The standard formula is: ending inventory equals beginning inventory plus purchases minus cost of goods sold, all at cost. Beginning inventory is last period's ending inventory, purchases are what you added at landed cost, and COGS is the cost of what sold. Alternatively, you can take a physical count of units on hand and value them with your valuation method (FIFO or weighted average) to get the cost.
Why does ending inventory matter?
Because it directly determines your cost of goods sold and therefore your profit and taxable income. COGS equals beginning inventory plus purchases minus ending inventory, so if you overstate ending inventory, you understate COGS and overstate profit, and vice versa. An error in ending inventory flows dollar for dollar into your bottom line and your tax bill.
Andrew Erickson is the founder of Inventory Hero. He has spent years working with Amazon FBA sellers on demand forecasting, restock planning, and the cash flow side of running a private-label brand. Inventory Hero exists because every spreadsheet-based inventory system he tried eventually broke — usually right before Q4.
What is the difference between the formula and a physical count?
The formula (beginning plus purchases minus COGS) derives ending inventory from your records, which works if your perpetual system tracks COGS accurately. A physical count measures what you actually have and values it directly. Best practice is to do both and reconcile: the count catches shrinkage and errors the formula cannot see, so the two together keep your inventory value honest.
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Calculating ending inventory means finding the cost value of the stock you still hold at the end of a period, and it matters because it directly sets your cost of goods sold. The short version: ending inventory equals beginning inventory plus purchases minus COGS, or you count the units and value them with your valuation method, and because COGS and ending inventory move opposite each other, an error in one lands dollar for dollar in your profit. This is a practical overview, not tax advice. Below is the formula, the methods, and why it matters.
Beginning inventory is last period's ending inventory, the stock you carried in.
Purchases are what you added during the period, at landed cost.
COGS is the cost of the units that sold.
Work an example: you start a quarter with 20,000 dollars of inventory, buy 50,000 dollars more, and your COGS for the quarter is 45,000 dollars. Ending inventory is 20,000 plus 50,000 minus 45,000, or 25,000 dollars. That 25,000 dollars is what sits on your balance sheet going into the next period.
The formula derives ending inventory from your records; a physical count measures it directly:
Count the units you actually hold at period end.
Value them using your valuation method, FIFO or weighted average, to get the cost per unit.
Multiply and total across SKUs for your ending inventory value.
If you hold 2,500 units and your weighted-average cost is 10 dollars, ending inventory is 25,000 dollars. The counted method is what catches the shrinkage, damage, and errors that the formula, working purely from records, cannot see.
For FBA stock, your count comes from Seller Central: the Manage FBA Inventory page shows current on-hand, and the Inventory Ledger report gives a date-range snapshot for a period close. Two Amazon-specific wrinkles matter. Units in reserved status (in an FC transfer, or pending a customer order) are still yours and still count toward ending inventory, so do not exclude them. And inventory sitting at a prep center or on the water is owned but not yet on the FBA report, so add it in from your own records. Miss either and you undercount the asset.
Best practice is to compute both and reconcile them:
The formula tells you what your records say you should have.
The count tells you what you actually have.
The gap is shrinkage, miscounts, or unrecorded transactions, and it is real information.
A formula ending inventory of 25,000 dollars against a counted 23,500 dollars means 1,500 dollars of inventory has quietly disappeared or was mis-recorded. You write that difference off (an adjustment entry) so your books match reality, and you investigate why. Ignoring the gap just carries an overstated asset forward. This is core inventory accuracy work.
Overstate ending inventory and you understate COGS, which overstates profit and your tax bill.
Understate ending inventory and you overstate COGS, understating profit.
Either way, the error flows straight through, dollar for dollar, to your bottom line. That is why a sloppy ending-inventory number is not a rounding issue; it directly misstates how much money you made and how much tax you owe, which is why inventory accounting treats it as a number to get exactly right.
You calculate ending inventory at every accounting close, monthly for good books, at minimum quarterly and at year end for taxes, because it is what fixes your COGS and profit for the period. A few mistakes recur:
Valuing at the wrong cost. Using invoice price instead of full landed cost understates ending inventory and distorts COGS. Value at the same landed cost you capitalized.
Forgetting in-transit and 3PL stock. Inventory you own but is sitting at a prep center, a 3PL, or on the water is still yours; leaving it out understates the asset.
Skipping the count. Relying on the formula alone means shrinkage never shows up, so your asset drifts above reality until a painful year-end correction. For FBA stock, your physical count is the Manage FBA Inventory report (or the inventory ledger) in Seller Central; pull it at period end before the next day's transactions move the numbers.
Inconsistent method. Switching valuation methods between periods makes ending inventory, and therefore COGS, non-comparable.
Avoiding these is mostly discipline: value at landed cost, count everything you own wherever it sits, and reconcile every close.
Calculating ending inventory is beginning inventory plus purchases minus COGS, or a physical count valued at your method's cost per unit, ideally both, reconciled. It sits opposite COGS in the same identity, so every error in it is an equal error in your profit and taxable income. Count, value consistently, reconcile to the formula, and write off the gap. For the framework around it, see inventory accounting and Amazon seller accounting.