To find out how much profit or loss your business has produced in the last accounting period, you need to prepare a balance sheet which shows the flow of money into and out of your business. One of the items on both sides of the equation is your inventory, which comes into and leaves your business, depending on sales for the period. If you don't have a constant running inventory system, you'll need to do a periodic inventory count to get a final figure for the period.
To begin your calculations, you will need to know the inventory levels on the first day of the accounting period. Then, add the cost of any new purchases added to the business during the current accounting period. Finally, subtract the cost of goods sold at the end of the accounting period. This will give you the ending inventory.
Your Beginning Inventory
To figure out your inventory figures for each period, you'll need a beginning number that represents all the inventory held by your business on the first day of the accounting period. This number represents everything your business can use, at that exact point in time, to generate income for the period. Using the beginning inventory formula will help you understand the value of this inventory at the beginning of this accounting period.
Use the balance sheet from the last period to figure out the beginning inventory. Start by finding the Cost of Goods Sold (COGS) during the previous period. If it took you $1 to produce each taco, and you sold 1,200 tacos, your COGS for the period would be $1,200.
Check your records to find your ending inventory balance and the amount of new inventory you purchased, both in the last accounting period. If your ending inventory had enough to make 300 more tacos and you bought enough for an additional 800 during the period, use these numbers to figure the beginning inventory.
Add the ending inventory to the COGS. For example, $300 + $1,200 = $1,500. To calculate your new beginning inventory, subtract the amount of purchased inventory from this amount. $1,500 - $800 = $700. Your beginning inventory for the accounting period is $700.
Calculating the Ending Inventory
At its most basic, the ending inventory is the materials left at the end of an accounting period that are yet to be sold to produce revenue for the company. Ending inventory is the value of the goods that are still available for sale at the end of the accounting period. The formula for the ending inventory is similar to that of the beginning inventory.
Take the beginning inventory you calculated at the start of the accounting period. This store's beginning inventory for taco ingredients was $700. Next, add the cost of any new purchases added to the business during the current accounting period. If you purchased $2,000 more in inventory, your figure would be $2,700.
Finally, subtract the cost of goods sold when you calculate that at the end of the accounting period. If you sold 2,500 tacos, your COGS would be $2,500. Subtract that from $2,700 and you'll get an ending inventory of $200 in ingredients.