Inventory are goods that you have available for sale in your business, as well as the raw materials used to create these goods.
Understanding inventory
Inventory is an important asset in your business. Selling your inventory is one of the main ways that your company earns money.
The process of managing these assets is called inventory management, and is usually done in an inventory management system.
Inventory is usually categorized into raw materials, work-in-progress items, and finished goods. Let’s go through these categories.
Raw materials
This category includes everything you’ve purchased in order to produce your goods. If you, for example, sell hats, this includes the purchase of fabric, thread, decorative items, and so on.
Work-in-progress
As the name suggests, this category includes goods that you are working on, but that you’re not yet ready to sell. In the example above this could include a partially finished beanie.
Finished goods
Finished goods are items that are ready to be sold. You can also refer to this as merchandise. If you run a hat business, this would be all the finished hats that you’re selling in your store and/or on your website.
Inventory in your accounts
When it comes to accounting, inventory is categorised as a current asset in your general ledger, and on your balance sheet, which you have to submit as part of your annual report.
A current asset is defined as an asset with a short lifespan that you expect to sell or use within a year. These types of assets are important because the money you make from selling them is used to cover your incoming invoices, pay your loan installments, and manage unforeseen expenses.
There are different ways to value these assets. Which method you have to use, depends on what country you operate in, and which accounting standard you use. For specific advice concerning your business, you should speak to an accountant.