How to Close the Year When Your Company Holds Inventory

On 31 December a distributor of pump parts shows €120,000 of inventory and a profit of €60,000 for the year. Six steps later inventory is €115,200 and profit is €59,700. Inventory moved by €4,800 and profit by €300. That gap is the reason a year-end close starts with the stock and not with the profit figure.

What is a year-end inventory close?

A year-end inventory close is the set of steps that makes the inventory balance on the last day of the year match the goods the company owns, valued at no more than it can recover. It runs a cut-off, a physical inventory count, a write-down test and a reconciliation, and only then the year-end closing entries and the period lock.

The order matters. Every step before the closing entries can still change profit. The closing entries take profit as it stands and move it to retained earnings, so anything posted after them lands in a year that is already reported. For a distributor or a manufacturer, inventory is often one of the largest balances on the balance sheet, and cost of goods sold comes from the same movements. An error in stock is always an error in profit too, but rarely of the same size.

Our example: a distributor on 31 December

A distributor of pump parts closes its books on 31 December. To keep the arithmetic readable, every unit costs €20.00. VAT is left out.

The stock ledger and the general ledger agree at €120,000. That only says the two records tell the same story. Whether the story is true is what the six steps test.

Step 1: Cut off the documents

Cut-off means every receipt and shipment lands in the year it happened. Three documents sit on the year line in our example.

A shipment that left but was not posted

Shipment SH-7751 to customer Brenta Pumps left the dock on 31 December, and the warehouse posted it on 2 January. It carried 150 units sold at €30.00. The goods left in December, so the sale and its cost belong in December:

If the January posting already exists, it is reversed so the sale is not counted twice. Inventory is now €117,000 for 5,850 units.

Goods received but not invoiced

Goods receipt GR-2291 brought in 200 units, €4,000, from supplier Kestrel Castings on 30 December. The invoice will come in January. Nothing needs to be posted: the units are already in the 6,000, and the receipt already credited GRNI (goods received not invoiced). The year-end task is to prove that the list of open receipts equals the GRNI balance in the general ledger, here €4,000.

Goods bought but still on the way

A container of 300 units, €6,000, was handed to the carrier on 28 December on terms that pass control to the buyer at that point. It arrives on 9 January, and the supplier's invoice has not arrived either. The goods are not in the warehouse, but they are already the distributor's, so they go on the balance sheet as goods in transit:

The container is not counted on 31 December and is not in the stock ledger. It sits in its own account until the goods receipt in January.

Step 2: Count the stock

The physical inventory count is taken on 31 December, after SH-7751 left the dock. The stock ledger says 5,850 units. The count finds 5,820. Thirty units are missing, and at €20.00 that is €600:

Inventory is now €116,400. Count differences are investigated before they are posted, because a missing receipt or a shipment counted twice looks like shrinkage until someone checks. The posting itself is an inventory adjustment. A company that runs cycle counting through the year usually finds a smaller difference here, because most of the errors were corrected in the months they happened.

Step 3: Test for write-downs

The count says the goods are there. The write-down test asks whether they are still worth what the books say. Inventory is carried at cost, but never above net realizable value (NRV), the price the goods can be sold for less the costs of selling them.

Two hundred slow-moving units are carried at €20.00, and their net realizable value is €14.00. The difference, €6.00 × 200, is an inventory write-down:

Inventory is now €115,200. The quantity does not change. The 200 units are still on the shelf, now at €14.00 each. That is the difference between the two entries so far: shrinkage removes units that are gone, and a write-down lowers the value of units that are still there.

Step 4: Reconcile stock to the general ledger

Now each balance is proven from two sides. The stock ledger value follows from the count:

Stock ledger = counted units × cost − write-down
€115,200     = 5,820 × €20.00   − €1,200

Stock on the balance sheet is €115,200 + €6,000 = €121,200. A gap in any row means a movement reached one record and not the other, and it is found and fixed before the closing entries. Inventory reconciliation covers how to trace a gap back to its document.

Step 5: Year-end closing entries

After the first four steps the income statement is final for the year:

Year-end closing entries bring every revenue and expense account to zero and move the profit to retained earnings, so the new year starts counting from nothing:

Both sides total €904,500. Some books pass the balances through an income summary account first, and the result is the same. Inventory does not appear in the entry. It is a balance sheet account, so it is not closed. It carries forward. The inventory journal entries guide shows the everyday postings that built these balances.

Step 6: Lock the period and open the new year

Once the figures are approved, the last period of the year is closed so nothing more can be posted into it. The new year opens with the income statement at zero and the balance sheet exactly as it closed:

Opening must equal closing. If the two differ by even €1, something was posted into the old year after it was closed, or the carry-forward missed an account.

