![]() ![]() There are a few different ways to calculate the closing inventory. However, doing a physical check may not be feasible, especially if you have a huge volume of inventory to track. 3 Different Methods of Closing Inventory Calculation With Examples in 2023Ī physical inventory count is the easiest approach for closing stock calculation. Note that only the estimated value of the inventory changes as the units in hand is constant. You will find these 3 methods for ending inventory calculation in the following section. We arrive at different values based on the calculation method when the ending inventory is calculated. Cost of goods is the total costs involved in sourcing, procuring, manufacturing and getting the finished product ready for sale.Net purchases include all items that have been additionally bought and added to the inventory.Beginning inventory is the closing inventory from the last accounting period.The ending inventory calculation formula is:Įnding Inventory = (Beginning Inventory + Net Purchases) – Cost of Goods Sold (COGS) Having accurate calculations also ensures no unexpected shortage or shrinkage in the physical inventory compared to the recorded inventory. This makes it even more crucial to have the right data to achieve better inventory management. For every new accounting period, the starting inventory is calculated from the closing inventory of the previous period. It is important to calculate the closing inventory correctly to keep taxes and accounting in check. ![]() The Formula for Ending Inventory Calculation Using the Ending Inventory Formula This also improves the forecasting capabilities for future inventories, discounts etc. Having the closing stock details paints a clear picture of which items sell better than others, the ideal volume of items in the inventory, and how soon items need to be replenished. When you calculate the closing stock, it considers the starting inventory during the beginning of the accounting period. Improve Forecasting and Inventory Management You can see how to calculate average revenue here. Suppose the recorded inventory and physical inventory costs don’t match up, it can indicate that the sold items are not profitable as the initial purchase or production will be more expensive than the sale price. This can also help provide clarity on the pricing strategy. Know the Revenue Being GeneratedĬalculating the business’s net income becomes easier with the starting inventory and ending stock. The cause for this discrepancy could be accounting errors, theft, or various other concerns. ![]() If the physical inventory is less than what is recorded, it is known as ‘inventory shrinkage‘. This provides insight into any stock discrepancies between the recorded and physical inventory in the warehouse/fulfilment centers and matches it with the sales made. Visibility on closing inventory is important to: Match Recorded Inventory with Actual Stock Levels ![]() By understanding which products take longer to be sold, businesses can improve their forecasting and production strategies and decide if their production or sourcing volumes need to be shortened or lengthened accordingly. What is the Need to Calculate Ending Inventory?Ĭalculating ending stock is important to identify what products are fast selling and need greater importance and which items take a longer time to sell. Taking note of the ending inventory is necessary for accurately calculating taxes and estimating the total business value. Closing inventory calculates the total value of the good, not the inventory volume or the number of units available. The closing stock includes mentioned assets on the balance sheet.
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