Managing a business is not a simple thing. There are so many different aspects that you need to cover, and one of them is inventory account. In inventory accounting, you need to understand the importance of ending inventory formulas. The ending inventory will basically allow the company to know how much sellable inventory remains after the completion of the accounting.
If you don’t know much about the ending inventory and you want to learn more about it, then we have covered you. Here, we have mentioned a detailed guide through which you will be able to understand all aspects of this.
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Part 1: What is Ending Inventory?
Ending inventory is basically the leftover inventory that is sellable to the customers after the end of the accounting period. With the help of the ending inventory formula, you will be able to calculate the value of the goods that you can sell to the customers; it also helps with understanding the tax liabilities and even the profit of the company.
With the help of ending inventory, the business can manage its goods, have a better picture of its accounting, and understand how much tax it needs to pay. Hence, this is the reason why the business needs to ensure that they are calculating the ending inventory in the right way and that everything is tracked correctly.
Many people might think that ending inventory and closing inventory are two different things. However, this is not the case. These two terms are synonyms, and both have the same meaning.
Part 2. Why Do We Need to Calculate Ending Inventory?
Now, you might be wondering why it is so important to calculate the ending inventory. Ending inventory gives clear insights into the inventory of the business that is directly effecting the company’s net profit. It also allows the owners to understand the tax liability that their company needs to pay.
With the help of ending inventory, the company will also be able to strategize and plan its business accordingly. It can also help with efficient inventory management. This shows that calculation of the ending inventory plays a vital role in a business as it can help the company increase its sales and improve the working of the business overall.
Part 3. How to Calculate Ending Inventory?
The next question that might come to your mind is what the ending inventory formula is and how to calculate it. There are ending inventory calculators that you can use online. However, if you want to calculate the inventory manually, then you can use the formula mentioned below:
Ending inventory= beginning inventory + net purchases – cost of goods sold (COGS)
Mentioned below is the detailed information on each part terms that is used in this formula.
· Beginning Inventory
In simpler words, you can say the value of the items that are present in stock and that are ready to be sold to the customers at the start of the accounting period. It can also be referred to as the value of the inventory that the company got at the end of the previous accounting period.
The beginning inventory is also called the opening inventory, and hence, it is an important aspect when calculating the ending inventory.
· Net Purchases
Net purchases are present in between the accounting period. These are basically the items that the company purchases during the accounting period.
· COGS
The last thing that is present in this formula is the COGS, which is the cost of goods sold. This is the value of manufacturing and the purchasing of the finished products that are then sold during this period.
Part 4. Ending Inventory Methods
There is a basic ending inventory formula that is used, and then there are also different methods through which you can calculate the inventory. All of these methods have their pros and cons, so let’s take a detailed look at all of these different types of ending inventory methods.
· FIFO
FIFO, also called the first in, first out method, through which it is assumed that the goods you purchased earliest were sold first. According to FIFO, the batch of the products that are purchased first will be sold first, and the amount they have been purchased for will be used to calculate the ending inventory.
This approach is basically how the companies work. They start selling the goods that they have already as it will make space for the newer goods.
- Let’s say the chronological order of transactions is as follows:
- Purchase 1: 100 units at $5 each
- Purchase 2: 150 units at $6 each
- Sale: 120 units
FIFO assumes that the first units purchased are the first ones sold. Therefore, the cost of goods sold (COGS) is calculated using the costs of the oldest inventory first:
- COGS = (100 units * $5) + (20 units * $6) = $500 + $120 = $620
· LIFO
Last in, first out, more commonly called LIFO, is another ending inventory method that the companies use. As the name suggests, this method assumes that the products that come into the inventory most recently will be sold first.
One of the significant pros of using this method is that when the seller increases the prices, the companies also start reporting the higher COGS price, and the gross profit will be lowered. This is an ideal way through which companies can reduce tax liabilities.
Using the same transactions as above, LIFO assumes that the last units purchased are the first ones sold. Therefore, the COGS is calculated using the costs of the newest inventory first:
- COGS = (120 units * $6) = $720
· WAC
There is another method for calculating the ending inventory. WAC, also known as the Weighted Average Cost method, is the middle method between the two methods mentioned above. In it, there is no timeline regarding the purchase of the products. Here, the business will take the average of the inventory cost and then calculate the COGS and the ending inventory.
This method is commonly used by companies who are selling the same type of products. It is excellent to simplify the process and perfect it when there is a massive volume of products that need to be calculated.
WAC calculates the average cost of all units available for sale and uses this average cost to determine COGS.
- Average cost per unit = [(100 units * $5) + (150 units * $6)] / (100 units + 150 units) = ($500 + $900) / 250 units = $3.60 per unit
- COGS = 120 units * $3.60 = $432
Part 5. Using 3PL to Improve Ending Inventory Management
The management of the inventory is a huge challenge that companies face, and it is also a crucial thing that plays a role in the success of the company. Partnering with 3PL means that you will be able to manage your inventory much more efficiently and smartly.
There are a lot of different 3PL companies that are working worldwide. However, NextSmartShip is one of the best. This company is packed with the latest innovative technology that makes the process of eCommerce much simpler. It also helps the companies with their inventory process, which means they don’t even have to worry about the ending inventory formula.
Therefore, if you want to grow your company, then partnering with NextSmartShip can be a fantastic option for your business.
Conclusion
Ending inventory is an essential step in inventory management. It helps in many different aspects, such as allowing the company to manage the inventory and strategize their next moves. We hope this article was beneficial for you in learning about this. Also, if you are trying to find the best 3PL company, then make sure you check out NextSmartShip.
