Question

In goodwill chapter there are certain questions like stock is undervalued or overvalued ... And in some while subtracting in the year in which overvaluation or undervaluation takes place we also make changes. In the next year ..... Please tell me in detail about the treatment..... ath

Answer 1

Over-valuation of Closing Stock has the following impacts-
a) Decrease profits in the year of over-valuation
b) Increase profits in the subsequent year

Explanation-Closing Stock is recorded on the credit side (reflecting incomes) of Trading A/c. Now, when closing stock is over-valued it means Trading A/c will give inflated gross profit and Profit and Loss A/c will give inflated net profit. Therefore, in the year of over-valuation, to arrive at the correct profit figure, we need to 'decrease' the profit given in the question. You must also be knowing that closing stock of one year becomes the opening stock of the next year. Therefore, over-valued closing stock in current year, indicates over-valued opening stock in the subsequent year. Opening Stock is recorded on the debit side (reflecting expenses) of Trading A/c. Now, when opening stock is over-valued it means Trading A/c will give lower gross profit and Profit and Loss A/c will give lower net profit. Therefore, in the subsequent year of over-valuation, to arrive at the correct profit figure, we need to 'increase' the profit given in the question. ​

Under​-valuation of Closing Stock has the following impacts:
a) Increase profits in the year of under-valuation
b) Decrease profits in the subsequent year

Explanation: Closing Stock is recorded on the credit side (reflecting incomes) of Trading A/c. Now, when closing stock is under-valued it means Trading A/c will give lower gross profit and Profit and Loss A/c will give lower net profit. Therefore, in the year of under-valuation, to arrive at the correct profit figure, we need to 'crease' the profit given in the question. You must also be knowing that closing stock of one year becomes the opening stock of the next year. Therefore, under-valued closing stock in current year, indicates under-valued opening stock in the subsequent year. Opening Stock is recorded on the debit side (reflecting expenses) of Trading A/c. Now, when opening stock is under-valued it means Trading A/c will give inflated gross profit and Profit and Loss A/c will give inflated net profit. Therefore, in the subsequent year of under-valuation, to arrive at the correct profit figure, we need to 'decrease' the profit given in the question.

Answer 2

Hey Mate!

In undervaluation of closing stock, add profit in the respective year n less profit in next subsequent year.

In overvaluation of closing stock, less profit in the respective year n add profit in next subsequent year.

Hope it helps u...

☺️☺️☺️