What is Inventory?


Lesson One: What is Inventory? (current page)
Lesson Two: FIFO Method and Weighted Average Cost
Lesson Three: Sales, Cost of Goods Sold and Gross Profit
Lesson Four: Perpetual and Periodic Inventory
Lesson Five: Accounting for Manufacturing Businesses
Lesson Six: The Manufacturing Cost Statement





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

Call Center Agent

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.



Return from What is Inventory? to the Home Page





Lesson One: What is Inventory? (current page)
Lesson Two: FIFO Method and Weighted Average Cost
Lesson Three: Sales, Cost of Goods Sold and Gross Profit
Lesson Four: Perpetual and Periodic Inventory
Lesson Five: Accounting for Manufacturing Businesses
Lesson Six: The Manufacturing Cost Statement



Enjoying this Website?
Help Support it with a Donation

OR...



Questions Relating to This Lesson

Click below to see questions and exercises on this same topic from other visitors to this page... (if there is no published solution to the question/exercise, then try and solve it yourself)

Scrap Gold And Inventory?
Q: I have a company that buys gold from people (jewelry, coins, etc). They then send this gold to a company out of state who in turn sends them a check …

Four Ways for Valuing Inventory
Q: I have a question on my study guide for my final on Monday. It says "What are the 4 ways for valuing inventory?" I cannot find a definite answer to …

Work-In-Progress Inventory &
Stage Of Completion Valuation

Q: I want to ask how do you calculate opening work in progress inventory and closing work in progress inventory... and whether this calculation should …

What are Merchandise Inventory?
Q: What are merchandise inventory? What does this consist of? A: Merchandise are finished goods that can be sold to the consumer. This includes anything …


Comments

Have your say about what you just read! Leave me a comment in the box below.

Advertise on ventoup.ru

privacy policy




Related pages


work out vat on calculatorsalary defwhat is the accounting cycle stepsgeneral ledger cyclenet sales minus cost of goods soldgross operating profit formulasynonym for cash flowcost of goods sold ending inventoryaccounting terminology for dummiessalary received journal entryhow to convert margin to markupaccounting booksledger examplesowner's equity statementwhat does debtors mean on a balance sheetnormal balance of expense accountcash cheque receipt formatp&l accountsdefinition of payablesequity synonymaccounts receivable subsidiary ledger examplep&l and balance sheetcost of good soldsexamples of assetlifo advantages and disadvantagesjournal entry for depreciationjournal entries in tallyaccounting tutorial for beginnersbalance sheet exercises with answerswhat is trial balance why is it preparedcolumnar journalfinished goods inventory definitiondebit meaning in accountingpro forma balance sheet template excelworking out gross profit margincost of goods manufactured statement formatreverse sales tax formulajournalizing transactions and posting to a general ledgerhow to interpret a cash flow statementexamples of owners equitytransactional accounting definitioncash flow diagram excelwac costwhen are debits increases and decreasesjournal entry in tallyexplain fifo methodequity in urduexamples of capital expensesadvantages and disadvantages of periodic inventory systemabbreviation for interviewretained profit definitionwhat is a retained earningpurchase ledger control accountwhat is carriage on purchasespercentage markup formulaliabilities meaning in urdusample of petty cash bookpartnership accounting for dummiesdeloitte sample papersretained earning balancegross profit fifoaccounts aptitude testaccruals entriescogs formulacarriage inward meaningprofit to sales ratio formulalist of accounting journalsrestaurant profit and loss statement templatetrade debtors balance sheetjournals of accountingresidual value meaning in urduwhat is a perpetual inventory system accountingjournal entries examples accountingtesting mcq with answers