Businesses of all shapes and sizes need to know their beginning inventory to understand how much money they’ve got tied up in inventory when a new accounting period begins. In this article, we’ll zoom in on beginning inventory, walking you through how to calculate beginning inventory and breaking down the beginning inventory formula.
What is beginning inventory?
Beginning inventory is the recorded value of a business’s inventory at the very start of the accounting period, such as a month, quarter, or fiscal year. Beginning inventory also includes whatever inventory was still in stock when the previous accounting period ended.
Beginning inventory represents the dollar-and-cents value of your inventory. It is not a measure of inventory units—although you’ll need that data to calculate beginning inventory, too.
Your beginning inventory might include one, two, three, or four of the four types of inventory. If you’re in the retail business, your beginning inventory will measure all the finished goods your business currently has for sale. Think umbrellas, sweatshirts, or lava lamps. And if you’re a manufacturer, your beginning inventory will include finished goods, works in process, and raw materials.
Why does beginning inventory matter?
Beginning inventory is an inventory calculation that’s essential for accounting, budgeting, and tax purposes. While a year-end inventory count measures the units of stock your business has on hand, beginning inventory can help your company understand and account for the value of inventory sitting on your business’s shelves.
Here are a few ways companies use beginning inventory:
To assess financial health
Beginning inventory has an important line on a company’s balance sheet, which indicates the financial well-being of a business. Since inventory is typically the most valuable asset a company has, this figure is considered by everyone from loan officers to investors.
To assist with accounting processes
Beginning inventory is also essential to your company’s accounting department. Your business needs these numbers and figures to generate accurate income statements, keep an eye out for inventory shrinkage, and write off inventory that’s been lost, stolen, or damaged.
To prepare tax documents
Finally, beginning inventory is necessary for many business tax documents. That’s because most companies take deductions for their inventory. To claim these deductions confidently, you’ll need straightforward calculations that back up your beginning inventory claims.
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How to calculate beginning inventory
Calculating beginning inventory can be achieved using a relatively simple formula, but you’ll need to know how to get all that information. Here’s the beginning inventory formula—and a step-by-step guide on how to solve it.
Beginning inventory formula
Beginning Inventory = (COGS + Ending Inventory) – Purchases
Step 1: Determine your COGS (cost of goods sold)
Once you decide what item you’re calculating beginning inventory for, your first step is calculating the cost of goods sold (COGS) for the previous accounting period. Your cost of goods sold refers to the direct costs of producing inventory your company has sold. This can include the cost of raw materials, labor, packaging—anything like that. Indirect costs, like marketing and overhead, are not included in COGS.
Step 2: Determine your ending inventory
Next, you’ll need to calculate your ending inventory balance. Using your inventory records, determine how much of a particular item you had in stock at the very end of the previous accounting period, then multiply it by the cost to produce each item.
Step 3: Determine what’s been purchased
Finally, you’ll need to account for any inventory that’s been purchased and added to your existing stock since the end of the previous accounting period. This number should also be in dollars.
Step 4: Calculate your beginning inventory
Now, use those numbers to plug into the beginning inventory formula.
Here’s an example. An accessories boutique sells bedazzled headbands. These headbands cost $15 a unit to buy wholesale, and the shop sold 1,000 of them in 2020. At the very end of that previous accounting period, the shop had 100 headbands left in stock. They also purchased 400 more headbands during that accounting period, on top of the beginning inventory.
- COGS: $15 x 1,000 = $15,000.
- Ending inventory: 100 headbands x $15 = $1,500
- Purchases: 400 headbands x $15 = $6,000
Beginning Inventory = ($15,000 + $1,500) – $6,000. The accessories shop’s beginning inventory is $10,500.
How beginning inventory works for businesses with inventory across multiple locations
Beginning inventory is always a simple equation, even if you run a large business that stores inventory across multiple locations. By practicing tight inventory control and maintaining accurate inventory reports, your accounting team should be able to calculate beginning inventory for your company as a whole, and beginning inventory for different locations, too.
These two versions of beginning inventory can help your business do everything from file taxes to forecast demand more accurately.
How inventory management software can help you calculate beginning inventory
Calculating beginning inventory isn’t complicated—but it does require businesses to look into past numbers, figures, and inventory records. If your business isn’t using a solid inventory management system to track its inventory, chances are your inventory records won’t be reliable enough to calculate key inventory formulas and ratios.
An inventory app can help your business get organized for good, all while allowing you to track your cost of goods sold and how your inventory levels have fluctuated from one accounting period to the next. Plus, the right inventory software can help you track inventory across many locations, allowing even the largest of businesses to stay on top of their beginning and ending inventories.
Sortly is a top-rated inventory app that allows businesses to organize, track, and manage their inventory effortlessly. Perfect for small businesses and large enterprises alike, Sortly offers completely-customizable inventory management with a host of powerful features, including barcode and QR code scanning, low stock alerts, in-depth inventory reporting, and access to historical data that makes calculating essential inventory formulas much easier.
Curious how the right inventory software could help your business stay on top of beginning inventory? Give Sortly a try today, absolutely free with this two-week trial.