Closing inventory, also referred to as ending inventory, refers to the amount of inventory a business has left on the shelves and in stock at the end of the accounting year. Closing inventory is counted in 2 different ways:
- To reflect the physical amount of products left in stock
- To reflect the monetary value of products left in stock
In these 2 cases, you’ll either have a number of units or dollars left to reflect.
Ending inventory is the value of the stock or product that remains at the end of an accounting period.
The ending inventory refers to the final value of products held by a company at the end of a financial period such as the accounting year.
Ending inventory is determined by the value of the beginning inventory, plus purchases less the cost of goods sold.
Estimating Closing Inventory
Now, if you can’t count inventory on hand at the end of an accounting period or you can assign values to products, there’s a few things you can do. There’s a wide range of situations that can cause this, like too much shipping activity at the end of the month to do a count. If your staff is pressed for time or you just don’t have anyone available, there are two methods you can use to estimate the closing inventory.
3 Methods To Calculate Closing Inventory
(1) The Gross Profit Method
To calculate closing inventory by the gross profit method, use these 3 steps:
- Add the cost of beginning inventory plus the cost of purchases during the time frame = the cost of goods available for sale.
- Multiply the expected gross profit percentage by sales during the time period = the estimated cost of goods sold.
- Subtract the number from Step 1 minus the number from Step 2 = ending inventory.
(2) The Retail Inventory Method
This approach is popular among retailers to calculate closing inventory. It’s a little different from above, here’s the 4 steps to follow:
- Calculate Cost-To-Retail Percentage: Cost divided by retail price.
- Calculate Cost Of Goods Available For Sale: Cost of beginning inventory plus cost of purchases.
- Calculate Cost Of Sales During The Period: Sales x cost-to-retail percentage.
- Calculate Ending Inventory: Cost of goods available for sale minus cost of sales during the period.
(3) Physical Counting Method
If you need an accurate count of closing inventory, rather than an estimate, physically counting is the safest way to go. If you have the time and manpower, the simplest way to calculate ending inventory is the following 5 steps:
- Count the quantity of unsold products on the store’s shelves and stockroom.
- Determine the cost of each individual unit.
- Multiply the cost by the number of products.
- If you have different prices for products, you will need to multiply separately, then add all the amounts together.
- This will give you a dollar amount for your ending inventory.
How Ending Inventory Is Used
Your ending inventory will always be based on the market value or the lowest value of the goods that your company possesses. The cost of purchases made for the inventory is added to the value of the stock at the beginning of the selected period.
The market value of goods created or distributed by a company is generally higher than the associated costs. Despite that, it can change if the goods become outdated and experience depreciation and/or become obsolete.
In this case, the market value can fall below the cost of production for the goods, this would create a loss in asset value.
Why Ending Inventory Is Important
It’s a good idea to keep track of your inventory over the entirety of the fiscal year, but ending inventory is particularly important to calculate. Not only in order to ensure your actual stocks match with your sales and purchases over the course of the the accounting period, but also because this is often required in the case of an audit.
Whether your ending inventory matches with your financial transactions can indicate how well your business has stuck to its budget and can be useful for determining whether there are any glaring problems with production costs.
It is also important to a business because ending inventory carries over to the new accounting period. An inaccurate measure of stock value would then continue to have financial implications into the new accounting period.
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