No doubt, there are different methods for calculating the value of Closing Stock i.e. LIFO, LIFO PERPETUAL ,FIFO, FIFO PERPETUAL, COST PRICE, MONTHLY AVERAGE COST, STANDARD COST, LAST PURCHASE COST, AVERAGE PRICE, LAST SALE PRICE OR STANDARD PRICE.
Out of above meaning of LIFO and FIFO is given as under:-
LIFO = Last in Fast Out
FIFO = First in First Out
In a business, a businessman can adopt one method out of above in the starting of their business. If he adopt LIFO system, then in whole period of business LIFO system will be implemented. if he adopt FIFO system then FIFO system will be implemented.
Commonly, the following method is accepted by everyone.
- Cost Price
- Market value
(Least in above)
In above method, if Market value is Less than Cost Price, then income tax department accept the valuation of Closing Stock on the basis of Market Value and If Market Value if Higher than the Cost Price then valuation of Closing Stock will be accepted on the basis of Cost Price.
Overall, benefit is in the hand of Businessman, if there is loss due to valuation of Closing Stock then loss will be allowed immediately as per income tax rule and if there is profit due to valuation of Closing Stock then Income tax will not be charged on the profit immediately (benefit of Cost Price). Income tax will be charged on sales of such goods which market value is higher at the end of the financial year.