Understanding your inventory levels and what they mean to your business’s health are important aspects of both accounting and inventory management. That’s where beginning inventory comes in.
Beginning inventory is one metric that helps you evaluate demand, check in on how you’re managing inventory, and plan for tax deductions. As such, being able to calculate beginning inventory and understand what this number means for the health of your business is essential.
Learn more about beginning inventory, how to use the beginning inventory formula, and what it means for your business’s finances in this post. If you’re still getting the hang of inventory management, we recommend taking the time to read through the entire guide. Or, if you have a specific question, use the links below to navigate directly to the information you’re looking for.
- What is beginning inventory?
- When will you use beginning inventory?
- How to calculate beginning inventory
- Beginning inventory calculation example
- Beginning inventory calculator
What is beginning inventory?
Beginning inventory, or opening inventory, is the valuation of all inventory held by a business at the starting point of an accounting period. This value represents all the goods a business can put toward generating revenue. Beginning inventory is classified as a current asset and is an important aspect of inventory accounting.
Not sure how to calculate beginning inventory? We’ve got you covered. You can use the beginning inventory formula to better understand the value of inventory at the start of a new accounting period.
When will you use beginning inventory?
You’ll calculate beginning inventory at the start of an accounting period.
Being able to compare beginning inventory period over period can provide insights into business performance, such as inventory turnover and the value of your inventory. There are several reasons why knowing the value of beginning inventory can prove useful to your business, including:
- Noting changes in demand. Any change to beginning inventory compared with the previous period usually signals a shift in the business. For instance, a lower beginning inventory count compared to the month prior could be a result of growing sales during the period. Higher beginning inventory could signal a downward trend in sales.
- Identifying inventory management issues. A greater number of units leftover than usual could indicate a breakdown in your inventory management process if you didn’t reorder sufficient stock. If you have little-to-no beginning inventory, it could indicate that you possibly over-ordered inventory during the previous period.
- Highlighting supply chain issues. Similarly, having more or less stock than usual could be due to an issue in the supply chain. The case may be that your supplier didn’t fulfill your order correctly, or you only received a portion of your inventory purchases.
- Preparing to file your taxes. If you can estimate your average inventory at the end of an accounting period and how much you’ll need in the following period, you can pre-purchase inventory. Doing this can lower your taxable income, which can help you reduce how much you owe.
- Keeping an eye out for shrinkage. Shrinkage occurs when there’s a discrepancy between how much inventory should have been accounted for and what was actually accounted for. This is a problem for retailers and e-commerce wholesalers alike, and can occur due to human error, damaged products, or potentially stolen goods. While errors may happen occasionally, it’s important to keep an eye out for shrinkage patterns to ensure employees aren’t stealing merchandise.
Beginning inventory is a tool for better understanding sales and operational trends for your small business. With this data and the conclusions you can draw from it, you can make improvements to your inventory management strategy. With a better inventory method, you can optimize the cost of inventory and improve gross profit.
How to calculate beginning inventory
The beginning inventory formula is simple:
Beginning inventory = Cost of goods sold + Ending inventory – Purchases
Let’s break down the steps for how to find beginning inventory:
1. Determine the cost of goods sold (COGS) using your previous accounting period’s records.
a. 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.
a. 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 you’re going to use the beginning inventory formula to manually calculate this value, it’s important that you double-check your math. Using an incorrect number for beginning inventory can create a domino effect of miscalculations and mislead future decisions. To ensure accuracy, you may want to consider using a beginning inventory calculator.
Beginning inventory calculation example
To help you get more comfortable using the beginning inventory formula, here’s an example:
1. Determine the COGS using your previous accounting period’s records. Example: Candles cost $2 each to produce, and Jen’s Candles sold 600 candles during the year.
COGS = 600 x $2 = $1,200
2. 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 another 1,000 candles during the next year.
Ending inventory = 800 x $2 = $1,600
New inventory = 1,000 x $2 = $2,000
3. Add the ending inventory and cost of goods sold. Example: $1,600 + $1,200 = $2,800
4. To calculate beginning inventory, subtract the amount of inventory purchased from your result. Example: $2,800 – $2,000 = $800
Take the next step toward better inventory management
Understanding how to calculate beginning inventory is one aspect of improving inventory system management and the financial health of your business. But, that’s just the start. An inventory management software like QuickBooks Commerce can help you manage your multi-channel business much more efficiently. With QuickBooks Commerce, you get access to features that allow you to track inventory, list and manage products, and fulfill orders all in one place. And you’ll get access to reports that provide powerful insights above and beyond beginning inventory. Take control of your business and make smarter decisions that help you plan, sell, and grow.
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