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Knowing your ending inventory is crucial for inventory accounting. But knowing how much sellable inventory is on hand at the end of the accounting period may be a challenge. This is why you should know how to choose the right inventory valuation method and how to calculate the value of your ending inventory.
Ending inventory is a term used to define the sellable inventory that’s left at the end of an accounting period.
At the end of an accounting period, you have to find your ending inventory’s value by adding net purchases to your beginning inventory and subtracting the cost of goods sold (COGS).
Then, you’ll have to claim all inventory as an asset for a complete balance sheet. Knowing your ending inventory can affect your balance sheets and taxes, so calculating it correctly is very important.
Calculating ending inventory is a best practice in eCommerce with shipping for small businesses and it’s also an important part of the accounting process.
First of all, you want to make sure that your inventory balance matches your warehoused stock. Calculating the ending inventory is a way of checking that your records match your physical inventory on hand. If you discover that your inventory levels do not match your records, that may be a sign of inventory shrinkage due to theft, accounting errors, or a wide variety of different reasons.
Calculating ending inventory is also a way of determining your net income or finding out how much you’re actually making. When you calculate it, you gain a clear understanding of whether your physical inventory matches your records. If the two don’t match up, this could indicate that you’re paying too much for the goods, which might be a sign that you should rethink your pricing strategy.
Ending inventory can help you ensure that your future reports will be accurate. The ending inventory of an accounting period represents the beginning inventory of the following accounting period. By accurately determining your ending inventory, you’re also ensuring that the beginning inventory for the next period is correct.
Ending inventory can be determined using the following formula:
\[\text {Ending Inventory} = { \text {Beginning Inventory} + \text {Net Purchases} - \text {Cost Of Goods Sold (COGS)} } \]
Where the Beginning Inventory is the previous accounting period’s ending inventory,
Net Purchases are the items you’ve purchased and added to the inventory,
And COGS represents the total cost of purchasing/manufacturing the finished goods that you sell.
The easiest way to determine your ending inventory is by doing a physical inventory count. However, that can be very difficult for businesses that have a large amount of inventory to process.
Fortunately, you can calculate ending inventory with the help of third-party logistics (3PL) providers like Ship Expert. Integrating Ship Expert’s inventory management solution with your eCommerce platform makes calculating ending inventory a breeze.
You can use Gross Profit to calculate ending inventory by following this formula:
\[\text {Ending Inventory} = { \text {Cost of Goods Sold} - \text {Cost Of Goods Available} } \]
Where Cost of Goods Sold = Gross Profit Percentage X Sales
And Cost of Goods Available = Beginning Inventory + Cost Of Purchases
You can also use Retail to calculate ending inventory by following the formula:
\[\text {Ending Inventory} = { \text {Cost Of Goods Available} - \text {Cost Of Sales} } \]
Where Cost Of Goods Available = Beginning Inventory + Cost Of Purchases
And Cost Of Sales = Sales X Cost / Retail Price
However, you should keep in mind that this formula only works if all the products have the same markup. This means that stock clearances or discounts can change the outcome of this calculation.
Calculating ending inventory is a crucial part of your business, so it’s important to get it right every time. Thanks to its inventory management software and integrated eCommerce integrations, Ship Expert can make this process easier and more efficient.
Find out how Ship Expert’s fulfillment services and integrated eCommerce technology can help your business. Contact us for more details.
Director, Ship Expert
Greg Woo is a seasoned expert in the logistics and distribution industry, with a career spanning over two decades. He has a comprehensive understanding of shipping and distribution needs, and has extensive experience integrating with e-commerce stores as well as customer specific WMS (warehouse management systems) and ERP’s (enterprise resource planning software). His tenure in the industry and established courier and LTL partnerships have allowed clients to benefit from reduced shipping expenses, as well as improved operations through software and specialized integrations.
Greg is currently the Director at Ship Expert Inc., a role he has held since February 2015. Prior to his role at Ship Expert, Greg held significant positions at Juxto, a telecommunications and managed internet service provider.
