Inventory, also called stock, is the goods a business holds to sell to customers or to use up in making the products it sells. It is a current asset because it is expected to be sold and turned into cash within the normal trading cycle.
What it means
Inventory stays on the balance sheet at cost while it is held. When it is sold, its cost moves off the balance sheet and onto the income statement as cost of sales, matched against the revenue from the sale. If inventory is damaged or cannot be sold for at least its cost, it is written down to the lower figure.
Where it fits in
Inventory is not a payroll concept, but the two meet in manufacturing: the wages of production staff can form part of the cost of the inventory they help produce, so a slice of payroll cost may sit in inventory until the goods are sold.
Key rules
- Goods held for sale or for use in production.
- A current asset, carried at cost while held.
- Its cost becomes cost of sales when the goods are sold.
- Written down to net realisable value if that is lower than cost.
