If a company has a perpetual inventory system, it always knows how much inventory it has on hand at any given time. However, businesses with a periodic inventory system can calculate the inventory for the balance sheet. To find the ending inventory figure, add beginning inventory to inventory purchases and subtract cost of goods sold.
Step 1: Find Beginning Inventory
Determine beginning inventory for the period. Beginning inventory for any accounting period equals ending inventory from the previous accounting period. For example, if you're calculating inventory for the March 31, 2015 balance sheet and inventory was listed as $200,000 on the February 28, 2015 balance sheet, beginning inventory is $200,000.
Step 2: Calculate Inventory Purchases
Identify inventory purchases made during the period. Inventory purchases include raw materials along with any amounts paid for direct labor and manufacturing overhead. For example, if the company bought $50,000 worth of raw materials during March 2015 and paid another $20,000 to laborers and plant supervisors, purchases were $70,000.
Step 3: Determine Cost of Goods Sold
Calculate the cost of goods sold during the accounting period. This figure includes direct materials, direct labor and manufacturing overhead incurred for all units sold during the account period. Usually, the company has the accounting software calculate the cost of inventory using a specific inventory valuation model. For example, if the company uses the weighted average method, the software will assign a per unit cost to inventory based on costs incurred during that period.
Step 4: Find Ending Inventory
Add inventory purchases to beginning inventory and subtract cost of goods sold to find ending inventory. For example, if beginning inventory is $200,000, purchases are $70,000, and cost of goods sold is $30,000, ending inventory is $240,000 ($200,000 plus $70,000 minus $30,000).
Step 5: Report on Balance Sheet
Report ending inventory as the inventory balance on the current asset section of the balance sheet. In this example, the inventory balance listed on the March 2015 balance sheet should be $240,000.