What is Inventory Accounting

This free online accounting training tutorial on inventory will help you to understand:

  • What is Inventory in Accounting
  • Meaning & Definition of Inventory
  • Types of Inventory

Inventory is the name that is referred to those goods which are either manufactured or purchased for resale in the business activities of any merchandising company. If the products have been sold then these product are not considered as assets.

In order to manufacture the merchandise or to purchase the products there are some costs incurred. The company will remove these costs from the asset in its balance sheet and that deduced amount will be reported on the income statement as an expense. Inventory is categorized according to the nature of business. In Merchandising Company inventory includes different items. For example, in a grocery store, canned goods, dairy products, meat etc are the inventory item. There are two common characteristics of inventory, these are manufactured or purchased by companies. And they are ready to sale to customers in the business activities. ‘ In some merchandising companies™ inventory may not ready for sale, or inventory may in the manufacturing condition. Therefore Merchandisers may need one inventory classification for merchandising the inventory.

There are basically three types of inventory: raw materials, Work in process and finished goods.

  • Raw Materials:Raw materials are the basic goods that will be used in manufacture but have not yet been positioned into manufacturing process.
  • Work in Process:Work in process consists of partially finished products that has been placed into the manufacture process but is not yet finished.
  • Finished Goods: finished goods are the completed merchandise and ready for sale.

Lets discuss these types by an example. In a furniture manufacturing farm, a cabinet that is fully manufactured and ready for sale is finished goods. Before that the various stages of processing woods were work in progress. And the wood is the raw material.

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