Businesses of all shapes and sizes need to know their beginning inventory to understand how much cash they have tied up in inventory when a new accounting period begins. In this article, we’ll define beginning inventory, walk through how to calculate beginning inventory and break down the beginning inventory formula.
What is beginning inventory?
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.
Why does beginning inventory matter?
Beginning inventory is an inventory calculation 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 on your business’s shelves.
Here are a few ways companies use beginning inventory:
To assess financial health
Beginning inventory is an important line on a company’s balance sheet, which indicates the financial well-being of a business. Since inventory is often the most valuable asset a company has, this figure matters to 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 this data to generate accurate income statements, monitor inventory shrinkage, and write off lost, stolen, or damaged inventory.
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.
Beginning inventory formula
Calculating beginning inventory can be achieved using a relatively simple formula, but you’ll need to know how to retrieve all the data to complete the equation.
Beginning Inventory = (COGS + Ending Inventory) – Purchases
How to calculate beginning inventory
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 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 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 headbands. These headbands cost $15 a unit to buy wholesale, and the shop sold 1,000 of them in 2023. At the 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 filing taxes to forecasting demand more accurately.
This easy, comprehensive guide will help you:
Free Ebook: Getting Started With Inventory Tracking
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 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 businesses to stay on top of their beginning and ending inventories.
About Sortly
Sortly is an inventory management solution that helps you track, manage, and organize your inventory from any device, in any location. We’re an easy-to-use inventory software that’s perfect for large or small companies. Sortly builds inventory tracking seamlessly into your workday so you can save time and money, satisfy your customers, and help your projects succeed.
With Sortly, you can track inventory, supplies, parts, tools, assets, and anything else that matters to your business. It comes equipped with smart features like barcoding & QR coding, low stock alerts, customizable folders, data-rich reporting, and much more. Best of all, you can update inventory right from your smartphone, whether you’re on the job, in the warehouse, or on the go.
Whether you’re just getting started with inventory management or you’re an expert looking for a more efficient solution, we can transform how your company manages inventory—so you can focus on your business. That’s why over 15,000 businesses globally trust us as their inventory management solution.
Start your two-week free trial of Sortly today.
