Closing Stock in Tally vs the Balance Sheet: Why They Don't Agree

At year-end the client's accountant gives you three stock figures. The stock summary in Tally says ₹62.40 lakh. The balance sheet you are about to sign says ₹61.02 lakh. The stock statement filed with the bank for March says ₹66.50 lakh. All three come from the same godown, so why don't they agree? The reasons repeat from client to client: how Tally values stock, how the books were kept during the year, and AS 2 adjustments made only at year-end. Below are the reasons, a reconciliation format and the set-up steps that close most of the gap before March. Law as at 3 November 2026; figures are illustrative. For the note itself (sub-heads, mode of valuation, goods in transit) see inventories disclosure under Schedule III.

Three stock figures, three purposes

Agreement is not the goal; every difference must be explained and, where the books were wrong, corrected. The balance sheet figure flows into the profit and loss through changes in inventories and cost of materials consumed (see cost of materials consumed and changes in inventories). An error in closing stock is an error in profit.

How Tally values the stock, and where AS 2 differs

Costing method. Tally values each stock item using the costing method set in its master. According to Tally's own help, Average Cost is the default. The other options include FIFO, FIFO Perpetual, LIFO Annual, LIFO Perpetual, Last Purchase Cost, Standard Cost, Monthly Average Cost and At Zero Cost. The Balance Sheet uses whatever method is set at the master level. AS 2 allows only FIFO or weighted average for interchangeable items, plus standard cost or the retail method where the result approximates actual cost. LIFO, last purchase cost and zero cost do not meet AS 2. Two checks follow:

• List the costing method of every item (the stock item masters show it once costing and market valuation methods are enabled in the item's F12 configuration).
• Make sure the accounting policy says what Tally actually does. If the policy says FIFO and the items are on Average Cost, either change the items or change the policy. Don't leave the two to disagree. Tally's Balance Sheet can show the closing stock under other methods side by side (Alt+N, Auto Column, Stock Valuation Methods), which gives you the difference quickly.

NRV. Tally does not write anything down to net realisable value. AS 2 requires the lower of cost and NRV, normally item by item. Slow-moving, damaged, expired and obsolete items have to be found and written down outside Tally, from the ageing of the stock, sales after the year-end and the physical count. In small companies it is often the largest difference.

What is in the cost. AS 2 puts duties and taxes into cost only if they are not later recoverable, and adds freight inwards and other directly attributable costs. Tally's item cost gets both of these wrong easily:

• GST in the item value. If purchases are entered with the item rate inclusive of tax, or with the GST amount added to the item line, the stock carries GST that has also been claimed as input credit. Blocked credit under section 17(5) is different: that tax is not recoverable and is part of the cost. Purchases from composition or unregistered suppliers carry no input credit, so the full invoice value is cost.
• Freight not in the item cost. Freight inward booked as a separate journal or expense voucher never reaches the stock value. TallyPrime can spread an expense ledger in the purchase invoice over the items (by quantity or by value) as an additional cost of purchase, but only if the ledger is set up for it and the freight is entered on the invoice.

Negative stock. When sales are billed before the purchase is entered, or purchases are booked as accounting invoices without items, or the wrong godown or batch is picked, an item goes below zero. Its value is then negative and it reduces the total stock. In TallyPrime, the Verification of Stock Items report (Display More Reports, Analysis & Verification, Data Analysis) lists them under Negative Stock. Correct the vouchers and rely on the physical count.

"Integrate Accounts with Inventory" and the manual closing stock ledger

This one setting decides where the Balance Sheet's closing stock comes from. It is in F11 (Features).

• Yes: the Balance Sheet and P&L pick up the stock value from the inventory records. To type a closing balance into a Stock-in-Hand ledger, Tally's help says the option has to be set to No. Every difference in this article then shows up as a difference between Tally's Balance Sheet and the audited figure.
• No: accounts and inventory run separately. The closing stock is entered by hand in a ledger under Stock-in-Hand, which takes only opening and closing balances, not vouchers. The Balance Sheet shows that typed figure, whatever the stock summary says.

Many small companies switch it off at year-end to type in the valued figure. That is fine if the figure comes from a working that starts from the stock summary. The risks: a typed figure with no working behind it, and a manual Stock-in-Hand ledger left with balances when the setting is switched back on, so that the ledger and the stock items no longer agree. If the trial balance shows only opening stock, the closing stock has to be added to both the balance sheet and the P&L. Missing one side is a classic reason why the balance sheet does not tally after mapping.

