How to Find Beginning Inventory: A Step-by-Step Guide for Businesses

Knowing your beginning inventory is crucial for any business that buys or makes products to sell But what exactly is beginning inventory, and how do you calculate it?

In this comprehensive guide, we’ll explain what beginning inventory is, why it matters, and walk through the steps and formulas you need to determine your opening inventory value.

What is Beginning Inventory?

Beginning inventory, also known as opening inventory, refers to the value of a company’s inventory at the start of an accounting period.

It’s the total value of all inventory carried over from the prior period that is available for sale Beginning inventory should match the ending inventory value from the previous accounting cycle.

For retailers, beginning inventory includes finished products purchased from suppliers and ready for customers to buy.

For manufacturers, it encompasses raw materials, work-in-progress items, and completed products.

Why Knowing Your Beginning Inventory Matters

Calculating beginning inventory serves several important purposes:

• Provides transparency into available inventory: Beginning inventory shows you exactly how much stock you have on hand to sell so you can avoid stockouts or excess inventory.

• Enables better forecasting: Knowing your beginning inventory helps you make smarter purchasing decisions for the upcoming period based on projected sales.

• Improves inventory management: Tracking beginning inventory helps you identify potential shrinkage issues and ensures you have appropriate stock levels.

• Determines cost of goods sold (COGS): You need beginning inventory to accurately calculate COGS, which is vital for understanding product profitability.

• Strengthens financial reporting: Correct beginning inventory numbers lead to better balance sheets and income statements that provide stakeholders with an accurate view of company finances.

In short, determining beginning inventory is a critical first step for inventory accounting and overall financial health. Now let’s look at how to actually calculate it.

How to Calculate Beginning Inventory in 5 Steps

You’ll need data from the prior accounting period to determine beginning inventory. Follow these steps:

Step 1: Calculate the Cost of Goods Sold

Cost of goods sold (COGS) is the total cost of products sold during a period. The COGS formula is:

COGS = Beginning Inventory + Purchases – Ending Inventory

To determine COGS, you’ll need beginning inventory, total purchases, and ending inventory from the previous period.

Example:

• Beginning inventory: $100,000
• Purchases: $200,000
• Ending inventory: $50,000

COGS = $100,000 + $200,000 – $50,000 = $250,000

Step 2: Determine Ending Inventory

Ending inventory is the value of unsold products at the end of the prior period. Calculate it with:

Ending Inventory = Beginning Inventory + Purchases – COGS

Using the example above:

• Beginning inventory: $100,000
• Purchases: $200,000
• COGS: $250,000

Ending inventory = $100,000 + $200,000 – $250,000 = $50,000

Step 3: Find the Total Purchases

Purchases include the cost of products, materials, and inventory bought or produced during the previous period.

Tally up invoices and production records to determine total purchases.

Step 4: Plug the Numbers into the Formula

Now you have all the pieces needed to calculate beginning inventory:

Beginning Inventory = COGS + Ending Inventory – Purchases

Continuing the example:

• COGS: $250,000
• Ending inventory: $50,000
• Purchases: $200,000

Beginning inventory = $250,000 + $50,000 – $200,000 = $100,000

Step 5: Compare to Ending Inventory

As a final check, compare your beginning inventory result to the ending inventory value from the prior period. They should match! If not, recheck your numbers.

Following this process each accounting cycle will ensure your beginning inventory is up-to-date and accurate.

Beginning Inventory Calculation Example

Let’s walk through a detailed example from start to finish:

Janelle owns a small retail store that sells home goods. At the beginning of May, her beginning inventory was worth $15,000 at cost.

During May, Janelle purchased $22,000 more in inventory. At the end of May, Janelle’s ending inventory was valued at $12,000.

First, Janelle calculates the cost of goods sold:

• Beginning inventory: $15,000
• Purchases: $22,000
• Ending inventory: $12,000

COGS = $15,000 + $22,000 – $12,000 = $25,000

Next, she verifies her ending inventory:

• Beginning inventory: $15,000
• Purchases: $22,000
• COGS: $25,000

Ending inventory = $15,000 + $22,000 – $25,000 = $12,000

Then, she plugs the numbers into the formula to get beginning inventory for June:

• COGS: $25,000
• Ending inventory: $12,000
• Purchases: $22,000

Beginning inventory = $25,000 + $12,000 – $22,000 = $15,000

The beginning inventory amount for June matches the ending inventory from May, confirming her calculation is correct.

Inventory Valuation Methods

When determining beginning and ending inventory values, you’ll need to choose a costing method:

• FIFO: First-In-First-Out values inventory based on chronological order of purchase. Oldest items are costed first.

• LIFO: Last-In-First-Out assumes newest inventory is sold first. Great for managing taxes but not commonly used.

• Weighted average: Calculates average cost per unit based on total cost of goods available for sale divided by units in stock.

• Specific identification: Tracks specific cost basis of each individual unit. More complex but can be most accurate.

Work with your accountant to select the optimal method for your business. Be consistent across periods.

Tips for Retailers & Ecommerce Businesses

Retailers and ecommerce merchants have some added nuances when determining beginning inventory:

• Use inventory management software to maintain perpetual inventory records and value stock in real-time.

• Integrate with 3PLs like ShipBob that provide visibility into inventory across multiple warehouses.

• Factor in inventory held by 3PLs, dropshippers, consignment locations, and in transit when counting beginning inventory.

• Account for omnichannel inventory available across brick-and-mortar stores, website, Amazon, etc.

• Build in time and resources for periodic physical inventory counts to confirm system accuracy.

Maintain Accurate Inventory Records

Properly tracking and documenting inventory is critical for calculating beginning inventory each period. Here are some tips:

• Record all purchases and sales transactions in your accounting system in real-time.

• Perform cycle counts periodically to validate inventory quantities.

• Use barcodes, serial numbers, and bin locations to carefully track products.

• Identify and write-off any obsolete, damaged, or lost inventory.

• Monitor software inventory levels vs. physical counts for discrepancies.

• If using a 3PL, leverage their inventory tools and integration to maintain visibility.

Beginning Inventory Sets the Foundation

As the starting point for each new accounting cycle, beginning inventory influences everything from your purchase orders to financial statements.

While determining beginning inventory involves some upfront legwork, having an accurate count is invaluable for making smart business decisions and keeping finances on track all year long.

By following the steps outlined here and instituting good inventory management practices, you can ensure your beginning inventory calculations are correct every reporting period.