What is the beginning Inventory?
The value of all inventory owned by a business at the start of an accounting period is known as beginning inventory or opening inventory. This value represents all of the goods that a company can use to generate income. Beginning inventory is a current asset that is an important part of inventory accounting.
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.
Where you’ll use the beginning inventory
Beginning inventory is an essential aspect of inventory accounting that you’ll need to use in the following areas at the start of an accounting period.
- Balance sheets
Balance sheets are an important indicator of financial health since they help you qualify for bank loans and give investors and partners more confidence in your company. Beginning inventory is the amount documented when a new accounting period begins, and it is often the largest asset an eCommerce business has.
- Internal accounting
Taking stock of inventory at the start of each accounting period is useful for assessing future inventory needs, whether that means an increase or decrease in production or in the amount to reorder. Companies also use beginning inventory data to seek out (and understand) possible differences from one period to the next, as well as to protect against inventory shrinkage — loss generally attributed to damage, expiration, theft, or bad math generated by manual calculations or subpar software.
- Tax documents
Knowing your beginning inventory can help you calculate your tax deductions. Having too large of a beginning inventory, or one that’s too small can be detrimental to your taxes.
Consider a warehouse that has been completely destroyed by fire. Knowing beforehand how much beginning inventory it had can help the company determine the value of its loss for write-off and tax deduction purposes. But a tragedy isn’t the only reason to keep track of beginning inventory: Taxes and potential deductions are calculated using a company’s COGS, which includes beginning inventory.
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:
- Determine the cost of goods sold (COGS) using your previous accounting period’s records.
COGS = (Previous accounting period beginning inventory + previous accounting period purchases) – previous accounting period ending inventory - Multiply your ending inventory balance by the production cost of each inventory item. Do the same with the amount of new inventory.
Ending inventory = Previous accounting period beginning inventory + Net purchases for the month – COGS - Add the ending inventory and cost of goods sold. See the formula for calculating ending inventory above.
- Subtract the amount of inventory purchased from the number above to calculate the value of the beginning inventory.
Note: It’s critical to double-check your calculations if you’re going to manually calculate this value using the beginning inventory formula. Using an incorrect number for beginning inventory can create a domino effect of miscalculations and mislead future decisions. You might want to use a beginning inventory calculator to assure inventory accuracy.
Beginning inventory calculation example
The easiest way to understand the above-mentioned formula is by walking through an example.
Let’s say you sold 1,000 refrigerators during the last accounting period, and you purchased each one for $500 from the supplier. The cost of goods sold is: Manufacturing Price x Quantity = COGS ($500 x 1,000 = $500,000). Now, let’s say at the end of the period, you have 500 refrigerators left. This means the ending inventory is worth: Manufacturing Price x Remaining Quantity = Ending Inventory ($500 x 500 = $250,000). Furthermore, if your business produced or purchased an additional 700 refrigerators in the new year, the cost of the new inventory is: Manufacturing Price x Quantity = Purchases ($500 x 700 = $350,000). Thus, we can now calculate beginning inventory using the formula: (COGS + Ending Inventory) – Purchases (($500,000 + $250,000) – $350,000 = $400,000). This means the beginning inventory is $400,000 at the start of the accounting period.
Take the Next Step Toward Better Inventory Management
One part of enhancing inventory system management and the financial health of your organization is learning how to calculate the beginning inventory. But that’s only the beginning. Elmasys, an inventory management software, may help you run your business more efficiently. You have access to capabilities that let you track inventories, list and manage products, and fulfill orders all in one place with Elmasys. You’ll also have access to reports that provide valuable information beyond the beginning inventory. Take control of your company and make better decisions that will help you plan, sell, and grow it.
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