When you start a new business and that business will be dealing with inventory, then Beginning of Year (BOY) Inventory balance ***MUST*** be zero. No ifs, ands, or buts about it.
When dealing with Inventory that's dealt with in the COGS section. (Inventory/Cost of Goods Sold).
Your BOY Inventory balance "MUST" match your prior year's End of Year (EOY) Inventory Balance. Since the business did not exist in 2018, there's no possible way a non-existent business could have any inventory on Dec 31 of 2018. Period. So that's why in the first year the BOY Inventory balance has to be zero. It doesn't matter if you may have purchased that inventory 50 years ago either. Here's how this works.
1st year:
BOY Inventory Balance - $0 This is what "you" paid for the inventory in your physical possession on Jan 1 of the tax year. This balance *MUST* match the prior year's EOY Inventory Balance. So if this is your first year dealing with inventory, the BOY Inventory Balance has to be ZERO. It does not matter in what year that inventory was purchased.
COGS (Cost of Goods Sold) - $5000 What *you* paid for the inventory you actually sold in the tax year. It does not matter in what year you paid for that inventory either.
EOY Inventory Balance - $2000 What *you* paid for the inventory in your physical possession on Dec 31 of the tax year.
The above indicates that you started the year (or started the business) with no inventory on Jan 1 of the tax year. Then during the tax year you purchased (or acquired through a capital contribution) a total of $7000 of inventory. IN that same tax year you sold $5000 of that purchased/contributed inventory leaving you with $2000 of inventory on Dec 31 of the tax year. The $5000 purchased amount is what gets deducted from the business's gross income.
Year 2:
BOY Inventory - $2000 What *you* paid for the inventory in your physical possession on Jan 1 of the tax year. Note that this matches exactly the pror year's EOY balance. If it does not, then you'll have some "splainin' to do to the IRS, and they will *not* accept any reason or excuse you give them.
COGS - $7000 What "you" paid for the inventory you actually sold during the tax year.
EOY Inventory - $5000 - What "you" paid for the inventory in your physical possession on Dec 31 of the tax year.
The above indicates that you started the year with $2000 of inventory. It matches the prior year's EOY inventory so no problem there. This it shows you purchased an additional $9,000 of inventory making your total inventory for the year $11,000. Of that $11K of inventory you sold $7000 of it during the tax year leaving you with a $5000 BOY balance on Dec 31 of the tax year. Only the COS amount of $7000 will be deducted from the business's gross income for the tax year.
