How to Calculate the Value of Beginning Inventory and Give Stock a Dollar

While many small-business owners start their own businesses to earn a full-time salary, one fifth of admits that they don’t feel confident in their financial and accounting skills. This could explain why 30% fail in the first two years of small business.

You can prevent your retail store from falling into this sad statistic by learning more about accounting. Start with the most important metric: starting inventory.

What is starting inventory?

The value of inventory in the beginning of an accounting period is called the “beginning inventory”. It is used by retailers to determine if they have enough inventory for the next month, quarter or year.

It is also known as the opening inventory. It should equal the ending inventory for the preceding period. For example, if you have $10,000 in inventory at the quarter’s end, you will have the same amount in your beginning inventory for the next quarter.

Start inventory

  • Learn about business trends
  • Identify shrinkage
  • Bookkeeping and accounting
  • Documents tax

You can use beginning inventory for more than just accounting. Here are some of the many ways that you can use your inventory to start a business (including for bookkeeping purposes).

 

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Learn about business trends

Businesses that sell Christmas products have seasonal sales cycle. Each retail business experiences seasonal shifts. Certain products sell better at different times throughout the year.

You can use beginning inventory to understand these trends and adjust your open for-buy budget in order to avoid under- or excess stocking.

Sales may be slowing if your inventory is higher than it was the previous month. Your stockroom has more product than it did last month.

If your inventory is lower than it was a month ago, this could indicate problems with your supply chain or products that are selling well. If this is the case, you might consider investing more stock to maintain momentum.

READ MORE Increase Cash Flow, Replenish Stock: How Perpetual Inventory Works For Retailers

Identify shrinkage

Inventory shrinkage is when your inventory numbers are not in line with the numbers that were recorded during a count. Shoplifting and employee theft are two of the most common causes. These problems cost retailers $61,000,000 each year.

Beginning inventory allows retailers to spot phantom inventor before it becomes an expensive problem. It can be compared to physical inventor counts , and any discrepancies should be investigated.

Bookkeeping and accounting

The balance sheet is an important accounting record for retail stores. It’s a financial statement that shows your current assets and liabilities–including your inventory at the starting point of the period in question.

Because it is used to calculate the cost of goods sold (COGS), retailers need to know their inventory balances at beginning. COGS is the math formula: COGS = beginning inventory + purchase for the period + ending inventory = COGSMelissa Pedigo is the founder of A CPA who Writes

Documents tax

Retail business owners can be stressful during tax season. However, it can be tax-saving to calculate your starting inventory in advance and make sure it’s not too large or too small.

Retailers can also calculate their tax liability ahead of time by using inventory value. You might adjust your open-to buy budget if you know that you will be paying $15,000 in tax at the end the tax year.

Formula for beginning inventory

This formula is the easiest way to calculate your beginning inventory.

(COGS + ending inventory) – inventory purchases = beginning inventory

Let’s say that you spent $5,000 on manufacturing products during the year. Ending inventory was $10,000 at the end of the previous accounting period. Add $6,000 to inventory and you get $15,000 in inventory. Your beginning inventory would then be worth $9,000.

How do you find your beginning inventory?

  • Selling price
  • Ending inventory
  • Purchases of inventory

There are many other calculations that go into calculating the beginning inventory. Let’s look at the accounting formulas that you will need to be familiar with.

Selling price

The cost of goods sold ( COGS) indicates how much you spent on products that are already sold. This includes shipping costs, labor and the cost of raw materials.

Here is how to calculate the cost of goods sold.

COGS = (Beginning inventory + purchases during period) – ending inventory

The inventory method used will affect the cost of goods sold. Below are the most popular inventory systems. Be aware that no matter which system you choose, you will need to use it. You run the risk of inconsistent data causing havoc in your financial reports.

  • Average weighted cost. The average price for each SKU in your stockroom.
  • First in and first out (FIFO) This assumes that products purchased first were actually sold first, regardless of whether they were bought at different prices. You would use $5 to calculate COGS if you sold four mugs and bought 10 mugs for $5 and 10 for $7 during the accounting period.
  • Last in first out (LIFO) This model is different from FIFO because it assumes that your last products were sold first. This would be $7 in the example.
  • Gross profit method. A percentage of profit after subtracting the product’s production costs and manufacturing expenses. To find your profit margin, use this gratuitous profit margin calculator .

Ending inventory

Ending stock The dollar value of stock at the end an accounting period. It’s also sometimes called closing inventory and should correspond to the beginning inventory for any accounting period immediately following.

This formula calculates ending inventory:

Ending inventory = new purchases + beginning inventory

Purchases of inventory

Retailers have the highest inventory costs. You can calculate inventory costs to find out how much inventory you have spent.

Stock costs = Purchase costs + Order Costs + Holding costs + Slack Costs

How to calculate your beginning inventory

Here’s a recap: The formula to calculate inventory value at the beginning of an accounting period is (COGS + ending inventories) – inventory purchases = starting inventory.

Let’s use these numbers to make the calculation.

  • COGS: $50,000
  • Ending inventory balance $75,000
  • Purchase inventory: $20,000

($50,000 + $75,000) = $105,000 initial inventory valuation

Calculate your beginning inventory

At the beginning of each new accounting period, you will need to calculate your inventory. This formula will help you calculate yours. It can also be used to understand seasonal trends and identify shrinkage.

source https://www.shopify.com/retail/beginning-inventory

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