Inventory Definition

Knowing how many products and materials are available in a business at any given time, and at what value, can be an important part of measuring the financial stability and profit potential of the business. This useful number is called inventory and can be measured at different times in the accounting process. When a company counts stock at the beginning of an accounting period it is called beginning inventory. In this article, we explain the definition of beginning inventory and how to find it, to help you with your own accounting process.

What is beginning inventory?

Beginning inventory is the amount of product a business has at the beginning of an accounting period such as a month or a year. Because each accounting period is linked to the next, one period’s beginning inventory will equal the previous period’s ending inventory.

For retail businesses, inventory means items that are currently available for sale such as cell phones or snow shovels. For manufacturers, inventory includes finished goods, work-in-progress, such as partially assembled cell phones, and materials that go directly into goods for sale, such as wood for display handles.

Beginning inventory = (COGS + ending inventory balance) – purchase cost

Where do you use the beginning inventory count?

Beginning inventory is used in the accounting process to help measure the financial health of a company or organization. It is the same as the ending inventory of the previous accounting period and is considered a current asset for accounting purposes.

Beginning inventory factors current assets into the cost of goods sold formula which can help you figure out how profitable a business is.

Beginning inventory is also a good way to determine the average inventory for your accounting period. You can add beginning inventory for many accounting periods together and divide by the number of accounting periods you used to get a rough idea of ​​how much inventory you have. , average.

In addition, beginning inventory can be a useful part of investigating discrepancies in inventory, also known as depreciation. This means that initial inventory can help you determine if you may have a problem with an accounting error or theft.

If your beginning inventory doesn’t match the ending inventory of the previous accounting period, or if it’s very different from your expectations, you may want to know to look further into why this might be.

Beginning inventory can also be useful for tax purposes depending on your specific circumstances. Some transactions and types of goods may be tax-deductible, so maintaining an appropriate amount of beginning inventory for each accounting period may be beneficial for tax purposes.

Every tax situation is usually slightly different, so consider doing some extra research or consulting with a tax professional to see if this is relevant to you.

How to calculate beginning inventory

To find the initial inventory, follow these steps:

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

The cost of goods sold in the previous accounting period is an important part of calculating the beginning inventory for the next accounting period.

This figure is also useful for determining manufacturing efficiency, profit margins and gross profit. This information, combined with the beginning inventory of the accounting period, can help you make informed decisions about production, purchasing, and selling procedures.

To find the cost of goods sold, you need to know this information:

• Beginning inventory of previous accounting period: This is the value of your inventory, some products, and materials at the beginning of the last accounting cycle, using the formula for beginning inventory.
• Purchases made during that accounting period: This refers to the goods or materials your company purchased during this period, usually at wholesale costs.
• The accounting period’s closing inventory: This refers to the value of the goods and materials you have in inventory at the close of the accounting cycle. Often less than beginning inventory, depending on sales, unless your buying pattern includes large purchases towards the end of your accounting period.

The following is the formula for the basic selling price (HPP):

Cost of goods sold = (starting inventory of the accounting period + purchases made during that accounting period) – closing inventory of the accounting period

More simply, cost of goods sold is the amount you originally paid for the goods you sold to customers during that time. For example, if you were a retail store selling shovels for buildings, you sold 260 shovels during the accounting period and you bought each wholesale shovel for 10,000, your COGS would be 2,600,000.

2. Find your ending inventory balance

Next, find out the ending inventory value of the previous accounting period. You can do this by multiplying the number of items and materials left by their value.

For example, if you are a retail store that sells building shovels, and you have 40 shovels left at the end of the accounting period and you buy each, wholesale, for 10,000, your ending inventory balance will be 400,000.

3. Determine the cost of purchases made

It is likely that you also purchased inventory during the accounting period you were handling. Review your records to determine the cost of the purchase.

For example, if you buy 50 additional spades, this time for 15,000 each, your purchase cost will be 750,000. Be sure to account for items purchased at different price points if necessary.

4. Use the beginning inventory formula

Here is the formula for beginning inventory: Beginning
inventory = (COGS + ending inventory balance) – cost of purchases

Using the information above, this is how you would fill in the formula:
Beginning inventory = (2,600,000 + 400,000) – 750,000

Calculated, the result is:
Beginning inventory = 2,250,000

You can then use this information to complete your balance sheet, reconcile internal accounting documents and prepare tax documentation if relevant to your situation.