Ending inventory is the amount of goods that a business has on hand at the end of an accounting period. This does not include items it needs to run the business — it only includes merchandise it sells to other businesses or the public as a normal part of its business. A business expresses this inventory in units of goods and in monetary units for various internal company records.
For financial statements, the ending inventory is recorded as a monetary figure on the balance sheet and on an income statement. It appears on the income statement in the calculation of cost of goods sold. On the balance sheet, it appears as an asset. In essence, this figure is the cost of goods not sold.
A business calculates cost of goods sold to help determine gross profit. A business does not record as profit all of the revenue earned from selling goods. It cost the business money to buy the goods it sold during a period. Cost of goods sold tells a business how much it paid for the goods that customers purchased during the period. The total amount paid for all the goods sold is deducted from the total sales revenue figure — this gives a business a gross profit figure.
Beginning inventory plus net purchases minus cost of goods sold equals ending inventory. This formula tells a business that it started out with a certain amount of merchandise to sell. It purchased more merchandise in the period to keep shelves and displays full of stock. Also, it sold stock to customers during the period — the cost of selling this stock is cost of goods sold. Merchandise that is still available for sale next period is its ending inventory.
Inventory still on the premises of a business at the end of one accounting period becomes the beginning or opening inventory of the next accounting period. To check its calculated ending inventory figure, a business performs physical inventories at the end of an accounting period, typically at the end of the fiscal year. Most modern businesses rely on their computerized perpetual inventory systems to keep track of inventory throughout a fiscal year.
To determine its period-ending stock level, a business performs a physical count of all stock on hand. It then multiplies the number counted for each item by the cost per item according to accounting records. The costs of all merchandise are then added together to calculate the total cost of inventory on hand. This is the ending inventory amount, which can be verified against accounting records.