How to Calculate Beginning Inventory With a Formula

Beginning inventory represents the value of goods a business has on hand at the start of an accounting period. This figure serves as the foundational point for tracking inventory movement and valuation, providing the initial baseline for all subsequent inventory activities. Understanding how to determine this amount is an important step in managing a company’s financial records.

Gathering Necessary Financial Information

Determining beginning inventory requires specific financial figures from a company’s accounting records. These include the cost of goods sold, the ending inventory value, and the total purchases made during the period.

Cost of Goods Sold (COGS) represents the direct expenses attributable to the production of goods sold by a company during a specific period. This typically includes the cost of materials and direct labor used to create the product, along with any other direct costs of production. Businesses commonly report their COGS on the income statement, which summarizes a company’s revenues, expenses, and profits over a period, such as a quarter or a year.

Ending inventory is the value of unsold goods remaining in a company’s possession at the close of an accounting period. This figure is often determined through physical inventory counts, where staff manually count and value all items in stock at the period’s end. Alternatively, companies utilizing a perpetual inventory system continuously track inventory levels, allowing them to ascertain ending inventory from their system records without a full physical count.

Purchases refer to the total cost of all goods acquired for resale by the business during the accounting period. For a retail business, this might include finished products bought from suppliers. For a manufacturing company, it encompasses the cost of raw materials and components purchased for production. This information is typically sourced from purchase orders, vendor invoices, and the company’s accounts payable records.

Applying the Beginning Inventory Formula

Once the necessary financial information has been gathered, calculating beginning inventory involves a straightforward formula. The formula builds upon the relationship between what was sold, what was left, and what was added during the period.

The formula for beginning inventory is: Beginning Inventory = Cost of Goods Sold + Ending Inventory – Purchases. This equation effectively reverses the flow of inventory, working backward from the period’s end to its beginning. It accounts for all goods that left the inventory (through sales) and those that remained, then subtracts any new additions.

To apply this formula, first identify the Cost of Goods Sold (COGS) figure for the specific accounting period. This value can be obtained directly from the company’s income statement. It represents the expense incurred for the inventory that was actually sold during the period.

Next, identify the Ending Inventory figure, which represents the value of goods still on hand at the close of the period. This amount is typically derived from physical counts or perpetual inventory system records.

Finally, determine the total value of Purchases made during the period. This includes all goods acquired for resale, whether raw materials or finished products, and is found in purchase records and invoices. This figure accounts for all new stock that entered the inventory during the period.

With these three figures in hand, substitute them into the formula and perform the calculation. For example, if a business had a Cost of Goods Sold of $50,000, an Ending Inventory of $15,000, and Purchases of $40,000 for a particular period, the beginning inventory would be calculated as: $50,000 (COGS) + $15,000 (Ending Inventory) – $40,000 (Purchases) = $25,000. This result, $25,000, indicates the value of inventory the business started with at the beginning of that accounting period.