Inventory in a business - What is inventory? The simple answer to this is the properties and goods in stock. This article explains three main write ups on inventory.


noun: inventory; plural noun: inventories

    a complete list of items such as property, goods in stock, or the contents of a building.
    synonyms: list, listing, catalog, record, register, checklist, log, archive; More
    stock, supply, store
    "an inventory of all their belongings"
        North American
        a quantity of goods held in stock.
        "in our warehouse you'll find a large inventory of new and used bicycles"
        (in accounting) the entire stock of a business, including materials, components, work in progress, and finished products.

verb: inventory; 3rd person present: inventories; past tense: inventoried; past participle: inventoried; gerund or present participle: inventorying

    make a complete list of.
        enter in a list.
        "about forty possible sites were inventoried"
        synonyms:    list, catalog, record, register, log, document
        "I inventoried his collection of music boxes"

late Middle English: from medieval Latin inventorium, alteration of late Latin inventarium, literally ‘a list of what is found,’ from Latin invenire ‘come upon.’
Translate inventory to
Use over time for: inventory


  1. An itemized catalog or list of tangible goods or property, or the intangible attributes or qualities.
  2. The value of materials and goods held by an organization (1) to support production (raw materials, subassemblies, work in process), (2) for support activities (repair, maintenance, consumables), or (3) for sale or customer service (merchandise, finished goods, spare parts).

Inventory is often the largest item in the current assets category, and must be accurately counted and valued at the end of each accounting period to determine a company's profit or loss. Organizations whose inventory items have a large unit cost generally keep a day to day record of changes in inventory (called perpetual inventory method) to ensure accurate and on-going control. Organizations with inventory items of small unit cost generally update their inventory records at the end of an accounting period or when financial statements are prepared (called periodic inventory method). The value of an inventory depends on the valuation method used, such as first-in, first-out (FIFO) method or last-in, first-out (LIFO) method. GAAP require that inventory should be valued on the basis of either its cost price or its current market price whichever is lower of the two to prevent overstating of assets and earning due to sharp increase in the inventory's value in inflationary periods. The optimum level of inventory for an organization is determined by inventory analysis. Called also stock in trade, or just stock.


What is Inventory?

Inventory are stock, goods, merchandise. It's those assets, those products, those things of value, that you either buy from another or make yourself, that you then sell on to someone else (at a higher price than what it cost you to buy or make the inventory).

Inventory are classified as current assets, as the business intends to sell them (and usually does) within a year from the date that it is listed on the balance sheet.

Examples of Inventory

Here are some examples of inventory:
Shoes (Inventory)

1) Joe Superathlete Shoes sells Adidas and Nike shoes. Guess what? Those are both inventory for his business because they are bought from the manufacturers of the shoes and are sold to the public at a higher amount, resulting in a profit for the business.

Vehicles (Inventory)

2) Morgan Used Cars sells used cars. Are these inventory? Well, usually motor vehicles would fall under non-current assets in our balance sheet. However, in this particular case, the business intends to sell them as part of their regular business operations (they definitely intend to sell them in less than a year), and so these cars are classified as "inventory" under the category of "current assets."

Real Estate (Inventory)

3) Davison Investments is a property investment company, trading in residential and commercial properties. Now, these properties - land and buildings - couldn't possibly be anything but a non-current asset, could they? Actually, they could. Just like motor vehicles, land and buildings would usually fall under "non-current assets" in our balance sheet. However, because Davison Investments trade in properties - meaning they want to sell them as a regular part of their business operations - meaning they intend to sell them within a year - then these properties are also classified as "inventory."

So as you can see, inventory are not necessarily small items that are sold quickly. The size of the asset, or how quickly one can sell it, is not the overriding factor when classifying an asset as inventory. The overriding factor is what the business intends to do with the asset. If they bought it (or made it) with the intention of reselling it for a higher price, and they routinely resell this type of asset to others, then the asset is inventory.

Service Vs Trading Vs Manufacturing Businesses
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Now, up until now we have been looking at transactions, journals (debits and credits), T-accounts and reports for service businesses. Service businesses are businesses that provide a service, such as accounting services, tailoring services, electrical services, banking and medical.

