How to record opening and closing inventory

Get a clear picture of your business performance and inventory profitability. Your Profit and Loss report shows sales and expenses. To get accurate inventory profitability, include unsold inventory at the end of any period. Leaving it out can inflate profit or show a loss. Post opening and closing inventory journals to include unsold inventory.

By default, the Profit and Loss report calculates gross profit as:

Sales - Expenses = Gross Profit

Posting opening and closing inventory journals changes the calculation to:

Opening Inventory + Expenses - Closing Inventory = Cost of Sales

Sales - Cost of Sales = Gross Profit

Example calculation

January

• Purchase $10,000 of inventory
• Sell $5,000 of inventory for $12,000

Without inventory journals:

• Gross profit = $12,000 (sales) - $10,000 (expenses) = $2,000 profit
• This ignores the $4,000 of remaining inventory

With inventory journals:

• Cost of sales = $10,000 (opening inventory) - $5,000 (closing inventory) = $5,000
• Gross profit = $12,000 (sales) - $5,000 (cost of sales) = $7,000 profit

February

• No additional inventory purchased
• Sell the remaining $5,000 of inventory for $12,000

Without inventory journals:

• Gross profit = $12,000 (sales) - $0 (expenses) = $12,000 profit
• This ignores the $5,000 of inventory from January

With inventory journals:

• Cost of sales = $5,000 (opening inventory) - $0 (closing inventory) = $5,000
• Gross profit = $12,000 (sales) - $5,000 (cost of sales) = $7,000 profit

Overall

• Profit over two months is the same with either method
• Posting opening and closing inventory journals gives accurate monthly profitability

Create the opening and closing inventory ledger accounts

You already have a balance sheet Inventory ledger account (code 1200). Create profit and loss accounts for your opening and closing inventory.

1. Click Settings, Business settings.
2. Under Financial Settings, click Chart of Accounts.
3. Click New Ledger Account and enter the following information.

   Included in Chart	Leave this selected
   Ledger Name	Opening Inventory
   Display Name	Opening Inventory
   Account Number	5200            -  If code 5200 is already in use, enter a different code
   Category	Direct Expenses
   Visibility	Selecting a category automatically selects the applicable checkboxes

4. Click Save.
5. Create the closing inventory account by repeating the steps above. Replace the ledger and display name with Closing Inventory and use a different account number, like 5201. Keep everything else the same.

You've successfully created your opening and closing accounts and are ready to post your journals.

Start of month 1 or your financial year

Check if your balance sheet inventory account (1200) has an opening inventory value. Move the value to your profit and loss opening inventory account (5200) with a journal entry.

If there are no values, record the purchase as usual and post a closing inventory journal as your first entry. For more details, see "End of month 1 - Closing inventory journal.

1. Go to Adjustments, Journals, New Journal.
2. Enter the relevant information for your journal entry:

   Reference *	Enter a reference for the journal
   Date *	Enter a date within the correct month for the journal
   Ledger Account	Details	Debit	Credit
   Inventory (1200)	Inventory		Value
   Opening inventory (5200)	Opening inventory	Value

3. Click Save.

You've moved the inventory value to the profit and loss account. The balance remains as a debit in account 5200 for the year, offset by your closing inventory account.

End of month 1 - Closing inventory journal

At month-end, post a journal to move the closing inventory value back to the balance sheet inventory (1200). This way, the inventory shows up as an asset on your Balance Sheet report.

1. Go to Adjustments, Journals, New Journal.
2. Enter the relevant information for your journal entry:

   Reference *	Enter a reference for the journal
   Date *	Enter a date within the correct month for the journal
   Ledger Account	Details	Debit	Credit
   Closing inventory (5201)	Closing inventory	Value
   Inventory (1200)	Inventory		Value

3. Click Save.

You can now produce the Profit and Loss report.

Start of month two and subsequent months - Opening inventory journal

Post a journal to move the value of the opening inventory from the balance sheet inventory account, 1200, to the profit and loss account, 5201.

Note: The opening inventory value for month 2 is the closing inventory value for month 1.

1. Go to Adjustments, Journals, New Journal.
2. Enter the information for your journal entry:

   Reference *	Enter a reference for the journal
   Date *	Enter the date to use for the journal
   Ledger Account	Details	Debit	Credit
   Inventory (1200)	Inventory		Value
   Closing Inventory (5201)	Closing inventory	Value

3. Click Save.

Repeat these steps each month that you want to record opening inventory.

End of month two, subsequent months, or the end of your financial year - Closing inventory journal

Post a journal to move the value of the opening inventory from the profit and loss account, 5201, to the balance sheet inventory account 1200.

1. Go to Adjustments, Journals, New Journal.
2. Enter the relevant information for your journal entry:

   Reference *	Enter a reference for the journal
   Date *	Enter a date within the correct month for the journal
   Ledger Account	Details	Debit	Credit
   Closing inventory (5201)	Closing inventory		Value
   Inventory (1200)	Inventory		Value

3. Click Save.

Create a report at year-end to move inventory values to the profit and loss account (3100). This value appears in the Equity section of the Balance Sheet report, with unsold inventory as an asset in account 1200. Follow the 'Start of month 1' steps to post opening and closing inventory for the new year."