In January the year-end items clear. On 9 January the container arrives and the goods receipt moves it into stock:

Inventory is €121,200, the same stock the balance sheet showed on 31 December, now all on the shelf. When the container's invoice arrives, the €6,000 moves from accrued payables to accounts payable. The invoice for GR-2291 clears GRNI the same way:

What the close changed

Inventory moved 16 times as much as profit. The late shipment added €1,500 of margin, and the shortage and the write-down took €1,800, so profit barely changed. Inventory lost the full €4,800. A profit figure that looks right does not prove that the stock figure is right, which is why the stock is closed first and checked on its own.

Month-end close vs year-end close

Steps 1 to 4 are not year-end work. They belong to every month-end close. Steps 5 and 6 are what makes the year different.

A company that keeps steps 1 to 4 clean every month turns the year-end close into one more month with two extra steps. A company that leaves them for December does twelve months of work in one.

Common year-end inventory mistakes

1. Counting while the warehouse still ships. Goods move between the counted and the not yet counted, and the difference is a timing error, not a loss.
2. Leaving 31 December shipments for January. Revenue and cost of goods sold land in the wrong year, and the count no longer matches the stock ledger.
3. Booking goods in transit twice. The year-end entry stays in place when the goods receipt posts in January, and the same container is in stock two times.
4. Posting a count difference as a write-down. Missing units are shrinkage. A write-down is for units that are there but worth less.
5. Reconciling the total only. Two errors in opposite directions can produce a matching total. Large items are reconciled one by one.
6. Running the closing entries before the count is posted. The shrinkage and the write-down then miss retained earnings, and the closed year has to be opened again to fix it.
7. Leaving the year open after the closing entries. A late posting changes a year whose profit has already been reported.

How Gruvero approaches the year-end close

In Gruvero a count is a document for a full count, a cycle count or an ad hoc count. It moves through draft, counting, review, approved and posted. An approved count creates a draft warehouse adjustment for the difference, and the count is marked posted only after that adjustment is posted, so a count is never finished while its difference is still unposted.

Each accounting period moves from open to soft close to final close. A soft-closed period refuses operational postings. A final close needs the soft close first, a close package marked ready for final close and no draft journal entries. The close package lists what blocks the close: draft invoices, credit notes, payments and journal entries, inventory value that moved without reaching the inventory account, and warehouse quantity and FIFO value that sit in different locations or lots. The close package snapshot links a blocker to the screen where it is fixed. The Inventory Valuation Reconciliation screen in the accounting ERP compares inventory value with the general ledger that received it.

A fiscal year cannot be closed while any of its periods is open or while a final close package still has blockers or warnings. The year cannot be hard closed until the year-end closing entry, the retained earnings transfer and the opening balance carry-forward exist. A hard-closed year refuses both posting and reopening.

FAQ

What are year-end closing entries?

Year-end closing entries bring every revenue and expense account to zero and move the year's profit to retained earnings. In the example, revenue of €904,500 is debited, each expense is credited and €59,700 goes to retained earnings.

Is inventory closed at year-end?

No. Inventory is a balance sheet account, so it carries forward. In the example it closes the year at €115,200 and opens the new year at €115,200. In a periodic system the year-end count sets that closing balance and cost of goods sold with it. Perpetual vs periodic inventory explains the difference.

What is inventory cut-off?

Inventory cut-off means every receipt and shipment is recorded in the year it happened, so the count, the stock ledger and the general ledger describe the same moment. In the example, SH-7751 left on 31 December and was posted on 2 January, so it is posted with a December date instead.

Can cycle counts replace a year-end count?

They can, when every item is counted during the year, every difference is investigated and posted, and the records prove accurate when tested. Many companies still count high-value items or high-risk locations in full at year-end.

What is the difference between inventory shrinkage and a write-down?

Shrinkage is a loss of units: the books say 5,850 and the shelf holds 5,820. A write-down is a loss of value on units that are still there: 200 units carried at €20.00 that can only recover €14.00.

What happens if a period is reopened after the close?

Any posting into the reopened period changes the balances that the closing entries and the opening balances were based on, so both have to be calculated again. That is why companies lock the year once the figures are approved. In Gruvero a hard-closed year cannot be reopened.

Conclusion

A year-end inventory close is six steps in a fixed order: cut-off, count, write-down test, reconciliation, closing entries and the period lock. In the example they take inventory from €120,000 to €115,200 and profit from €60,000 to €59,700. The first four steps are ordinary month-end work, and a company that does them every month only adds the closing entries and the lock in December.