What is inventory?

Inventory is also known as ‘stock’, refers to physical goods and materials that business owns with a view of future resale. And it is very important asset for any company.

Further, inventory can be defined as asset held

• for sale in the ordinary course of business , or

• in the process of production for such sale , or

• for consumption in the production of goods or services for sale , including maintenance supplies and consumables other than machinery spares , servicing equipment and statutory equipment.

The inventories are used to produce goods as well as the goods that are available for sale .

There can be different types of inventory based on nature of business of an enterprise. The inventories of a trading concern consist primarily of products purchased for resale in their existing form. Moreover, it may also have an inventory of supplies such as wrapping paper, cartons and stationery.

And, the inventory of manufacturing concern consist of several types of inventories such as raw material , work in progress and finished products. In manufacturing concerns inventories will also include maintenance supplies , consumables , loose tools and spare parts .

However inventories do not include spare parts , servicing equipment and standby equipment. Which can be used only in connection with an item of fixed assets. Similarly , in an enterprise engaged in construction business , projects under construction are also considered as inventory.

Further, at the year-end every business entity needs to ascertain the closing balance of inventory. Which comprise of raw material, work-in-progress , finished goods and other consumable items.

Value of closing stock is put at the credit side of the trading account and asset side of the balance sheet . It is classified as current asset on company’s balance sheet. So before preparation of final accounts, the accountant should know the value of stock of the business entity.