Course Outline
Join PRO

Why does an inventory error affect two periods?

Harold Averkamp, CPA, MBA

Definition of Inventory Error

An inventory error could be the result of any of the following:

  • Omitting some items when physically counting inventory
  • Double counting some items during a physical inventory
  • Clerical errors when adding/multiplying inventory details

Since the ending inventory of one accounting period will automatically become the beginning inventory for the next accounting period, the calculation of the cost of goods sold for both accounting periods will be incorrect. Of course this means that the company’s gross profit, operating income, and net income for both periods will also be incorrect.

Example of an Inventory Error

Assume that a company began operations on December 1. During December the company purchased $100,000 of goods that it planned to sell to customers. The company’s December 31 ending inventory was calculated to be $15,000. As a result, its balance sheet will report inventory of $15,000 and its income statement will report cost of goods sold of $85,000 ($100,000 – $15,000). During January the company purchased $130,000 of goods and had $20,000 in inventory at the end of January 31. Therefore, January’s cost of goods sold will be $125,000 (beginning inventory of $15,000 plus purchases of $130,000 minus ending inventory of $20,000).

Now let’s assume that only one error occurred and it involved the calculation of the December 31 ending inventory. Instead of the $15,000 which was reported, the true amount of inventory was $19,000. That meant the December 31 balance sheet understated the true cost of inventory by $4,000. It also meant that December’s income statement cost of goods sold was not the reported $85,000. Rather, the true cost of goods sold was $81,000 ($100,000 minus $19,000 of inventory). In January, the true cost of goods sold is $129,000 (beginning inventory of $19,000 plus the purchases of $130,000 minus the January 31 inventory of $20,000) not the $125,000 that had been reported.

Join PRO to Track Progress
Must-Watch Video

Advance Your Accounting and Bookkeeping Career

  • Perform better at your job
  • Get hired for a new position
  • Understand your small business
  • Pass your accounting class
Watch the Video

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

Read all 2,645 reviews



PRO Plus

Lifetime Access (One-Time Fee)
Word Scrambles
Bookkeeping Video Training
Financial Statements Video Training
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Business Forms
All PDF Files
Progress Tracking
Earn Badges and Points
Certificate - Debits and Credits
Certificate - Adjusting Entries
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Payroll Accounting

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on

Learn More About Harold

Certificates of

Certificates of Achievement

We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

  • Debits and Credits
  • Adjusting Entries
  • Financial Statements
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Working Capital and Liquidity
  • Financial Ratios
  • Bank Reconciliation
  • Payroll Accounting
Badges and Points
  • Work towards and earn 30 badges
  • Earn points as you work towards completing our course
View PRO Plus Features
Course Outline
Take the Tour Join Pro Upgrade to Pro Plus