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When closing stock appears in adjustment it is recorded in the credit side of Trading Account and again in the asset side of Balance Sheet. From the trading account gross profit is found out which is the excess of net sales over cost of goods sold. Cost of goods sold is equal to pening stock + net purchase + Direct expenses - Closing stock. As Opening stock, Net purchase and Direct expenses are taken in the debit side of Trading Account, Closing stock is taken in the credit side to show the cost of goods sold. Again the closing stock is an unexpired account which is to be carried forward to the next account year as an asset. For this reason, it is taken in the assets side of Balance Sheet.
First of all i would like to tell that closing stock is never credited to P&L account.
Closing stock of raw material is first credited to Manufacturing account (if manufacturing unit) and then closing stock of raw material, work in progress and finished goods are credited to Trading account.
Rest of the thing is already explained by Mr. Rehan Qureshi in his answer.
