Closing stock in small company accounts: how to value it

In short: Count the goods the company holds at its year end and value each line at the lower of its cost and its net realisable value (expected selling price less the costs to sell it); the total is closing stock. Cost of sales is opening stock plus purchases minus closing stock. HMRC accepts that basis for Corporation Tax (HMRC manual BIM33115). Taxley takes your stock and cost of sales figures into the accounts and the Company Tax Return (CT600) for £49.95 with micro-entity accounts, and files the accounts at Companies House once the return is paid and the accounts are finished.

Take the 30-second check to see whether Taxley fits your company, or estimate the tax with the Corporation Tax calculator.

Key facts (checked on 10 October 2026)

What is closing stock and how does it change cost of sales?

Closing stock is the goods a company still holds at the end of its financial year, valued for the accounts. It is subtracted from opening stock plus the year's purchases to give cost of sales, so a higher closing stock means lower cost of sales and a higher profit, and a lower closing stock means the opposite.

HMRC's manual explains why: the profit calculation deducts the whole of the year's purchases and then credits a closing figure for unsold stock, which carries that cost into the next year (HMRC manual BIM33110). Stock is anything the company bought or made with a view to selling at a profit, as opposed to assets it keeps to use, such as equipment (HMRC manual BIM33015). A company that deals in goods must keep year-end statements of stock and the stocktake sheets they came from (Companies Act 2006 s.386(4)).

How do you value closing stock for company accounts?

Value each line at its purchase price or production cost, unless its net realisable value is lower, in which case use net realisable value. The rule comes from Schedule 1 to the Small Companies Regulations, SI 2008/409, and applies to every current asset in micro-entity and small company accounts, including stock.

Paragraph 23 of Schedule 1 says a current asset goes in at its purchase price or production cost, and paragraph 24 says it goes in at net realisable value if that is lower; a write-down must be written back if its reasons stop applying (SI 2008/409 Sch 1 para 24). Purchase price is the price paid plus incidental costs of buying, less incidental reductions, and distribution costs can't be part of a current asset's production cost (SI 2008/409 Sch 1 para 27). The same rule binds a micro-entity: regulation 3(1A) switches off only the alternative and fair value accounting rules for micro-entities, so stock stays on the cost-based rules (SI 2008/409 reg 3).

When identical items were bought at different prices, the directors pick a costing method for each class of stock. Paragraph 28 of Schedule 1 lists first in, first out (FIFO), last in, first out (LIFO), a weighted average price, and any other method reflecting generally accepted best practice, provided the method suits the company's circumstances (SI 2008/409 Sch 1 para 28). FIFO assumes the oldest stock sells first, so unsold stock carries the most recent prices (HMRC manual BIM33120). FRS 102 prohibits LIFO in the accounts (HMRC manual BIM33120), and for tax HMRC rejects LIFO and base stock methods, so pick FIFO, a weighted average or actual cost per item (HMRC manual BIM33125).

What does HMRC accept as a stock valuation for Corporation Tax?

HMRC accepts the stock figure in accounts prepared under generally accepted accounting practice, provided the practice is applied correctly, the valuation pays enough regard to the facts and no tax law overrides it. The two acceptable bases are the lower of cost and net realisable value, and mark to market; HMRC rejects every other basis.

Trading profits for Corporation Tax start from accounts drawn up under generally accepted accounting practice, subject to any adjustment the law requires (CTA 2009 s.46), and HMRC's manual says the valuation in such accounts should be accepted on those conditions (HMRC manual BIM33115). Net realisable value is the expected selling price in the company's normal market, less the further costs of getting the stock into a saleable state and selling it; FRS 102 calls this estimated selling price less costs to complete and sell. HMRC says it can fall below cost through deterioration, obsolescence or a change in demand, but a forced-sale value on the balance sheet date isn't acceptable (HMRC manual BIM33140). HMRC accepts age-based write-down formulas only when they give a realistic estimate of net realisable value (HMRC manual BIM33145).