But there are two other types of businesses apart from service businesses, both of which revolve around the selling of inventory.

Those two other types of businesses are trading and manufacturing businesses. In this section on inventory we're going to look at the different accounting rules regarding inventory and how they are applied in both of these businesses.

But first, let's make sure we understand what trading and manufacturing businesses are and what they have to do with inventory.
Trading Business

Trading businesses (like the one shown above) are businesses that buy inventory at a low price and sell it to someone else at a higher price. Examples of trading businesses are clothing stores, hardware stores and supermarkets. Retail stores are always trading businesses as they buy inventory at a low price from a wholesaler or manufacturer and sell these at a higher price to consumers.
Wood Manufacturing

Unlike trading businesses, manufacturing businesses do not buy products at a low price and sell at a higher price. Instead manufacturing businesses make products, which they then sell. Some common examples of manufacturing businesses are construction companies, car manufacturers and even bakeries (bakeries manufacture cakes, cookies, bread, etc.).

By the way, there may be one other category of business apart from service, trading and manufacturing businesses... A business that also deals with inventory... Care to take a guess?

This category consists of businesses who extract or gather natural resources and sell these. Businesses like mining companies and farmers. These guys don't manufacture (make) gold or wool. They also don't buy it at a low price and sell it at a higher price. They extract it or grow it in nature themselves. I don't know what you'd call this category exactly, but they're definitely a category on their own.


What is inventory?

Inventory is the goods that a business has on its premises or on consignment. The essential role of inventory is to act as a buffer, allowing for the smooth functioning of the production and order fulfillment processes.

The four components of inventory are defined as:

  • Raw materials. This is the source material for a company's manufacturing process. It can literally be "raw" materials that require considerable reconfiguration to become a product (such as sheet metal) or it can be components purchased from a supplier, and which can simply be bolted onto a product that is being assembled.
  • Work in process. This is raw materials that are in the process of being transformed into finished products through a manufacturing process. This can be quite a small amount if the manufacturing process is short, or a massive amount if the item being created requires months of work (such as an airliner or a satellite).
  • Finished goods. This is products that have successfully completed the manufacturing process, and are ready for sale.
  • Merchandise. This is finished goods that have been purchased from a supplier, and which are ready for immediate resale. Examples of merchandise are clothes sold at a retailer, or tires sold at a local automobile repair shop.

Inventory does not include supplies, which are considered to be charged to expense in the period purchased. Also, customer-owned inventory should not be recorded as inventory owned by the company. Further, supplier-owned inventory located on the premises should also not be recorded as inventory by the company.

Inventory can be located in three places, which are:

  • In company storage. By far the most common of the inventory location types, this is inventory kept in any location that is under the direct control of the business. This may be anywhere at a company facility, in trailers in the company parking lot, in leased warehouse space, and so forth.
  • In transit. A business technically takes ownership of inventory if the delivery terms from the supplier are FOB shipping point, which means that ownership passes to the buyer as soon as the goods leave the shipping dock of the supplier. At the other end of the delivery pipeline, a business also owns inventory until it reaches the customer's receiving dock if it is shipping under FOB destination terms. However, from a practicality perspective, most companies do not attempt to account for inventory that is either in transit to it or from it.
  • On consignment. A company may retain ownership of inventory at a retailer or distributor location, with its ownership interest continuing until such time as the inventory is sold. This inventory is much more difficult to track, since it is off-site.

Inventory is considered an asset, and is recorded as such on a company's balance sheet. Creating a proper valuation to include on the balance sheet requires either a physical count of the inventory to establish the quantities on hand, or a perpetual inventory system that relies on accurate record keeping of every inventory-related transaction. A proper valuation also requires the assignment of a cost to the  inventory, which usually involves a costing methodology, such as FIFO costing, LIFO costing, or weighted-average costing.

Related Topics

Inventory audit procedures
Inventory internal controls
Journal entries for inventory transactions
Types of inventory errors
What is inventory control?

References and Sources
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