Inventory refers to the goods or materials that a business has in stock and is available for sale or use in its operations. This can include raw materials, work-in-progress, and finished goods that are ready for sale.
Inventory is an important component of a business’s operations, as it represents a significant investment of capital and can have a significant impact on the company’s financial performance. Managing inventory effectively is critical to ensuring that the company has the materials and products it needs to meet customer demand while minimizing the costs associated with holding and storing inventory.
Bookkeeping Practices To Keep Your Business Fit
There are several methods that businesses can use to manage their inventory, including just-in-time inventory management, where inventory is ordered and received just in time for use in production or sale, and materials requirements planning, where inventory levels are managed based on demand forecasts and production schedules.
Inventory is typically reported on a company’s balance sheet, and can be classified as either raw materials, work-in-progress, or finished goods. The value of inventory is reported at its cost, which includes the cost of acquiring or producing the inventory, as well as any costs associated with storing and managing it.
Types of Inventory
- Raw Materials: Raw materials are the basic materials used in the production process. They are typically unprocessed or minimally processed substances that are transformed into finished goods. Examples include wood, metals, fabrics, chemicals, and agricultural products.
- Work-in-Progress Inventory: WIP inventory includes partially completed products that are still undergoing production but are not yet finished goods. It represents the value of materials, labor, and overhead costs invested in the production process at a given point.
- Finished Goods: Finished goods are the final products that are ready for sale or distribution to customers. They are the end result of the production process and are in a condition suitable for use or consumption. Examples include electronics, clothing, packaged food items, or assembled machinery.
- Merchandise Inventory: Merchandise inventory refers to the inventory of goods held by retailers or wholesalers for resale. It includes finished goods purchased from suppliers and intended for sale to end customers.