How does a stock write-down change Corporation Tax?

A write-down to net realisable value lowers closing stock, which raises cost of sales and lowers taxable profit by the same amount. At the 19% small profits rate, each £1,000 written down saves £190 of Corporation Tax this year, and the loss isn't counted again when the damaged stock is later sold.

Take Harbour Homeware Ltd, a fictional micro-entity selling homeware online, with no associated companies and a 12-month financial year ending 31 March 2026. Its stock at cost was £6,200 at the start of the year, it bought £31,500 of goods during the year, and its year-end count at cost came to £8,400. Included in that count are 120 candles, bought at £7.50 each (£900), that were damaged by damp. The directors expect to sell them for £3.00 each, with £0.50 of selling costs each, so their net realisable value is £2.50 each, or £300. The write-down is £900 − £300 = £600, and closing stock becomes £8,400 − £600 = £7,800. Sales were £64,000 and other allowable costs £18,600, with no other tax adjustments. The profit is £50,000 or less, so the 19% small profits rate applies (GOV.UK: Corporation Tax rates).

The write-down lowers closing stock by £600 and raises cost of sales by £600, so taxable profit falls from £16,100 to £15,500 and Corporation Tax from £3,059 to £2,945, a saving of £114 (£600 × 19%). Leaving the damaged line at cost would overstate the year's profit by £600. When the candles sell next year for £3.00 each less £0.50 of costs, they realise £300, exactly their value in opening stock, so next year shows no profit or loss on them: the loss sits in the year the damage was known, as paragraph 24 of Schedule 1 requires (SI 2008/409 Sch 1 para 24). Our Corporation Tax rates guide covers profits above £50,000.

Which stock-count mistakes change the profit?

Any mistake that overstates closing stock overstates this year's profit and Corporation Tax by the same amount, and one that understates it does the reverse. The year-end cut-off matters most: goods bought before the year end belong in the count, and goods sold before it don't, as HMRC's manual describes.

HMRC's guidance on stock provisions describes checking the "cut-off", meaning that items are correctly in stock where they were bought before the reporting date or sold after it (HMRC manual BIM33150). Each £1,000 of overstated closing stock adds £190 to the year's Corporation Tax at the 19% small profits rate (GOV.UK: Corporation Tax rates). The same error lowers next year's profit by £1,000, because closing stock becomes next year's opening stock, so it shifts tax between years. Keep the count sheets with the valuation workings. Our year-end checklist puts the count alongside accruals, prepayments and depreciation, and the accruals and prepayments guide covers the costs either side of the cut-off.

Where does stock go in micro-entity and small company accounts?

In micro-entity accounts, stock sits inside item C, current assets, as one figure with debtors and cash. In small company accounts using Format 1, it has its own line, C.I Stocks, under current assets. Small companies also choose a profit and loss format, and Format 1 shows cost of sales and gross profit.

The micro-entity formats in Section C of Part 1 of Schedule 1 run from A, called-up share capital not paid, to K, capital and reserves, with C current assets as a single lettered item and D prepayments and accrued income on its own (SI 2008/409 Sch 1 Part 1). The micro-entity profit and loss format has no gross profit line: its items run from A turnover and B other income through C cost of raw materials and consumables, D staff costs, E depreciation and other amounts written off assets and F other charges, to G tax and H profit or loss. The small company formats in Section B split current assets into I stocks, II debtors, III investments and IV cash at bank and in hand, and Stocks divides into stocks and payments on account. Profit and loss Format 1 shows cost of sales and gross profit; Format 2 shows the change in stocks instead. See what goes in micro-entity accounts and what goes in FRS 102 small company accounts.

What happens to stock a director takes or when the trade stops?

Stock the company takes out of its trade for any other purpose counts as a sale at open market value. Stock still held when a company permanently stops trading is valued under special cessation rules: on a sale to a UK trader, broadly the price or an arm's length price, and otherwise open market value.

