Ending inventory plays a crucial role in the inventory accounting process of your eCommerce business. It influences your sales calculations during an accounting period and aids in effective inventory management for future periods. Understanding what ending inventory entails, along with the methods for its calculation, can enhance your accounting practices and assist in selecting the appropriate accounting software for your eCommerce operations and how to find ending inventory. This article covers:
- The definition of ending inventory
- Its importance in eCommerce
- Calculation methods for ending inventory
- The role of 3PL services in inventory management
What is Ending Inventory?
At the close of each accounting period, you’ll have inventory that remains sellable and must be accounted for in the subsequent period. This is known as your closing inventory or calculation of closing inventory, calculated based on its market value. To determine your Cost of Goods Sold (COGS) for a given period, it’s crucial to know the ending balance of your remaining inventory. Since inventory is reported as an asset on your company’s balance sheet, the ending inventory calculation directly influences your accounting and, consequently, your business taxes.
Thus, accurately calculating ending inventory is vital for your annual tax reports and purchasing plans for each accounting period. Understanding the value of your current inventory is imperative for making informed purchasing decisions and is essential to understanding how to calculate ending inventory.
The Importance of Ending Inventory in E-commerce
Until your business’s inventory is sold, it represents a cost your business pays each accounting period. This makes unsold inventory at the end of each period, the ending inventory, a significant number to calculate correctly.
Here are just a few reasons why ending inventory is vital for your eCommerce business:
Revenue calculations
Accurate revenue calculations are essential for understanding your net income. If you discover that your expenses for goods exceed their market value during a specific accounting period, reconsidering your item pricing, shipping methods, or suppliers may be necessary. Accurate ending inventory figures are crucial for these decisions, as they reveal the discrepancies between actual and recorded inventories, aiding in calculating your cost of goods sold.
Inventory accounting
Your inventory balance sheets must consistently match the actual contents of your business’s warehouse. Checking your stock at the end of each accounting period is crucial for several reasons. First, it ensures accurate revenue calculations, as we’ve previously discussed. Second, it helps identify discrepancies between the reported and expected inventory values after accounting for sales. Such differences could point to various issues, including accounting errors or theft.
Documentation and reporting
Ending inventory is a crucial component of documentation for eCommerce businesses. Precise ending inventory figures are essential for tax accounting, and companies seeking financing must also maintain accurate records. Beyond tax implications, financial reporting depends heavily on these numbers. Internal business reports rely on accurate inventory data, as beginning inventory calculations are based on ending inventory figures.
Ending Inventory Formula
No matter which method you choose to calculate your ending inventory, there are key terms every business must understand for accurate results:
Beginning inventory – This figure represents the inventory from the previous accounting period. For the current period, it denotes the total stock you had at the start.
Net purchases – This is the total cost of all products added to your inventory during the current accounting period.
Cost of goods sold (COGS) – This encompasses all expenses required to sell an item, including purchasing and manufacturing costs.
Together, these terms form the foundation of the ending inventory formula.
Beginning Inventory + Net Purchases – Cost of Goods Sold = Ending Inventory
This formula of ending inventory follows a logical progression: the initial value, plus the cost of all purchases minus the expenses from sales, should equal the remaining amount for the next accounting period. However, as previously mentioned, this figure does not always represent the actual value of your business’s ending inventory—it merely indicates what the value should be. To ensure the actual value matches this expected value, you must employ other methods to calculate the ending inventory accurately. To assist with this, we have outlined several approaches businesses can use to determine the actual value of their ending inventory.
Methods for Calculating Ending Inventory
Though these methods are effective on their terms, they calculate ending inventory differently. This means that it’s important to select the formula for closing inventory method that works for your business and continue using the same method consistently to avoid discrepancies later.
Gross Profit
The gross profit method calculates ending inventory using the gross profit margin derived from subtracting the Cost of Goods Sold (COGS) from Net Sales for a given accounting period. Begin by summing up all items available for sale, including the beginning inventory and any purchases made during the period. Next, determine the COGS by multiplying the gross profit margin by total sales. To find the ending inventory, subtract the estimated COGS from the total cost of goods available for sale in that period. This method is effective as long as the gross profit margin remains consistent; significant changes in the margin will lead to inaccurate inventory calculations.
