Closing Stock Valuation and Write-Offs: Getting Inventory Right in the Books and Under GST
Value closing stock at the lower of cost and net realisable value, using FIFO or weighted average, not LIFO. Write down slow-moving and damaged stock, and write off what cannot be sold. Input tax credit on goods lost, destroyed, written off or given as samples must be reversed.
For a trader or manufacturer, closing stock is often the largest number in the balance sheet, and the one least checked. Overvalued stock inflates profit and tax. Damaged stock left in the books carries GST credit you are not entitled to.
The valuation rule
Stock is valued at the lower of cost and net realisable value (NRV), as required by the accounting standard on inventories.
- ✓Cost includes purchase price, non-recoverable taxes, freight inwards and, for manufacturers, conversion costs. It excludes GST you can claim as credit.
- ✓NRV is the expected selling price less costs to complete and sell.
Cost formulas
| Method | Allowed? |
|---|---|
| First in, first out (FIFO) | Yes |
| Weighted average | Yes |
| Specific identification | For items not interchangeable, such as custom machines |
| Last in, first out (LIFO) | No |
Use the same method every year.
Slow-moving and damaged stock
- Age the stock by date of receipt.
- Check items over 180 days without movement.
- Estimate NRV for slow, obsolete or damaged items, and write down to NRV.
- Write off what cannot be sold.
GST on stock lost, destroyed or written off
Input tax credit is blocked on goods lost, stolen, destroyed or written off (Section 17(5)(h) of the CGST Act). If you claimed credit when buying them, reverse it in GSTR-3B for the period of the write-off.
A worked example
A Ludhiana hosiery wholesaler's year-end stock at cost is ₹80 lakh. A review finds:
| Stock | Cost | NRV | Value in books |
|---|---|---|---|
| Current styles | ₹68 lakh | ₹90 lakh | ₹68 lakh |
| Last season's styles | ₹9 lakh | ₹5 lakh | ₹5 lakh |
| Water-damaged cartons | ₹3 lakh | Nil | Written off |
| Total | ₹80 lakh | ₹73 lakh |
The write-down of ₹7 lakh reduces profit. GST credit of about ₹15,000 (5% on the ₹3 lakh damaged stock) is reversed.
Physical counts
- ✓Count at least once a year; monthly for high-value items.
- ✓Reconcile the count with the books and investigate differences.
- ✓Record who counted and who checked.
Frequently asked questions
Is the write-down deductible for income tax?
Valuing stock at the lower of cost and NRV is generally accepted. Keep evidence for the NRV used.
Do I reverse credit on stock given as free samples?
Yes. Credit on goods given as gifts or free samples is also blocked.
What about stock destroyed in a fire and claimed from insurance?
Credit is reversed on the destroyed goods. The insurance claim does not restore it.
Sources
This is a summary, not professional advice. Confirm with your chartered accountant.
Written by
Founder, Airwix Technologies (Sleet)
Vatsal Sutariya is the founder of Airwix Technologies in Ahmedabad, the company that builds Sleet: SleetHR for HR and payroll, and Sleet Accounting for GST billing and books. He writes about GST, invoicing, business tax and choosing software for Indian businesses, and checks each rule against the official notification before it is published.
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