Beginning inventory is the dollar value of all inventory held by a business at the start of an accounting period, and represents all the goods a business can put toward generating revenue for that period. You can use the beginning inventory formula to better understand the value of your inventory at the start of a new accounting period.
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Determine the cost of goods sold (COGS) using your previous accounting period’s records.
Example: Candles cost $2 each to produce, and Jen’s Candles sold 600 candles during the year.
COGS = 600 x $2 = $1200
Use your accounting records to calculate your ending inventory balance and the amount of new inventory purchased or produced during the period.
Example: Jen’s Candles had 800 candles in stock at the end of the previous accounting period, and produced a further 1000 candles during the next year.
Ending inventory = 800 x $2 = $1600
New inventory = 1000 x $2 = $2000
Add the ending inventory and cost of goods sold.
Example: $1600 + $1200 = $2800
To calculate beginning inventory, subtract the amount of inventory purchased from your result.
Example: $2800 - $2000 = $800
So, in this case, the beginning inventory value for Jen’s Candles is $800.
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 anissue in the supply chain orinventory 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.