Yes, inventory is considered a current asset.
Current assets or short-term assets are accounts that track what a company owns and expects to use within a year. And since inventory is intended to be sold within 12 months, it’s recorded as a current asset in the balance sheet.
But why is inventory sold within a year? Are there any exceptions to the rule?
That’s exactly what we will be answering in this guide, along with the accounting basics of inventory and current assets.
Read on to learn about:
- What Is Inventory?
- What Are Current Assets?
- Is Inventory a Current Asset?
- Frequently Asked Questions
- Automate Inventory Management
What Is Inventory?
Inventory, or merchandise, refers to all goods and services that a business offers for sale to its customers. A company’s inventory doesn’t just include the finished products, but also raw materials, and the work in progress.
Since inventory is a current asset account, it’s recorded in the balance sheet of the business, along with liabilities and owner’s equity.
Every business owner tries to forecast consumer demand to their best ability, to avoid both the excess or lack of inventory.
Do you want to learn how to properly manage inventory, and accurately evaluate your stock? Check out our complete guide to inventory management.
Types of Inventory
As we briefly mentioned, inventory is made up of three main categories: raw materials, work in progress, and the final product.
Raw materials can be commodities such as fabrics, steel, or lumber, or components such as electric motors, wire or microchips, that businesses (extract or) purchase to produce goods.
For example, a manufacturing company might need precious metals and steel as raw materials, whereas a bakery would need flour and eggs, and so on.
Work in progress refers to all products that are not yet finished or fit for sale. Take the unassembled parts of a bicycle, or unbaked pottery, or a garment half-sewn as examples of work in progress.
Finished Goods are products that are ready and fit to sell. This can be anything from a bag of chips to an expensive sports car.
If you want to know more about the different inventory expenses for small businesses, head over to our guide on 5 Types of Inventory Costs.
What Are Current Assets?
Current assets include all assets expected to either be sold or used within a one year time period. Since they’re expected to be used soon, current assets are often referred to as short-term assets.
A business needs short-term assets in order to run its daily operations and make invoice payments on time.
Some common examples of current assets include:
- Cash and cash equivalents,
- Accounts receivable,
- Prepaid expenses,
- Marketable services, and
Current Assets vs Non-Current Assets
Any asset that has a useful life of over a year is considered a non-current asset.
Unlike current assets, non-current ones aren’t so easy to convert into cash, since they are used for a longer time period.
They include items such as:
- Trademarks and patents
Is Inventory a Current Asset?
Businesses put inventory for sale with a reasonable expectation that it will be sold within the next year. That’s why inventory is listed under current assets.
However, there may be cases when some inventory goes unsold, as there’s only so much you can do to predict customer demand, shipment delays, and other challenges.
This excess in merchandise results in a loss in revenue and a disturbed cash flow for the business, as the product might spoil, become less fashionable, or its technology might become outdated.
Nevertheless, inventory is again considered a current asset, since its useful life doesn’t exceed one year.
Frequently Asked Questions
#1. Is Inventory a Fixed Asset?
Inventory can’t be a fixed asset, since it’s expected to be converted into money within a year. Fixed assets provide benefits for a business for longer than one accounting period (which matches the fiscal year in duration).
Fixed assets include large equipment, buildings, land, plant, etc.
#2. Is Inventory a Debit or a Credit?
Inventory is a current asset with a normal debit balance.
That means that an increase in inventory will result in a debit entry, whereas a decrease will be recorded as a credit.
For more information on debit and credit entries check out our guide to double-entry bookkeeping for small businesses.
#3. How Do I Calculate Inventory?
One way to calculate inventory at the end of the year is by using the following formula:
Ending Inventory = Beginning Inventory + Purchases - Cost of Goods Sold
#4. How Do I Calculate Current Assets?
Current assets are pretty straightforward to calculate, all you have to do is add up all of the balances of the current assets account.
As a formula, that would look like this:
Current assets = Cash + Cash Equivalents + Inventory + Accounts Receivable + Marketable Securities + Prepaid Expenses + Other Current Assets
Automate Inventory Management
Use inventory management software like Deskera to track your stock levels in real-time, and establish an efficient inventory management system for your business.
Give the software a try right away, with our completely free trial.
And that’s a wrap! We hope our guide was helpful in answering your questions.
To recap, inventory is purchased or produced with the intent of being sold to customers, within a short timespan.
And since current assets are items meant to be used or sold within a year, inventory is considered a current asset.