What is Inventory?

Inventory is simply such asset that business has bought and holds with an intention to be sold in the normal course of the business i.e. it is the business of the entity to buy and sell such assets.

The words stock, goods and inventory are used interchangeably and mean one and the same thing. Some authors like to use stock and some inventory and some use all the variations. There is no difference among these words.

IAS 2 is not a name for a special kind of inventory. IAS is an acronym of International Accounting Standard where as “2” reflects the number of standard. We have several accounting standards dealing with different accounting aspects. IAS 2 deals with inventories and provides guidance regarding accounting of inventory and related matters.

According to International Accounting Standard (IAS) 2;

Inventories are assets:

  1. held for resale in the ordinary course of business i.e. finished goods;
  2. in the process of production for such sale i.e. work in process of finished goods mentioned above
  3. in the form of materials to be consumed in the production process or rendering of services i.e. raw material
  4. supplies that are used in the production process or rendering of service

All the four items mentioned are different types of inventories and the figure mentioned in the Statement of Financial Position (SoFP) is basically the aggregate of the values of all kinds of inventory business had with it at the end of financial period.

Business does not have to have all kinds of inventories mentioned. It may have just one type or all types of inventories with it.

Many students who learn about inventories for the first time develop an understanding that only manufacturers hold the inventory which is NOT true. Think about retailers who do not produce anything but still hold goods to be sold. For them anything on the shelf available for sale is their inventory.

Same way those entities that provide services and do not sell anything tangible can also have inventories. For example, hair stylist keeps hair oil, hair dyes, shampoo, razors and many other things with him which are consumed while rendering services. These goods are his inventory.

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