Weighted Average
Businesses with limited SKUs can benefit from the weighted average method for calculating ending inventory. This approach involves dividing the total cost of the current inventory by the number of items in stock, resulting in an average cost of goods for that period.
For many companies, this method is the most straightforward and most efficient. Consider a business that starts the accounting period with 500 products, each priced at $3.00. During this time, an additional 100 products are purchased at $4.00 each.
Using the weighted average method and assuming no further purchases, the ending inventory would consist of 600 items, each valued at $3.50, totaling $2,100.
First In, First Out
The First-in, First-out (FIFO) method calculates ending inventory by assuming that the oldest items are sold first, keeping the inventory fresher despite price changes. To employ this method, add the costs of your latest product acquisitions to your previous Cost of Goods Sold (COGS) assessment to determine your ending inventory. FIFO often results in a higher-valued ending inventory during high inflation or fluctuating prices.
For instance, if a product’s price doubles between your initial purchase of 10 units and a subsequent purchase, you may sell the lower-priced items first. However, you will calculate your ending inventory based on the product’s current value.
Last In, First Out
Last In, First Out (LIFO) contrasts with the FIFO approach. With LIFO, calculations presume that your latest acquisitions were sold most recently. As a result, the ending inventory might reflect a lower value, as it is based on the most recent prices. However, when product purchase costs decrease, LIFO is advantageous.
How 3PLs Help with Ending Inventory
3PLs offer various services to assist businesses in selecting the appropriate accounting calculation methods. Integrating inventory management software into a company’s infrastructure enables more informed purchasing decisions and precise accounting. Beyond inventory management, 3PLs provide reporting tools that analyze sales frequency, demand forecasts, and SKU-specific sales records, optimizing buying and selling strategies. By combining sales data, accounting history, and product demand forecasts, 3PLs deliver up-to-date statistics to enhance the fulfillment process and guide future purchasing and sales decisions.
The Takeaway for E-commerce Businesses
Ending inventory plays a crucial role in accounting, influencing purchasing and selling decisions within an accounting period and impacting tax considerations. Each inventory calculation method offers benefits, and a skilled third-party fulfillment company can select the approach that best suits your business needs. Contact eWorld Fulfillment to discover how our fulfillment, inventory management, and technology solutions can enhance your eCommerce business. We can help you solve how do you calculate closing inventory with our fulfillment solutions.
FAQs
How do you calculate inventory at the end?
Inventory at the end can be calculated using various methods, such as gross profit, weighted average, first in, first out (FIFO), and last in, first out (LIFO). These methods involve calculating the cost of goods sold and subtracting it from the total available inventory to determine the ending inventory value.
How do you find ending inventory without cogs?
While calculating ending inventory typically requires the cost of goods sold (COGS), it can sometimes be estimated without direct knowledge of COGS by using inventory valuation methods like FIFO or LIFO, which focus on tracking the cost of specific units over time. For example, under FIFO (First In, First Out), the ending inventory value is based on the most recent purchases.
For instance, if a company has 1,500 units remaining and the cost of the most recent units is $10 each, the ending inventory value would be calculated as 1,500 x $10 = $15,000. However, using inventory without exact COGS can limit accuracy, as COGS helps account for all goods sold in a period.
Note: Third-party logistics (3PL) providers can support inventory tracking but generally do not perform COGS calculations directly.
How to find ending finished goods inventory?
Finding ending finished goods inventory is similar to finding ending inventory for all other types of products. This can be done by adding up the inventory at the beginning and any purchases made during the accounting period, then subtracting the cost of goods sold (COGS). The resulting number will represent the value of your finished goods at the end of that period. Alternatively, businesses can use 3PLs to help track and manage their finished goods inventory more efficiently through specialized software and reporting tools. 3PLs can also assist with determining accurate COGS values for a better understanding of overall inventory costs.
How do you find the FIFO ending inventory?
