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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## How to calculate beginning inventory

1. 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

2. 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

3. Add the ending inventory and cost of goods sold.

Example: \$1600 + \$1200 = \$2800

4. 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 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.

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Calculating the real Cost of Goods Sold

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