Beginning inventory is a term used to refer to the products in stock at the start of an accounting period. It is used for accounting purposes to track changes in inventory. It is also important for running a business as it provides a mechanism for following changes in inventory to determine what is selling and when it tends to sell. This information is used to make ordering decisions.
One way to look at beginning inventory is to carry closing inventory over. For example, if a store that sells widgets and gadgets conducts accounting on a monthly basis and closes June with 15 widgets and 20 gadgets in stock, this would be the beginning inventory for July. Stores can find their closing inventory by seeing how many products they started with and subtracting sales or by manually counting the inventory.
However, the situation may be more complicated. Sometimes items are taken out of inventory because they expire, are stolen, or are damaged. Others may be added as a result of product returns. As a result, adjusting entries need to be made in order to keep inventory entries accurate. While one stray item might not be a cause for concern in the long term, when changes to inventory are not logged, this can result in increasing discrepancies that lead to confusion.
As a result, when stores come up with a beginning inventory, they consider not just the sales from the last period, but the actual inventory on hand as reflected by adjusting entries to remove or add items. Periodically, a store may close for a manual inventory in which everything in the store is counted and logged for the purpose of reconciling the inventory as recorded with the inventory that actually exists.
Also known as opening stock, the beginning inventory also has what is known as a book value, a reflection of the value of the inventory in stock. This value becomes important in situations like insurance claims, where stores must be able to show how much they lost in order to get compensation from an insurance company. As stores monitor their inventory, some of the things they look for include high theft rates, low inventory turnover that suggests that an item is unpopular, and losses incurred as a result of having to discount inventory. When items are sold on sale, the store may not break even on a product, and it will need to consider whether or not it wants to reorder that particular product.
