Calculating and Reporting Year-End Inventory
Inventory accounting requires knowledge of your ending inventory. The challenge of calculating your sellable inventory at the end of an accounting period is that it can be very difficult to determine. In order to ensure that you have the right method of valuing your inventory, it is important that you understand how to calculate the value of your ending inventory.
Our article discusses the importance of ending inventory in determining the cost of goods sold. Furthermore, you will learn how inventory management software can provide you with valuable insights into the value of your ending inventory at year's end.
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How does ending inventory work?
In an accounting period, closing inventory consists of the sellable items that remain at the end of the period. The ending inventory value of an accounting period is determined by subtracting the cost of goods sold (COGS) from your beginning inventory and adding net purchases. You must include all inventory as assets on a balance sheet in order to have a complete balance sheet.
It is important to pay attention to the details when managing an eCommerce business, such as eBay account management, In order to calculate your ending inventory value correctly, you need to know it impacts your balance sheet and taxes.
Using the ending inventory formula to determine the ending inventory
To calculate ending inventory, simply follow these steps:
Ending Inventory = Beginning Inventory + Net Purchases – COGS
A physical inventory count is the simplest method for calculating ending inventory. However, doing a physical count is not always advisable, particularly if your company has a large number of items to track. Whenever you need to perform an inventory count without any hassles, you may want to use inventory forecasting software.
What are the methods of finding the beginning inventory?
A business's beginning inventory is the amount of inventory stock that can be used to generate revenue. Using this formula, businesses can figure out how much inventory they have at the start of a new year.
Check how the beginning inventory compares to the last period to see what's changed. If there are any changes in the business, this usually indicates a change in direction.
What is the best method to find net purchases?
A 'net purchase' is the total price of any purchases you make less any discounts you may have received, any returns, and any allowances you may have made. It is calculated as follows:
Net Purchases= Purchases – Returns – Allowances – Discounts.
How can COGS be determined?
To calculate COGS, a company adds up all the various direct costs involved in generating revenue. In addition, COGS only includes the costs that the company has directly incurred in generating that revenue. For instance, inventory costs or labor costs that can be directly linked to a specific sale.
What is the significance of ending inventory?
Generally, you will be interested in knowing how much you sell and how much you do not. It is essential to know how much inventory you have until the product is sold. As part of the accounting process and as a business best practice, it is important to calculate ending inventories in eCommerce. The following are the reasons.
Make sure inventory recorded matches inventory in the warehouse.
In order to ensure that your inventory balance sheet accurately represents what is stored in your warehouse, make sure the figures match those on your inventory balance sheet. Knowledge of your ending inventory allows you to verify that the inventory you have recorded corresponds to what is actually in your possession. A reduction in inventory levels could indicate shrinkage caused by a variety of factors, such as accounting errors, theft, or a variety of other factors.
Calculates the profit or loss of the business
In the same way, you should know what your income statement says, for example, how much you are generating by selling the products you are selling. You will be able to determine if the recorded inventory and the actual inventory match once you calculate the ending inventory. In this case, you may be overpaying for the original purchase of goods, or your pricing strategy should be reviewed.
It makes future reports more accurate.
When beginning inventory is subtracted from ending inventory, how is ending inventory calculated? The same applies the other way around. Based on the end of the previous period's inventory, the beginning inventory of a given accounting period may be calculated. The beginning balance is determined by the ending balance of the preceding accounting period. Consequently, the correct ending inventory must be determined.
To avoid discrepancies in future reports, it is best to use the same method of calculating ending inventory every year.
Who is responsible for calculating the ending inventory?
Calculating ending inventory should be done by a company accountant or financial records administrator. Data input at many levels of the business is essential for this process - from stock counts on physical inventory to sales and purchases. Managers and business owners should also grasp the basics of these figures, regardless of who calculates them. This will allow you to take action in the future.
Examples and methods of closing inventories
The value of your ending inventory can be calculated in a variety of ways. The method you choose will have a significant impact on both your budgeting and inventory reordering processes but, more importantly, on your future profitability. Your choice of method for determining the ending inventory value will have an impact on your financial results. Choose a method that is appropriate for your business and use it consistently.
First-in-first-out (FIFO) method
An inventory management method based on FIFO assumes the most recent inventory was sold first. As a result, your COGS is calculated by adding the cost of your most recent inventory purchases to that of your earlier purchases, and your ending inventory is then calculated by judging the number of your COGS.
During times of high prices or inflation, accountants and business owners choose to use FIFO, as it increases the end inventory value as compared to LIFO (last in, first out).
Method of LIFO (last in, first out)
According to the LIFO method, inventory items that were purchased most recently are the first to be sold and shipped out. In other words, goods purchased later in the production process are sold sooner.
Using the weighted average method
The weighted average method (WAC) is a way of determining a worker's earnings by multiplying the total amount spent on stock on hand by the number of stock items present. An average of the purchasing cost of the items in your end-of-year inventory can be obtained by doing this. In the event that all products sold are identical, WAC is the most logical method of valuing end-of-period inventory.
That's all you need to know about calculating the ending inventory of your Amazon business. Hire an accountant or a financial expert to do this for you in case you don't have enough time on your hand.