Goods held for sale, in production, or to be consumed in producing goods for sale, recorded as an asset until recognized through sale or use.
Inventory is the asset category for goods a business holds for sale, goods in production, or materials to be used in producing goods for sale. Until those goods are sold or consumed, their cost usually remains on the balance sheet rather than the income statement.
Inventory often represents a large balance, and mistakes here affect both the balance sheet and profit. Quantity errors, cutoff problems, or weak valuation choices can all distort cost of goods sold and gross profit.
Businesses track inventory through purchase records, production records, counts, and control procedures. Periodically, accountants reconcile inventory records to physical counts and adjust for shrinkage, damage, obsolescence, or cutoff issues.
The accounting questions usually focus on ownership, measurement, cost flow, and when the inventory balance should leave the balance sheet and become cost of goods sold.
A wholesaler buys goods for 30,000:
| Account | Debit | Credit |
|---|---|---|
| Inventory | 30,000 | |
| Accounts Payable | 30,000 |
Later, when some of those goods are sold, the related cost moves from inventory to cost of goods sold.
Inventory is not the same as supplies or fixed assets. It is also not always a single finished-goods number. Many businesses separate raw materials, work in process, and finished goods for control and reporting.