Final answer:
Closing inventory is accounted for as a current asset on the debit side of the Statement of Financial Position (SFP) and impacts the cost of goods sold (COGS) on the Statement of Profit and Loss (SPL), where an increase in closing inventory decreases COGS and vice versa.
Step-by-step explanation:
In the context of financial accounting, closing inventory (also known as ending inventory) refers to the total value of goods that a company has in stock at the end of an accounting period. It is crucial in the calculation of Cost of Goods Sold (COGS) and hence, affects both the Statement of Financial Position (SFP) and the Statement of Profit and Loss (SPL).
On the Statement of Financial Position (SFP), also known as the Balance Sheet, closing inventory is considered a current asset and is therefore listed on the debit side. As an asset, an increase in inventory would require a debit entry, while a decrease would need a credit entry. The value of closing inventory is the cost of items that have not been sold by the end of the accounting period.
Regarding the Statement of Profit and Loss (SPL), also known as the Income Statement, closing inventory influences the cost of goods sold during the period. At the beginning of the accounting period, the inventory is accounted for as an expense (opening inventory). Over the period, purchases are added, and closing inventory is subtracted to arrive at the COGS. Ultimately, the COGS is deducted from sales to determine the gross profit. Therefore, increasing closing inventory will decrease COGS and increase gross profit; conversely, decreasing closing inventory will increase COGS and decrease gross profit.