What is beginning inventory: beginning inventory formula

What is beginning inventory?

Beginning inventory is the dollar value of all inventory held by a business at the start of an accounting period, and represents all the goods a business can put toward generating revenue. You can use the beginning inventory formula to better understand the value of your inventory at the start of a new accounting period.

How to calculate beginning inventory

• Determine the cost of goods sold (COGS) using your previous accounting period records.
• Multiply your ending inventory balance with the production cost of each item. Do the same with the amount of new inventory.
• Add the ending inventory and cost of goods sold.
• To calculate beginning inventory, subtract the amount of inventory purchased from your result.

Beginning inventory calculator

To save you time, we have built a beginning inventory calculator just for you: 

Beginning inventory calculation with examples

1. Determine the cost of goods sold (COGS) using your previous accounting period records. Example: Candles cost $2 each to produce, and Jen’s Candles sold 600 candles during the year.
2. COGS = 600 x $2 = $1200 
3. Use your accounting records to calculate your ending inventory balance and the amount of new inventory purchased or produced during the period. Example: Jen’s Candles had 800 candles in stock at the end of the previous accounting period, and produced a further 1000 candles during the next year.
4. Ending inventory = 800 x $2 = $1600. New inventory = 1000 x $2 = $2000
5. Add the ending inventory and cost of goods sold. Example: $1600 + $1200 = $2800To calculate beginning inventory, subtract the amount of inventory purchased from your result. Example: $2800 - $2000 = $800 

Why is beginning inventory useful?

Any change to beginning inventory compared with the previous period usually signals a shift in the business. For instance, decreasing beginning inventory could be a result of growing sales during the period, or it could be due to an issue in the supply chain or inventory management process. Increased beginning inventory could be due to a business ramping up stock before a busy period, or it could signal a downward trend in sales.

As with all business accounting, beginning inventory is a good way to better understand sales and operational trends for a business and make improvements to the business model based on the available data.