Beginning inventory definition
/What is Beginning Inventory?
Beginning inventory is the recorded cost of inventory in a company's accounting records at the start of an accounting period. The beginning inventory is the recorded cost of inventory at the end of the immediately preceding accounting period, which then carries forward into the start of the next accounting period.
How to Calculate Beginning Inventory
The easiest way to derive beginning inventory is to take the ending balance from the immediately preceding period - since this becomes the next period’s beginning balance. Thus, if the ending inventory balance for March was $60,000, then the beginning inventory balance for April will also be $60,000. If you want to roll back the ending inventory balance for a month to arrive at the beginning inventory balance, then the calculation for doing so is as follows:
Cost of goods sold + Ending inventory - Cost of Inventory purchases = Beginning Inventory
Thus, if the cost of goods sold for a reporting period is $100,000, the ending inventory is $40,000, and inventory purchases during the period were $80,000, then the beginning inventory will be $60,000.
Presentation of Beginning Inventory
Beginning inventory is an asset account, and is classified as a current asset. Technically, it does not appear in the balance sheet, since the balance sheet is created as of a specific date, which is normally the end of the accounting period, and so the ending inventory balance appears on the balance sheet. However, as just noted, beginning inventory is the same as the ending inventory from the immediately preceding accounting period, so it does appear in the balance sheet as the ending inventory in the preceding period.
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How Beginning Inventory is Used
The primary use of beginning inventory is to serve as the starting point of the cost of goods sold calculation for an accounting period, for which the calculation is:
Beginning inventory + Purchases during the period - Ending inventory = Cost of goods sold
A secondary use of beginning inventory is for the calculation of average inventory, which is used in the denominator of a number of performance measurements, such as the inventory turnover formula. These measurements can use just the ending inventory figure, but using the beginning and ending inventory balances to derive an average inventory figure for an accounting period tends to generate a smoothing effect that counteracts an unusually high or low ending inventory figure.