Beginning Inventory: What You Should Know

Beginning inventory is known as the recorded cost of inventory in a company’s accounting records at the start of any particular accounting period. The beginning inventory is the recorded cost of inventory at the end of the preceding accounting period, which would then carry forward to the start of the next accounting period.

Beginning inventory is classified as a current asset as it’s an asset account. It usually doesn’t appear in the balance sheet because the balance sheet is created as of a specific date, this is usually the end of the accounting period, so the ending inventory balance appears on the balance sheet.

Now, beginning inventory is the same as ending inventory from the preceding accounting period, so it will appear in the balance sheet as the ending inventory. The main 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

While COGS is the priority reason we use beginning inventory, another 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.

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