What Is Starting Inventory and How Do You Calculate It?

Starting inventory, also called opening inventory, is the monetary value of all goods a business has available for sale at the very beginning of an accounting period. This figure represents the value of stock carried over from the prior period. For a new business, the starting inventory is the value of its initial stock purchase.

The Role of Starting Inventory in Business Accounting

The primary function of starting inventory is its application in calculating the Cost of Goods Sold (COGS). The formula is: Starting Inventory + Purchases – Ending Inventory = COGS. This figure represents the direct costs a business incurs to produce or acquire the goods it sells during a specific period.

To illustrate, if a business begins a quarter with $20,000 worth of inventory, purchases an additional $15,000 in goods, and ends with $10,000 in inventory, the COGS is $25,000. This COGS value is then used to find the gross profit.

Gross profit is determined by subtracting COGS from the total sales revenue. If the same business generated $50,000 in sales, its gross profit would be $25,000 ($50,000 – $25,000). This shows how starting inventory directly influences a company’s profitability and net income.

Determining Your Starting Inventory Count

The first step is to conduct a physical count of all items intended for sale. This includes all categories of inventory, such as raw materials, work-in-progress items, and finished goods.

Items used for business operations but not sold to customers, like office supplies or cleaning materials, should not be included. Fixed assets, such as computers, vehicles, or machinery, are also accounted for separately and are not part of inventory.

A structured process helps ensure accuracy. This can involve:

• Scheduling a specific time for the count, often outside of normal business hours to prevent transaction errors.
• Preparing count sheets or using a digital system to tally items.
• Organizing the storage area for easy access.
• Having a clear method for marking counted sections to prevent double-counting or omissions.

Valuing Your Starting Inventory

After the physical count, you must assign a monetary value to each item. Inventory must be valued at its acquisition cost, not its selling price. This acquisition cost includes the purchase price from the supplier plus any other direct costs incurred to get the inventory ready for sale, such as shipping fees and handling charges.

Businesses use one of several valuation methods, and the choice impacts COGS and reported profit. The First-In, First-Out (FIFO) method assumes the first items purchased are the first ones sold. For example, if a company buys 10 units at $5 and later 10 more at $7, the cost of selling 12 units under FIFO is (10 x $5) + (2 x $7), which equals $64.

The Last-In, First-Out (LIFO) method assumes the most recently purchased items are sold first. Using the same example, the cost of selling 12 units under LIFO would be (10 x $7) + (2 x $5), or $80. LIFO is permitted under U.S. Generally Accepted Accounting Principles (GAAP) but is prohibited by International Financial Reporting Standards (IFRS) because it can distort earnings.

Another option is the Weighted-Average Cost method, which uses the total cost of goods divided by the total number of units to find an average cost. A business should select one valuation method and apply it consistently for reliable financial reporting.

Recording Starting Inventory

The total starting inventory value is recorded as a current asset on the company’s balance sheet. It represents a resource the company expects to be converted into cash within one year.

A new business records its initial inventory with a journal entry. This involves a debit to the Inventory account and a credit to an equity account, like Owner’s Equity or Paid-in Capital, reflecting the owner’s investment of goods.

For an existing business, the starting inventory for a new period is the ending inventory from the previous one. No new journal entry is needed at the start of the period, as the ending balance automatically carries over.