Post on Wednesday, April 4th, 2018 in Accounting
Beginning inventory, or opening inventory, is your inventory value at the start of an accounting period (typically a year or a quarter). Accordingly, ending inventory, or closing inventory, is the value of inventory at the end of an accounting period.
These two figures are necessary to create an income statement of a company, and sometimes they even appear on income statements.
Beginning inventory reflects your balance before you purchase more inventory items or sell the existing inventory during an accounting period. If the total ending inventory is larger than the cost of the beginning inventory, that’s because the company bought more than it sold. Sometimes the beginning inventory is considered to be the ending inventory of the previous accounting period.
Businesses use the beginning inventory formula to get a better understanding of inventory value when a new accounting period starts.
The main reason is that it can help you monitor current trends in your business. For example, on one hand, decreased beginning inventory cost is a good sign, because it can result from sales growth during a particular period.
On the other hand, it can result from issues in your supply chain or inventory management processes. As for increased beginning inventory cost, it can result from either building up stock before a busy period, like right before the holidays, or a downward trend in sales. Therefore, it is important to be as accurate as possible, draw correct conclusions and make the right decisions both when you calculate beginning inventory and when you are calculating ending inventory.
The beginning inventory formula looks like this:
(Cost of Goods Sold + Ending Inventory) – Inventory Purchases during the period = Beginning Inventory
And now let’s take a look at each component of this formula.
Cost of Goods Sold (CoGS) is a total of all costs that are involved in selling a product. To find the cost of goods sold, check out the inventory records for the previous accounting period. For example, if your company, LED Bulb Inc., sells LED bulbs at the cost of $20 per item and has sold 1,000 bulbs throughout the year, then your CoGS will be calculated as follows:
Amount of Goods Sold x Unit Price = Cost of Goods Sold
1,000 x $20 = $20,000
Now you need to find out how to calculate ending inventory. Let’s assume that at the end of the previous year, LED Bulb Inc. had 1,200 bulbs in stock and produced 1,500 bulbs throughout the next year. Therefore, your ending inventory formula will be as follows:
Amount of Goods in Stock x Unit Price = Ending Inventory
1,200 x $20 = $24,000
Next, you should add up the calculated ending inventory cost and the CoGS value:
$ 24,000 + $ 20,000 = $ 44,000
Finally, you should subtract the amount of inventory purchases from your result. To find the amount of inventory purchases, multiply the amount of bulbs produced throughout the year by the item price:
1,500 x $20 = $30,000
And the result for calculating beginning inventory cost will be as follows:
$44,000 – $30,000 = $14,000
That is how to find beginning inventory. But if you already know the beginning inventory and ending inventory figures, you can also use them to determine the cost of goods sold.
Amount of Goods Sold x Unit Price = Cost of Goods Sold.
So now you are aware of at least two CoGS calculation methods.
You can also use the beginning inventory to calculate the average inventory, which is applied in measurements of the various performance indicators, such as the inventory turnover formula. These measurements can take advantage of the beginning and ending inventory balances to determine an average inventory figure for the accounting period trends.
Adam is the Assistant Director of Operations at Dynamic Inventory. He has experience working with retailers in various industries including sporting goods, automotive parts, outdoor equipment, and more. His background is in e-commerce internet marketing and he has helped design the requirements for many features in Dynamic Inventory based on his expertise managing and marketing products online.
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