One of the most common accounting questions is if inventory is an asset or expense. Although companies need to spend money to create inventory, it is considered an asset.
In this article, we will answer some of the most common questions about inventory, and the type of asset it is.
Is inventory an asset?
Yes, inventory is a current asset of the company, because it has value and can be converted into cash. It is a current asset because it can be converted into cash in under 12-months.
However, it is important to understand that although inventory is an asset it is also an important measure of the company’s efficiency. The amount of inventory a company’s balance sheet carries should be proportional to the demand from customers.
This allows the company to be extremely efficient in allocating capital and makes sure that they are not building up inventory they won’t sell in the near future. This could create a situation where the business may need cash to allocate to other parts of the business, and it is not available anymore.
Another factor to keep in mind is that some businesses carry inventory that can depreciate over time. For example, an electronics store will have to manage its inventory very carefully. With new electronics products being introduced every day, there is a risk that building too much inventory that decreases in value could put the company at risk.
What kind of asset is inventory?
Inventory is a current asset, because it is intended to be sold, or converted into cash over the following 12 months. Current assets usually include assets that the business will convert into cash in less than a year's time.
As opposed to non-current assets that the business wants to hold for over a year.
Is inventory a fixed asset?
No, inventory is not a fixed asset because it is meant to be converted into cash in less than 12 months. Fixed assets are assets that the company will use for a period of over a year, and therefore, since inventory will be used in less than a year, it can’t be considered a fixed asset.
Does inventory count as expenses?
The cost of creating an inventory is an expense, however, it is usually accounted for as the cost of goods sold (COGS), when revenue for that inventory is recognized. Although inventory is an asset, the cost of goods sold is not an asset.
The cost of goods sold appears on the income statement right after the revenues, and when you subtract it from the revenue you get gross profit.
Why is inventory not a financial asset?
Inventory is not a financial asset, because they are a physical resource owned by the company, while financial assets are non-physical assets that can easily be converted into cash. Therefore in accounting, inventory is not considered a financial asset-
How do you expense inventory?
Inventory expenses are accounted for as the cost of goods sold and appear on the company’s income statement. The cost of goods sold is one of the most important measures of profitability for a business because it allows companies to calculate their gross profit and project net margins.
Does inventory go on the balance sheet?
Yes, inventory is on the balance sheet of a company, and it is considered a current asset. Current assets are expected to be converted into cash in less than 12 months.
What is the difference between inventory and expense?
Why is inventory classified as a current asset?
Inventory is classified as a current asset because the company is expected to turn it into cash over the preceding 12 months. Since the company's intention is to convert its inventory into cash, through revenues, it is considered a current asset.
Is inventory a tangible fixed asset?
Yes, inventory is a tangible fixed asset that the company owns and that it can easily convert into cash over the next 12 months. Once the company sells its inventory, the cost of producing those goods and services is accounted for as the cost of goods sold. It is present on the company’s income statement.
Is inventory an intangible asset?
No, inventory is a tangible asset because it is physical possession of the business.