Section 157 of the Corporation Tax Act 2009 says that when a company appropriates trading stock for any other purpose, the open market value at that time is a trading receipt and anything actually received is ignored (CTA 2009 s.157). HMRC's manual summarises sections 156 to 161 as treating any disposal of trading stock not made in the course of the trade as a sale at market value (HMRC manual BIM33630). So goods a director takes home aren't simply left in cost of sales: record them, and check the director's side separately, such as a director's loan account entry. When a company permanently stops trading, its remaining stock must be valued (CTA 2009 s.162).

The cessation value depends on who takes the stock. Sold to an unconnected buyer who will trade with it in the UK and can deduct its cost, the value is the price actually received (CTA 2009 s.165). Sold to a connected UK trader, the value is an arm's length price (CTA 2009 s.166), unless both parties elect for a lower value within two years after the end of the accounting period of cessation (CTA 2009 s.167). In any other case it is the amount the stock would have realised on the open market (CTA 2009 s.164), which HMRC reads as a bulk sale under practical business conditions, not a fire sale (HMRC manual BIM33525). Our guide to the final CT600 when closing a company covers the rest of the closing return.

How does Taxley handle stock and cost of sales?

Taxley takes the stock and cost of sales figures you have worked out and puts them in place: stock on the balance sheet, cost of sales in the profit and loss account, and the resulting profit in the Corporation Tax computation. It doesn't count, cost or write down stock for you.

Taxley (taxley.co.uk), UK online software that prepares and files the Company Tax Return (CT600) with HMRC and the annual accounts with Companies House, asks a trading company for its year-end stock in the balance sheet step, as "Stock / inventory", and for its cost of sales, the direct cost of the goods sold, in the profit and loss step. One-page Simple mode asks for the same cost as "Cost of raw materials and consumables", with stock inside total current assets. If you import a trial balance, Taxley suggests the stock line for a closing stock account shown in the balance sheet, and cost of sales for one shown in the profit and loss account or for opening stock and stock movement accounts; you check each suggestion before applying it.

In micro-entity accounts Taxley shows stock inside item C, current assets, and cost of sales as item C, cost of raw materials and consumables. In small company (FRS 102 Section 1A) accounts it shows a Stocks line and a Format 1 profit and loss account with cost of sales and gross profit. The cost of sales figure reduces the profit the computation starts from, so it flows into trading profits in box 155 (HMRC: Company Tax Return guide). Before you declare, Taxley reminds a trading company that stock and work in progress must be valued at the year end, because it applies the figures you enter but doesn't work them out. The fee is £49.95 with micro-entity accounts or £139 with small company accounts, and covers filing the accounts at Companies House once the return is paid and the accounts are finished. Taxley isn't tax advice, so review your valuation before you file. Take the 30-second check to see whether Taxley fits your company, or see the price for your company.

Frequently asked questions

Can I value closing stock at its selling price?

No. Company accounts include stock at cost unless net realisable value is lower (SI 2008/409 Sch 1 para 24), so using the selling price would count a profit not yet earned. A retailer may estimate cost as selling price less its normal margin, if that approximates actual cost (HMRC manual BIM33135).

Should slow-moving stock be written down automatically?

No. HMRC says slow-moving stock isn't by itself a reason to value below cost, because it may still sell at a profit, as antiques and jewellery often do (HMRC manual BIM33150). Write it down only where you expect to sell it for less than it cost.

Can a stock write-down be reversed later?

Yes. If the reasons for writing stock down to net realisable value stop applying, in whole or in part, the write-down must be written back to that extent (SI 2008/409 Sch 1 para 24). The reversal increases profit in the year it is made.

How long should the company keep its stock count sheets?

For 6 years from the end of the last company financial year they relate to, or longer in some cases, such as a late return or an HMRC compliance check (GOV.UK: Company and accounting records). Keep the count sheets and the valuation workings together.

General information, not personalised tax or accounting advice.