Question

Valuation of closing stock at actual cost price or market price whichever is lower is an example of which accounting convention explain that convention

Answer 1

Conservatism

It states that "anticipate no profit, but provide for all possible losses"

Answer 2

Closing Stock is always calculated at cost price or market price, whichever is less. This is a mere example of Convention of Conservatism which asks us to anticipate all probable losses in business, but never anticipate any profits of the business. This is because closing stock values are usually of two types - one being the cost value and the other being the market value. Now, the question arises is why do we calculate it at a lower price? The answer to this question purely is as followed -

Closing Stock is regarded as the stock of any commodity of business which remained unsold during the financial year. As it remained unsold, but let's assume you calculated it's market price which would be around -

Let's assume you bought 100 books to sell at the beginning of the year, costing you 50 per book so, 50 x 100 = 50,000

Now let's say, 30 of the books remain unsold at the year, and their cost is 50 x 30 = 1500, this is the cost price of the closing stock.

If the market price of closing stock was 40 per book at that time, marked price would be 1200 - which would be an overall loss of stock for you. But, per to the principals / conventions of accounting, you must always show the value lowest when calculating closing stock and showing it in Trading A/C and Balance Sheet on the Asset Side.