Ending inventory value: 4 figures to check at period end

Key takeaways

• Reconcile physical quantities with stock records.
• Trace unit costs to purchase invoices.
• Confirm the valuation method before calculating the total.
• Investigate differences before posting an adjustment.

If they don't agree, your cost of goods sold and your profit for the period will be wrong, even when every sale was recorded correctly. Most of the trouble comes from a few figures that get checked too quickly, or not at all.

This post covers four figures to check before you sign off on ending inventory value. None of them is hard to understand on its own. The work lies in checking each one against its source, and in confirming that the total you carry forward is the total your records support.

The examples use plain numbers so you can follow the arithmetic. Your system may label things differently, and your accountant may want certain treatments documented. Treat this as a checklist for your own review, not as a rulebook for how your books must be kept.

Why ending inventory affects profit

Ending inventory is the value of the goods you still hold when a period closes. Cost of goods sold and ending inventory are closely tied together, so an error in one shows up in the other. In the periodic method, cost of goods sold is what remains after ending inventory is taken away from the goods you had available to sell. If the ending figure is too high, the cost of what you sold looks too low and profit looks too high. If it is too low, the reverse happens.

That is why a quick glance at the report is not enough. A small error in the ending figure can change the profit you report and the decisions you make about buying. The OpenStax chapter on the periodic method works through this relationship with real numbers, and it is worth reading alongside this checklist: OpenStax, 10.2 Calculate the Cost of Goods Sold and Ending Inventory Using the Periodic Method.

Figure 1: The counted quantity

Start with the count, because every other figure depends on it. If the quantity is wrong, the value will be wrong, no matter how carefully you price the stock.

Decide your counting rules before anyone starts. Say whether a sealed case counts as one unit or as twelve, and whether a partly used box is counted by the unit or by weight. Write the rules on the count sheet. Mixing units of measure is one of the most common reasons a count fails to match the books, and it is easy to prevent.

Next, separate the stock that belongs to you from stock that does not. Goods held for a supplier, customer returns waiting for inspection, and items out for repair each need a clear decision. Include or exclude each category on purpose, and apply the same choice every period. If you change the choice, write down why.

Check cutoff too. Check whether stock received just before the period closes but not yet entered in the system belongs to you. Stock shipped just before close may already belong to a customer. Compare the last few receiving and shipping documents with what the system shows, and make sure both sides fall on the correct side of the close. Cutoff errors are easy to miss because each single document looks fine on its own.

Finally, recount a sample. Pick a handful of items at random, and give extra attention to the highest-value lines, since a small error there moves the total the most. If a recount differs from the first count, find the cause before you change anything. A difference often points to a receiving error, an unrecorded return, or a sale entered against the wrong item. Adjusting the quantity to match the books without finding the cause only hides the problem for next period.

Also compare the physical count with what the system says should be on hand, item by item. Walk the shelves, storage areas, and back rooms in a fixed order so nothing is counted twice or skipped. Let the counter record what is actually there before anyone looks at the system figure. If the counter can see the expected number, the count tends to drift toward it, and the check stops being a check.

For help organizing this work, use the physical inventory reconciliation guide.

Figure 2: The unit cost

Once you trust the quantity, check the cost attached to each unit. A cost is not the selling price, and it should never be a number typed in from memory. It should trace back to a source document, usually a purchase invoice.

Begin with the most recent invoice for each item. Check how the invoice cost feeds into your system's chosen valuation method. Then decide which extra charges belong in cost, such as freight, duties, or discounts that reduce what you paid. The same invoice can produce different unit costs depending on those choices, so write the rule down and use it every period. A rule you apply only when it is convenient is not a rule.

Watch for items bought in batches at different prices. If the same product sits on the shelf at two costs, you need to know which cost each unit carries. This is where the valuation method, covered in the next section, comes in. Without that link, a total can look correct and still be wrong, because the units were priced under no clear assumption at all.

Look for stale costs. A supplier may have raised prices during the period while your system kept the old cost. Check whether that cost reflects the purchases and valuation method used. The reverse happens too. A cost may be updated for new stock while older units retain their purchase costs; check those differences against your chosen method. Either way, the item needs a second look before the total goes anywhere.

Finally, check unusually low or high unit costs against what the item usually costs. A number that looks wrong often is. Sorting the cost list by value and reading the top and bottom rows is a quick step that catches many of these problems.

Figure 3: The valuation method

The third figure is not on the shelf at all. It is the method you use to assign cost to the units still on hand, and it decides which purchase prices end up in the ending value.

The Odoo documentation on average price valuation describes the general idea: "Inventory valuation is a method of calculating how much each in-stock product is worth internally." That definition is worth keeping in mind. The figure is an internal calculation under a stated method. It is not a market price, and it is not whatever you would get if you sold the stock today.

Under average cost, the same Odoo guide explains that when new products arrive, the average cost for each product is recomputed. When products leave the warehouse, the average cost does not change. Check whether your system behaves that way, because a method that does not match your records will produce a total you cannot defend.

A different approach assigns cost by the order in which units were bought. The OpenStax page shows what that looks like in a periodic example: "Following that logic, ending inventory included 210 units purchased at $33 and 75 units purchased at $27 each, for a total FIFO periodic ending inventory value of $8,955." You can repeat that kind of multiplication with your own unit counts and costs, and you should get the same kind of answer from the same kind of inputs.

