When a company counts stock at the beginning of an accounting period it's called beginning inventory. In this article, we explain the definition of beginning inventory and how to find it, to help you with your own accounting process. Related: How To Track Inventory. Beginning inventory is the quantity of a product a business has in stock at the start of an accounting period such as a month or a year. Because each accounting period connects to the next, the beginning inventory of one period will be the same as the ending inventory of the previous.
For retail businesses, inventory means items that are currently available for sale such as cell phones or snow shovels. For manufacturers, inventory includes completed items, items in progress, such as partially-assembled cell phones, and the materials that go directly into an item that will be sold, such as wood for show shovel handles. Beginning inventory is used in the accounting process to help measure a company or organization's financial health. It is the same as the ending inventory of the previous accounting period, and it is considered a current asset for accounting purposes.
Beginning inventory as a current asset factors into the formula for the cost of goods sold which can help you figure out how profitable a business is. Beginning inventory is also a good way to determine average inventory for your accounting periods — you can add the beginning inventory for many accounting periods together and divide by the number of accounting periods you used to get a rough idea of how much inventory you have in stock, on average.
Additionally, beginning inventory can be a useful part of investigating discrepancies in stock, also known as shrinkage. By accessing and using this page you agree to the Terms and Conditions. Privacy Statement. Product Multichannel Sales Sell across different sales channels with ease. Automation Optimize your order and shipping workflows. Mobile Sales App Manage your products, customers and orders on the go.
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All of these items are important components of financial ratios used to assess the financial health and performance of a business. It assumes that the most recent items purchased by the company were used in the production of the goods that were sold earliest in the accounting period. In other words, it assumes the last items ordered are sold first.
Under LIFO, the cost of the most recent items purchased are allocated first to COGS, while the cost of older purchases are allocated to ending inventory—which is still on hand at the end of the period.
First in, first out FIFO assumes that the oldest items purchased by the company were used in the production of the goods that were sold earliest. Simply, this method assumes the first items ordered are sold first. Under FIFO, the cost of the oldest items purchased are allocated first to COGS, while the cost of more recent purchases are allocated to ending inventory—which is still on hand at the end of the period. During a period of rising prices or inflationary pressures, FIFO first in, first out generates a higher ending inventory valuation than LIFO last in, first out.
The weighted average cost method assigns a cost to ending inventory and COGS based on the total cost of goods purchased or produced in a period divided by the total number of items purchased or produced. It "weights" the average because it takes into consideration the number of items purchased at each price point. To highlight the differences, let's take a look at the same situation with ABC Company using each of the three valuation methods from above.
ABC Company made multiple purchases throughout the month of August that added to its inventory, and ultimately its cost of goods sold. This is the company's inventory ledger:. The first step is to figure out how many items were included in COGS and how many are still in inventory at the end of August.
Alternatively, ABC Company could have backed into the ending inventory figure rather than completing a count if they had known that items were sold in the month of August. The next step is to assign one of the three valuation methods to the items in COGS and ending inventory. In each of these valuation methods, the sum of COGS and ending inventory remains the same. However, the portion of the total value allocated to each category changes based on the method chosen.
A higher COGS leads to a lower net profit. Therefore, the method chosen to value inventory and COGS will directly impact profit on the income statement as well as common financial ratios derived from the balance sheet.
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