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Hello Community! If you haven’t checked out the QuickBooks Resource Center, you should head over there this week. There are many amazing articles to help you start, grow, and understand your business. Today I want to talk about beginning inventory. Not sure what I mean? Read below for the breakdown.
Most likely you know what inventory is but beginning inventory is the valuation of all inventory held by a business at the starting point of an accounting period.Being able to compare beginning inventory period over period allows an accurate look into business performance, such as the value of your inventory. There are so many reasons why knowing the value of beginning inventory can prove useful to your business, including:
- Noting changes in demand
- Identifying inventory management issues
- Highlighting supply chain issues
- Preparing to file your taxes
- Keeping an eye out for shrinkage
Now that we’ve gone over what beginning inventory is, how do we calculate it?
1. Determine the cost of goods sold (COGS) using your previous accounting period’s records. Note: COGS = (Previous accounting period beginning inventory + previous accounting period purchases) – previous accounting period ending inventory
2. Multiply your ending inventory balance by the production cost of each inventory item. Do the same with the amount of new inventory. Note: Ending inventory = Previous accounting period beginning inventory + Net purchases for the month – COGS
3. Add the ending inventory and cost of goods sold. See the formula for calculating ending inventory above.
4. Subtract the amount of inventory purchased from the number above to calculate the value of beginning inventory.
If that feels like a lot of steps, no worries. Just take it slow and check your math because the number you get will be valuable to getting an accurate starting inventory.
Understanding how to calculate beginning inventory is one aspect of improving inventory system management and the financial health of your business. For more information and a beginning inventory example, check out the full article: Beginning inventory formula: How to calculate beginning inventory.
