# Adjustment for Mis-valuation of Stock

If opening or closing stock has been under-valued or over-valued, profit gets distorted. The rule is to reverse the impact when arriving at correct PGBP.

## The 4-Way Table

Situation	Effect on Profit	Adjustment to Profit
Under-valuation of Closing Stock	Profit under-stated	ADD to profit
Over-valuation of Closing Stock	Profit over-stated	LESS from profit
Under-valuation of Opening Stock	Profit over-stated	LESS from profit
Over-valuation of Opening Stock	Profit under-stated	ADD to profit

## Memory hook

Closing stock moves with profit in the same direction (↑ Closing = ↑ Profit).
Opening stock moves with profit in the opposite direction (↑ Opening = ↓ Profit).

So to correct: do the opposite of the error.

## Trading Account framework

```

Opening Stock xxx Sales xxx

Purchases xxx Closing Stock xxx

Gross Profit xxx

```

If Closing Stock is wrongly shown lower → Gross Profit is wrongly shown lower → ADD back the under-valuation.

Worked example

### Example 1

Example: Closing Stock is shown at ₹2,00,000 but its correct value is ₹2,50,000. Under-valuation = ₹50,000. Adjustment: ADD ₹50,000 to Net Profit.

### Example 2

Example: Opening Stock is shown at ₹3,00,000 but correct value is ₹2,70,000. Over-valuation of Opening Stock = ₹30,000. Adjustment: ADD ₹30,000 to Net Profit (because over-valued opening stock had reduced the profit).

⚠️ Common exam mistakes

Reversing the direction — e.g., subtracting for under-valuation of closing stock.
Applying the same direction to opening and closing stock (they work opposite to each other).
Forgetting that this is purely a P&L correction — has nothing to do with disallowance under Section 40.

Reference:

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Under-valuation / Over-valuation of Stock — Adjustment Rule

Worked example

⚠️ Common exam mistakes