried at the lower of this cost and net realisable value — the estimated selling price less the costs still to be incurred to make the sale.
The write-down rule bites whenever goods deteriorate. Suppose an item cost ₹150 but, being shop-soiled, will now fetch only ₹100 after spending ₹10 on repacking. Its net realisable value is ₹90, so it is carried at ₹90 and ₹60 is charged to the current year's profit rather than left buried in stock. Expired, obsolete and slow-moving items deserve the same scrutiny at every year-end.
Practice slips in predictable ways: valuing stock at selling price, leaving claimable GST inside cost, and rolling forward last year's rates without a fresh physical count. Goods in transit, stock lying with job-workers and goods sent on approval are routinely missed from the count. Since closing stock feeds both the balance sheet and COGS, every one of these errors flows straight into reported profit.