How To Calculate Beginning Inventory

The beginning inventory formula is simple:
  1. Beginning inventory = Cost of goods sold + Ending inventory – Purchases.
  2. COGS = (Previous accounting period beginning inventory + previous accounting period purchases) – previous accounting period ending inventory.

How to Calculate Inventory For Your Business

Where do you use beginning inventory?

Beginning inventory is a tool used in accounting to assess the financial health of a business or organization. For accounting purposes, it is treated as a current asset and is identical to the ending inventory of the prior accounting period. You can determine how profitable a business is by using the cost of goods sold formula, which includes beginning inventory as a current asset.

Beginning inventory is another useful tool for calculating average inventory for your accounting periods. To get a general idea of how much inventory you typically have on hand, add the beginning inventories for several accounting periods together and divide by the number of accounting periods you used.

Beginning inventory can also be a helpful component of examining stock discrepancies, also known as shrinkage. This means that taking an initial inventory can assist you in identifying potential accounting errors or theft issues. If your beginning inventory differs significantly from your expectations or doesn’t match the ending inventory of the prior accounting period, you may want to investigate further as to why this might be happening.

Depending on your individual circumstances, beginning inventory may also be useful for tax purposes. Maintaining the proper amount of beginning inventory each accounting period may be advantageous for tax purposes as some transactions and goods may be tax deductible. Since every tax situation is typically a little bit unique, you might want to conduct additional research or consult with a tax expert to determine whether this is applicable to you.

What is beginning inventory?

The amount of a product that a company has in stock at the beginning of an accounting period, such as a month or a year, is known as beginning inventory. The beginning inventory of one accounting period will be the same as the ending inventory of the previous because each accounting period is interconnected. In the context of retail, inventory refers to goods that are currently on the market for purchase, such as smartphones or snow shovels. For manufacturers, inventory consists of finished goods, in-progress goods (like partially assembled cell phones), and materials that are used directly in the production of finished goods (like wood for show shovel handles).

Cost of goods sold minus the cost of purchases equals the beginning inventory.

How to find beginning inventory

To find beginning inventory, follow these steps:

1. Find the cost of goods sold for the previous accounting period

When determining beginning inventory for the following accounting period, the cost of the goods you sold in the previous accounting period is a crucial factor. Additionally, this figure can be used to calculate gross profit, profit margin, and manufacturing efficiency. Making informed decisions regarding production, purchasing, and sales procedures can be made easier with the help of this information and the beginning inventory of an accounting period.

You need to know the following details to calculate the cost of goods sold:

Here is the formula for cost of goods sold (COGS):

Cost of goods sold is calculated by subtracting the closing inventory from the beginning inventory plus purchases made during the accounting period.

Simply put, your original investment in the goods you sold to customers during that time is your cost of goods sold. If you operate a retail store that sells snow shovels, for instance, and you sold 260 shovels during the accounting period while paying $10 per shovel in wholesale prices, your COGS would be $2,600.

2. Find your ending inventory balance

Next, determine the closing inventory value for the prior accounting period. To do this, multiply the quantity of goods and materials you still have on hand by their respective values. For instance, if you run a retail store that sells snow shovels, and at the end of an accounting period, you still have 40 shovels on hand that you bought at wholesale for $10 each, your ending inventory balance would be $400.

3. Determine the cost of purchases made

It’s likely that during the accounting period you are dealing with, you also bought inventory. Review your records to determine the cost of those purchases. For instance, if you purchased 50 more snow shovels at a price of $15 each, your total cost of purchases would be $700. If necessary, make sure to take into account items bought at various price points.

4. Use the beginning inventory formula

Beginning inventory is calculated using the following formula: Beginning inventory = (COGS plus ending inventory balance) – cost of purchases

This is how you would enter the formula using the information above:Beginning Inventory = ($2,600 + $400) – $750

Calculated, the result is:
Beginning inventory = $2,250

Then, if it applies to your situation, you can use this information to complete your balance sheets, reconcile internal accounting documents, and get ready for tax documentation.

FAQ

What is the formula of beginning inventory?

The formula to determine ending inventory is: Quantity of Goods in Stock x Unit Price

How do you find beginning and ending inventory?

Beginning inventory is a current asset that belongs in the asset account. Since the balance sheet is created as of a specific date, which is typically the conclusion of the accounting period, the ending inventory balance appears on the balance sheet even though technically it should not.

How do you calculate beginning inventory in production budget?

Add the ending inventory to the number of units used or sold and deduct the inventory you bought to obtain your beginning inventory. Say, for instance, that you have 10,000 units in your final inventory, 15,000 units sold, and 5,000 units purchased.

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