Closing or ending Inventory is exactly what it sounds like: the amount of inventory a business has left on the shelves and in stock at the end of the accounting year. Closing inventory can be counted in two ways: to reflect the physical amount of products left in stock, or to reflect the monetary value of the leftover products. This means that the number will either reflect a number of units or dollars.
How to Estimate Closing Inventory
On occasion, a business owner isn't able to count the amount of inventory on hand at the end of an accounting period or has difficulty assigning a value to it. This situation can occur when there is too much shipping activity at month-end to conduct a count. Maybe the staff is too busy to take a physical count or the counting process is too labor-intensive. There are two methods of estimating the closing inventory as an alternative.
The Gross Profit Method
To calculate closing inventory by the gross profit method uses the following steps:
- Add the cost of beginning inventory plus the cost of purchases during the time frame = the cost of goods available for sale.
- Multiply the expected gross profit percentage by sales during the time period = the estimated cost of goods sold.
- Subtract the number from Step 1 minus the number from Step 2 = ending inventory.
The Retail Inventory Method
This alternative approach is often used by retailers to calculate their ending inventory. This method is different from the first in that it uses the proportion of the retail price to the cost of goods during prior periods. Use the following steps:
- Calculate the cost-to-retail percentage: Cost divided by retail price.
- Calculate the cost of goods available for sale: Cost of beginning inventory plus cost of purchases.
- Calculate the cost of sales during the period: Sales x cost-to-retail percentage.
- Calculate ending inventory: Cost of goods available for sale minus cost of sales during the period.
Physical Counting Is Most Accurate
If you need an accurate count of closing inventory, rather than an estimate, physically counting is the safest way to go. If you have the time and manpower, the simplest way to calculate ending inventory is as follows:
- Count the number of unsold products on the store's shelves and stockroom.
- Determine the cost of each unit counted.
- Multiply the cost by the number of products.
- If there are different prices for products, you will need to multiply separately, then add all the amounts together.
This will give you a dollar amount for your ending inventory.
Heather Skyler is a business journalist and editor who has written for wide variety of publications, including Newsweek.com, The New York Times and Delta's SKY magazine. She has a bachelor's degree in English from Miami University and a master's degree in writing from the University of Washington in Seattle. Before writing for a variety of publications, she taught business writing in Seattle.