To calculate FIFO ending inventory, add the cost of your most recent product purchases to your previous COGS assessment. This will give you the value of your current inventory at the end of that period, assuming you use the First In, First Out method. 3PLs can assist with tracking and managing this method for businesses through advanced software and reporting tools. They can also provide valuable insights into purchasing decisions based on sales frequency and demand forecasts.
How do you find beginning inventory and ending inventory?
Businesses can use their records from the previous accounting period to find the beginning inventory. This number represents the inventory value at the beginning of the current period. Add any purchases made during the current period to the beginning inventory and subtract COGS to calculate the ending inventory. The resulting number will represent the value of your ending inventory at the end of that period. 3PLs can assist with tracking and managing both beginning and ending inventory through specialized software and reporting tools. They can also provide valuable insights into purchasing decisions based on sales frequency and demand forecasts to help optimize inventory levels.
What is an example of ending inventory?
Suppose 100 units at $10 each are in the beginning inventory. After purchasing 50 units at $10 and selling 80 units, you’d calculate the ending inventory as the 70 unsold units, remaining at the $10 cost per unit, resulting in $700 in ending inventory under FIFO.
How do you calculate LIFO to FIFO inventory?
To convert from LIFO (Last In, First Out) to FIFO (First In, First Out), you will need the following information:
- Beginning inventory value
- Purchases made during the accounting period
- Cost of goods sold (COGS)
Then, use this information to:
- Calculate the ending inventory using the LIFO method: add the most recent purchases to the beginning inventory and subtract COGS.
- Determine the total units sold during this period by subtracting the ending inventory from the sum of beginning inventory and purchases.
- Using this number, calculate the average unit cost for these sales by dividing COGS by the total number of units sold.
- To get the FIFO ending inventory value, multiply this average unit cost by the number of units remaining in the ending inventory (calculated in step 2). This is the equivalent value of LIFO ending inventory when using the FIFO method.
- Repeat this calculation for all other products in your inventory, if applicable.
Note: For accurate calculations and informed decision-making, it is recommended that you consult a third-party fulfillment company skilled in handling different inventory methods. Additionally, specialized software and reporting tools can make this conversion process more efficient and reliable.
How do you calculate ending inventory using gross profit method?
The gross profit method is a simplified way of calculating ending inventory value. This method involves using the gross profit percentage to estimate the cost of goods sold (COGS) and subtracting it from the total available inventory. The formula for this calculation is:
Ending Inventory = Total Available Inventory – (Gross Profit Percentage * Net Sales)
To use this method, you will need the following information:
- Beginning inventory value
- Purchases made during the accounting period
- Gross profit percentage
- Net sales (total revenue minus any returns or allowances)
For example, if a business has $10,000 worth of beginning inventory and purchases $5,000 more during the period with a gross profit percentage of 40% and net sales of $15,000, the ending inventory would be calculated as:
Ending Inventory = ($10,000 + $5,000) – (40% * $15,000) = $12,000
This method can quickly estimate a business’s ending inventory value, but it is less accurate than other methods, such as FIFO or LIFO. 3PLs can assist with using this method and offer more detailed inventory tracking and management solutions for better accuracy.
How to calculate ending inventory with LIFO?
To calculate ending inventory using LIFO:
- Find the total units sold during the period.
- Determine the cost of goods sold (COGS) per unit.
- Multiply COGS by units sold for the total period COGS.
- Calculate the value of the remaining inventory at current prices by multiplying the remaining units by their cost.
- Subtract the value from step 4 from the total COGS to get the ending inventory.
Example:
If a business starts with 200 units at $10 each and buys 100 more at $12 each, selling 250 units at a COGS of $15 per unit:
- Units sold = 250
- COGS per unit = $15
- Total COGS = 250 × $15 = $3,750
- Remaining inventory value = (50 × $12) + (200 × $10) = $2,800
- Ending Inventory (LIFO) = $3,750 – $2,800 = $950
Working with third-party logistics providers or specialized software can streamline these calculations and provide insights for optimizing inventory.
Note: All calculations in these examples are simplified for illustration purposes only.