Two checks matter here. First, confirm the method in your system matches the method in your records and the method you used last period. Second, if you have changed methods, record the change and explain it to your accountant before the figure goes into the books. Switching methods quietly is one of the easiest ways to make two periods impossible to compare, and it can make a single period's profit look better or worse than it really was.

For a closer look at different purchase costs, read about valuing a stock count by cost layers.

Figure 4: The total and the books

The last figure is the total, and the test is whether it agrees with the books. For each item, multiply quantity by unit cost. Add the lines together. Then compare that result with the inventory balance in your books before any period-end adjustment.

Investigate the difference between those two numbers before recording an adjustment. The OpenStax periodic example shows how that works. It says: "Beginning merchandise inventory had a balance before adjustment of $3,150." It also says: "The inventory at period end should be $6,795, requiring an entry to increase merchandise inventory by $3,645." The arithmetic checks out, since $6,795 less $3,150 is $3,645. The inventory increase in this example is the gap between the opening balance and the ending value.

Do not stop at the adjustment. Trace where the offset goes. The same OpenStax page notes that "The credit entry to balance the adjustment is for $13,005, which is the total amount that was recorded as purchases for the period." In your own books, the closing entries should clear the purchases you recorded, and you should be able to show that they do. If you cannot follow the offset, the adjustment is not finished.

A total that agrees with the books is good. A total that agrees only because you adjusted to it is not. Keep the count sheets, the unit-cost sources, and the calculation together, so anyone reviewing the period can follow the figure from the shelf to the balance.

Illustrative example: Check the arithmetic

Suppose a counted item has 10 units at an assigned unit cost of $5. Its illustrative extended value is $50: 10 multiplied by $5. Check the multiplication before adding this line to the other items. This checks arithmetic; it does not establish whether the count or assigned cost is correct.

Now run the same discipline on your own stock. Give each row a column for the item name, the counted quantity, the unit cost, the extended value, and the source document that supports the cost. Totals should come from formulas, not from numbers you retyped. Once the total is done, compare it to the books, record any adjustment, and save the file with the period.

A simple layout makes review faster. When someone asks why a particular item carries a particular value, the answer should be one row away, with the quantity, the cost, and the invoice that supports it visible together.

When the numbers still do not match

Sometimes all four checks pass and the total still differs from the books. Start by listing the differences by item, not by total. A small net gap can hide a large error that is offset by another item. Sort the differences by size and look at the top few lines first.

For each difference, ask four questions in order. Was the quantity counted correctly? Was the cost correct? Did the valuation method apply the way your records say it should? Was there a cutoff issue that moved stock between periods? Working through the questions in that order keeps you from guessing. It also keeps the explanation short when someone asks why the figure moved.

If a difference cannot be explained, do not bury it in the adjustment. Record it as an open item, note the amount, and ask the person responsible for the count or the purchase records to look at it. An unexplained difference that is written down is far easier to fix than one that has been folded into a balancing entry and forgotten.

Keep the difference log with the count sheets. Next period, the same kinds of errors often return, and a short history of them shows where to focus the count.

Who should check what

In a small shop, one person may do the count, the costing, and the adjustment. That is common, and it is also where errors slip through unnoticed. If you can, split the work. The person who counts should not be the only person who prices the stock, and the person who posts the adjustment should not be the only person who reviews it.

A simple split works well. The counter records quantities and notes any damaged, returned, or unusual items. The person who handles purchasing confirms unit costs against invoices. The owner or bookkeeper reviews the valuation method, compares the total with the books, and signs off on the adjustment. Each person checks the part they know best, and each signature means something.

Where you cannot split the work, build the check into the file instead. Have someone else review the spreadsheet before the adjustment is posted, even if the review takes only a few minutes. A second pair of eyes catches the wrong decimal, the missing row, and the item counted under the wrong name.

Common mistakes to avoid

• Counting before the cutoff, so goods received or shipped near the close land in the wrong period.
• Pricing every unit at the latest invoice cost when older stock was bought at a different price, without applying your chosen method.
• Valuing stock at its selling price instead of its cost.
• Counting customer returns as sellable stock without checking their condition.
• Entering the adjustment as a balancing figure without tracing the difference to a cause.
• Changing the valuation method partway through the year without recording the change.
• Trusting a software report without checking that its quantities match the physical count.

Each of these looks small in the moment, and each one can move the total by more than you would expect. Reviewing the list before you start the count is a cheap way to avoid them.

Keeping the evidence

Good period-end work leaves a trail. Keep the signed count sheets, the valuation spreadsheet, the invoices used for unit costs, and the adjustment entry with its calculation. Store them where you will find them when the accountant asks, and in a format you can still open later.

Include a short note with each file. Write down the date of the count, who did it, the method used, any rules you applied to units or cutoff, and any open items. A note takes a few minutes to write, and it saves hours when someone needs to reconstruct the period later.

If you use inventory software, export the valuation report at close and save a copy outside the system. Software gets updated, and a report you can rerun next year may not match the one you produced today. A saved copy is your record of what the books said at that moment.

Your next step today

Choose an item from your current stock report. Recount it, find its purchase invoice, confirm how your valuation method assigns its cost, and check the multiplication. Save the calculation and note any difference for review before changing the books.

Questions about ending inventory

Is ending inventory valued at selling price?

Ending inventory uses assigned cost, not selling price. Trace the cost to purchase records and apply your chosen valuation method.

What should you do when the total differs from the books?

List the differences by item and investigate them before recording an adjustment. Keep unexplained amounts as open items with the count records.