Beginning inventory is a confusing part of inventory management for many business owners, but it’s important to get it right. 

By tracking beginning inventory, you can monitor inventory levels and better forecast what you need to order, and when. This helps you run a more effective and efficient operation. 

Ahead, you’ll learn how to calculate and use beginning inventory in your store. 

What is beginning inventory?

Beginning inventory is the value of your company’s inventory at the beginning of an accounting period. To calculate beginning inventory, use this formula: 

(cost of goods sold (COGS), + ending inventory) – inventory purchases = beginning inventory

What’s included in the beginning inventory:

• All sellable stock you currently possess, valued at its cost
• Any manufactured products ready for sale
• The cost of any work-in-progress (WIP) goods
• Capitalized landed costs you’ve included in the inventory’s value, such as freight-in, duties, and import fees
• Any manufacturing costs that your accounting policy requires to be included in the inventory’s value

Your beginning inventory data should equal the previous period’s ending inventory. If you’ve got $10,000 tied up in inventory at the end of a quarter, for example, you have the same amount in beginning inventory for the next quarter. 

Beginning inventory vs. opening balance vs. starting stock

In practice, all of these retail terms mean the same thing. They all refer to the total value of your inventory at the exact start of a new accounting period. 

Whichever term you prefer, use the same term and inventory valuation method across your accounting system, inventory app, and spreadsheets to ensure your audit trail lines up.

How to find beginning inventory value 

1. Carry over last period’s ending inventory

Your beginning inventory value is the same as your ending inventory from the period that just closed. The final, adjusted inventory number you reported last month or quarter is the starting number for this one.

Before you carry that number over, make sure the previous period is actually closed. That means you’ve posted all adjustments, including:

• Late-arriving invoices
• Customer returns processed
• Goods in transit
• Adjustments from consignment stock

Once you finalize all the entries, you have your ending inventory value for the previous period, and therefore, your beginning inventory value for the new period. 

✨ Shopify Power-Up: Use the Month-end inventory snapshot report to confirm this final value before rolling it into the new period.

How beginning inventory works for multi-location retailers 

Set beginning inventory per location, then add them together. Maintain separate opening balances for each site, like Store A, Store B, your 3PL, etc. Your total company-level beginning inventory is the sum of all these individual locations after all adjustments are made.

Be careful with transfers around period-end. If stock leaves Location A on the last day of the period and arrives at Location B on the first day of the new period, there’s a chance it could be double-counted or missed entirely. Use an “in-transit” holding location in your records to prevent this.

💡 Tip: Keep one master cost ledger for each SKU, broken down by location. Reconcile your marketplaces like Amazon and POS systems back to one single source of truth.

2. Choose an inventory costing method 

The value of your inventory changes depending on the costing method you use:

• FIFO (first-In, first-Out): This methodassumes that the products you purchased first were sold first, even if you bought them at different prices. If you sold four mugs during the previous period but bought 10 mugs at $5 and another 10 at $7, you’d use $5 to calculate the COGS.
• LIFO (last-In, first-Out). Unlike FIFO, this model assumes that the products you purchased last were sold first. In the example above, this would be $7 per mug.
• Weighted average cost: This method calculates a rolling average cost for all items in stock and applies that average to COGS and ending inventory. In the example above, your total inventory cost is $120 ($50 + $70) across 20 mugs. This makes your average cost $6 per mug, and you’d use $6 to calculate the COGS for every mug sold.

Account for write-downs and impairments

If items in your stock become damaged, obsolete, or are otherwise worth less than what you paid for them, you write down their value under the lower of cost or net realizable value (LCNRV) rule. Net realizable value (NRV) is the estimated selling price minus the costs to complete the sale.

Any write-downs you take reduce the value of your ending inventory. That new, lower value is what carries forward to become your beginning inventory for the next period.

📚 Read: Perpetual Inventory: How a Perpetual Inventory System Works

3. Verify with a physical inventory count 

Last, your book inventory, or what your software says you have, has to match your shelf inventory, which is what’s physically in your warehouse or store. 

Use a physical count to validate the records by counting everything at once, or use a cycle counting method to count small sections regularly. Document any differences between your book and stocktake and post the adjustments.

After adjustments are posted, the verified ending inventory value is the number you’ll use as your beginning inventory.

The beginning inventory formula

But what if your records are messy or missing data? No sweat. You can reconstruct beginning inventory using a standard accounting formula: 

(COGS + ending inventory) – inventory purchases = beginning inventory

Use this formula to reconcile your books if you have audited figures for COGS, purchases, and ending inventory but are missing the starting value.

💡 Beginning inventory formula in practice: Say you spent $5,000 manufacturing products throughout the year. You ended the previous accounting period with $10,000 ending inventory. From that $15,000, subtract the $6,000 you spent on inventory. Beginning inventory would be valued at $9,000.

Why is beginning inventory important? 

It’s clear beginning inventory plays an important role in accounting and business operations. Here are a few reasons why: 

Improves financial analysis and accuracy

One of the main ways beginning inventory improves financial analysis is by allowing you to calculate your average inventory. It provides a big-picture view of your inventory by smoothing out short-term fluctuations.

Average inventory is also the foundation for other critical key performance indicators (KPIs), such as inventory turnover and days inventory outstanding (DIO), which are essential for managing cash flow and stocking efficiency.

Plus, every retail business experiences seasonal shifts—certain products sell better than others at various points throughout the year. Beginning inventory helps you understand those trends and adjust your open-to-buy budget to prevent under- or overstocking.

Helps identify shrinkage and phantom inventory

Retail shrinkage happens when there’s a mismatch between your actual inventory and the numbers recorded during a cycle count. Often, the root of the issue is shoplifting or employee theft. Beginning inventory helps retailers spot phantom inventory before it becomes a major money drain. 

Informs purchasing decisions and cash flow

Inventory is part of a company’s working capital, and effective inventory management helps with working capital management. From an inventory perspective, the beginning inventory figure gives you an idea of how much working capital you had at the start.

It also helps you plan operations by giving you insight into your inventory levels. For example, if you start the period with a large inventory, you may plan fewer production runs or reduce purchasing.

Essential for tax reporting

A balance sheet is one of the most important bookkeeping records for any retail store. It’s a financial statement that shows your current assets and liabilities—including your inventory at the starting point of the period in question. 

Calculating your beginning inventory ahead of time, and making sure it isn’t too big or too small, can have tax-saving advantages. Inventory value also helps retailers calculate their tax liability in advance. If you know there’s a $15,000 tax bill coming up at the end of the tax year, you might want to adjust your open-to-buy budget accordingly. 

Common pitfalls of beginning inventory

Become an inventory pro by avoiding these common mistakes when determining beginning inventory:

• Using only the purchase price, not the full inventory cost: If you omit freight, duties, or handling fees from your inventory value, you can’t get an accurate beginning inventory. Capitalize all costs to get the inventory to its present location.
• Counting in-transit stock twice: Use shipping terms like FOB shipping point to determine who legally owns the stock at the cutoff moment. Count it only once, preferably by using an in-transit holding location in your records.
• Forgetting to include pending returns: Immediately assess returned items for damage and apply write-downs as needed.
• Mixing costs and currencies across locations: Using different cost bases or currency rates across various locations can throw off your beginning inventory value. Maintain one master cost ledger per SKU, per location. Translate all foreign currency purchases using the exchange rate from the original transaction date.