Stock in someone else's hands, and the cut-off gaps

A reconciliation format from Tally to the balance sheet and the bank

Example Industries Pvt Ltd, a small manufacturing company, keeps inventory in Tally with Integrate Accounts with Inventory on. Its accounting policy is FIFO, but the item masters were left on Average Cost. Figures at 31 March 2026:

Each line has a second side: the freight comes out of the expense, the GST taken out of stock also comes out of purchases where it was booked there as well as in the input credit ledger, the goods received not invoiced needs a provision for purchases, and the shortage and NRV write-down reduce profit. The shortage of ₹1,15,000 is net: raw materials short by ₹1,40,000 against a book value of ₹11,50,000 (12.2%), finished goods ₹25,000 in excess against a book value of ₹18,00,000 (1.4%).

The second table is the reconciliation Schedule III asks for; keep one for each quarter.

What the auditor has to report

Schedule III, additional regulatory information. A company that has borrowed from banks or financial institutions on the security of current assets states whether the quarterly returns or statements of current assets agree with the books and, if not, gives a summary of the reconciliation and the reasons for material discrepancies. There is no amount threshold, and it covers all such borrowings, not only working capital limits. See additional regulatory information under Schedule III.

CARO 2020 clause 3(ii)(b). Where CARO applies and the company was sanctioned working capital limits of more than ₹5 crore in aggregate, at any point during the year, from banks or financial institutions on the security of current assets, the auditor reports whether the quarterly returns or statements agree with the books, with details if they do not. ICAI's Guidance Note on CARO 2020 (Revised 2022) limits this to quarter-end statements even where the company files monthly. In the example, all three lines in the second table are differences between the statement and the books. The auditor reports the details under this clause, using judgement on materiality and relevance as the Guidance Note says, and the Schedule III note gives the summary reconciliation and the reasons.

CARO 2020 clause 3(ii)(a). The auditor reports whether management verified the inventory physically at reasonable intervals, whether the coverage and procedure were appropriate, and whether discrepancies of 10% or more in the aggregate for each class were noticed and properly dealt with in the books. The Guidance Note applies the 10% on value, net of excesses and shortages within a class, regardless of materiality. In the example, raw materials are short by 12.2%, so this is reported, along with the write-off. Finished goods are within 10%. More on both clauses in CARO 2020 clauses that are easy to get wrong.

The set-up checklist to give the client's accountant

• Set every stock item to the costing method in the accounting policy (FIFO or Average Cost), and keep new items on the same method.
• Enter goods purchases in item invoice mode, with GST in the tax ledgers and not in the item rate.
• Put freight inward on the purchase invoice as an additional cost of purchase, or keep a separate "freight inward" ledger so it can be allocated at year-end.
• Turn on the warning for negative stock in sales vouchers and clear the Negative Stock items in the Verification of Stock Items report every month.
• Keep godowns for each branch, each job worker and goods in transit; use receipt notes and delivery notes for cut-off.
• Count the stock at least once a year, class by class, and record shortages and excesses in Tally through physical stock vouchers.
• Prepare each quarter's bank statement from the Tally stock summary at cost, and file the reconciliation with it.

For the other year-end entries that small companies often miss, see 12 entries small companies forget before closing the books.

Frequently asked questions

Sources

• ICAI — AS 2, Valuation of Inventories (costs of purchase, cost formulas, NRV)
• ICAI — Guidance Note on CARO 2020 (Revised 2022), clause 3(ii)(a) and (b)
• Companies Act, 2013, Schedule III Division I as amended by G.S.R. 207(E), additional regulatory information
• Tally Solutions — TallyPrime Help: How to Apply Stock Valuation Methods in TallyPrime
• Tally Solutions — TallyPrime Help: Stock Items FAQ (Integrate Accounts with Inventory, Stock-in-Hand ledger)
• Tally Solutions — TallyPrime Help: How to Add Additional Cost of Purchase on Stock Items
• Tally Solutions — TallyPrime Help: Stock Summary FAQ (negative stock)
• Tally Solutions — TallyPrime Help: Verification of Stock Items (Negative Stock)

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