At the beginning of each accounting period, you have to determine the beginning inventory. This serves several purposes, including inventory control, determining discrepancies with expected inventory, and providing a dollar amount for the company’s inventory. It is an essential function of accounting for industries that are required to keep an inventory, even if that inventory is only used internally. The beginning inventory is calculated based on an established formula:
Beginning Inventory = Ending Inventory – Purchases during the Period + Acquired Inventory
Beginning inventory is something every business needs to know at the start of the accounting period, regardless of the industry. Whether you deal with stretch film and pallets, computers and mobile devices, groceries and clothes, or vehicles and large equipment, inventory control is a required aspect of accounting.
1. Begin with the balance sheet from the end of the last accounting period.
Ideally the beginning inventory will match the end inventory from the previous accounting period, but often this is not the case. This gives you the first part element of the equation needed to determine beginning inventory.
2. Check if any other goods or inventory was purchased between when ending inventory was taken and when you start calculating beginning inventory.
If you are quick to move between the ending period and beginning period of the accounting cycle, this could be a really quick task. If there is a lapse of several days or even a week or two, this could take a bit longer to calculate. All of the inventory purchased between cycles should be recorded at this point.
This is the second element of the equation (purchases during the period).
3. Total the amount of inventory purchased between the ending period and the new accounting cycle.
This one is not necessarily dependent on how quickly you transferred between cycles because at the ending inventory you may have realized that you need more inventory because of better than expected sales. Make sure to include items that you don’t purchase often, such as wiring. It is easy to miss the little things or the things that you don’t have to buy frequently. You can take this opportunity to work those kinds of purchases into the ending inventory process.
This is the third element of the equation (acquired inventory).
4. Plug the numbers into the equation and calculate the beginning inventory.
Take the number from the balance sheet as your starting point. Add the inventory that was added since the balance sheet was recorded. Next subtract the amount of inventory that was purchased since the balance sheet was recorded. The final number is your beginning inventory.
The process is relatively straightforward, but can be complicated when data is not recorded in real time. It should always be a goal of the company to ensure that all of the numbers are available and easily accessible to ensure that the beginning of the accounting cycle goes smoothly.
Inventory control is a critical factor of any business that has to keep inventory, so if the numbers are wrong it will throw off all other aspects of the business.