Inventory vs fixed assets comes down to intention. Inventory is held to sell or to use up soon; a fixed asset is held to use in the business for more than a year. The same fridge is inventory in an appliance shop and a fixed asset in a supermarket.
The difference decides when the cost reaches your profit: all at once when stock is sold, or a slice a year for equipment. This article gives the test from the standards and a table of items that land on either side. It ends with a worked example in UGX and the steps in ArmPOS.
What the standards say
Two standards draw the line. IAS 2 covers inventories: goods held for sale, goods being made for sale, and materials or supplies used up in production or in a service. IAS 16 covers property, plant and equipment, which is what most people mean by fixed assets.
The IFRS Foundation's summary of IAS 16 sets two conditions. The item is "held for use in the production or supply of goods or services, for rental to others, or for administrative purposes". And it is expected to be used during more than one period.
The UK tax authority says the same in plain words. For an asset to be stock, "the intention must be to sell the asset to make the profit". HMRC's manual adds that zoo animals are not stock, because the zoo exhibits them and does not sell them.
| Question | Inventory | Fixed asset |
|---|---|---|
| Why you hold it | To sell it, or use it up making or delivering what you sell | To use it in the business |
| How long | Within the trading cycle, usually under a year | More than one period |
| Standard | IAS 2 | IAS 16 |
| Balance sheet | Current asset | Non-current asset |
| When its cost reaches profit | When it is sold or used up | Spread over its useful life as depreciation |
| Measured at | The lower of cost and net realisable value | Cost less depreciation and impairment |
| Tax deduction in Uganda | The cost of trading stock disposed of, section 46 | A depreciation deduction by class, section 27 |
| In ArmPOS | Products with stock | The assets register |
Same object, different answer
The object never decides; its use does. This table sorts items an African shop deals with, several of which land on both sides.
| Item | Answer | Why |
|---|---|---|
| Fridges in an appliance shop's showroom | Inventory | Held for sale |
| The fridge that cools a shop's drinks | Fixed asset | Used in the business for years |
| A branded fridge a drinks company lends the shop | Neither, for the shop | The drinks company still owns it |
| Phones in a phone shop | Inventory | Held for sale |
| The phone or tablet that runs the shop's till | Fixed asset | Used to run the business |
| Motorcycles in a dealer's yard | Inventory | Held for sale |
| The shop's delivery motorcycle | Fixed asset | Used for deliveries for years |
| Spare parts a hardware shop sells | Inventory | Held for sale |
| Filters and belts for the shop's own generator, used within the year | Inventory | Spare parts are inventory unless they meet the fixed asset test |
| A spare generator kept for when the first one fails | Fixed asset | Stand-by equipment used over more than one period |
| Hand tools a workshop replaces within the year | Inventory | Used for less than a year |
| Shelving, counters and solar panels | Fixed asset | Used for years |
The spare-parts and tools rows come from the IFRS Foundation's module on property, plant and equipment. Its paragraph 17.5 says spare parts, stand-by and servicing equipment are fixed assets when they meet the definition, and "Otherwise, such items are classified as inventory". Its example of tools used for less than a year reaches the same answer.
Supplies are a third group, neither sold nor kept for years: cleaning products, till rolls, stationery. Where they end and inventory begins is in inventory vs supplies.
A worked example: one fridge kept, ten for sale
For example, an electronics shop in Kampala buys 11 fridges at UGX 1,800,000 each. It sells 8 at UGX 2,300,000, keeps 1 to cool the drinks it sells, and has 2 unsold at year end. The figures are illustrative.
| Fridges | Class | Effect on this year's profit | On the balance sheet at year end |
|---|---|---|---|
| 8 sold | Inventory, now sold | Cost of sales 14,400,000 | Nothing |
| 2 unsold | Inventory | None yet | 3,600,000 as a current asset |
| 1 kept for the shop | Fixed asset | Depreciation 360,000 (five years, straight line) | 1,440,000 as a non-current asset |
The kept fridge costs the year's profit UGX 360,000, not UGX 1,800,000, because its cost is spread over the five years it will work. Left in stock by mistake, it would be counted at every stock take and never depreciated.
In Uganda, the tax rules spread it differently. The Sixth Schedule of the Income Tax Act sets declining-balance rates by class. A shop fridge falls under "any depreciable asset not included in another class", at 20% a year (URA's July 2021 reprint).
That gives deductions of UGX 360,000, then 288,000, then 230,400 in the first three years. Computers and data handling equipment sit in a 40% class. Confirm current rates with URA or your accountant before you file.
Moving an item from stock to fixed assets
When you take an item off the shelf to use it, it leaves inventory at its cost and becomes a fixed asset at that cost. HMRC's manual says an asset's status follows the owner's intention, so it can move either way when that intention changes.
The reverse happens too. A business that routinely sells items it used to rent out moves them to inventory once they stop being rented, under IAS 16.
How to do it in ArmPOS
ArmPOS keeps inventory as products with stock, and fixed assets in a separate register. Moving the Kampala shop's fridge takes three steps.
- Take it out of stock. Open Adjustment › Create Adjustment, pick the warehouse and the product, and enter 1 as a Subtraction. Add a note such as "Moved to shop equipment".
- Add it to the register. Open Assets › Add Asset and fill the Tag, Name, Category and Warehouse. Add the Serial, Purchase Date and Purchase Cost of UGX 1,800,000.
- Set the next check. Next Validation is the date it is due for a service. Due assets lists what is due within 5 working days, and the people whose role includes Assets get a daily reminder.
Assets come with some plans only. The register does not work out depreciation: it keeps the purchase date and cost your accountant needs to do it.
Why the split matters for cash and losses
Buying equipment with the money meant for stock empties shelves, even though the balance sheet looks the same. Plan the purchase the way you manage cash flow, not out of the till.
Losses are recorded differently too. Missing stock is inventory shrinkage, found at a count and written off. A broken fixed asset is impaired or retired from the register, and money tied up in idle stock carries a holding cost.
Inventory is also called stock, and the two words mean the same goods, as inventory vs stock explains.
Frequently asked questions
Is inventory a fixed asset?
No. Inventory is a current asset held for sale or to be used up soon, as is inventory an asset explains. A fixed asset is held for use over more than one period.
Can inventory become a fixed asset?
Yes, when you take an item out of stock to use it in the business. It moves at its cost, and depreciation starts once it is ready for use.
Do you depreciate inventory?
No. Inventory is not depreciated; it is written down to its net realisable value when damage, expiry or falling prices push that value below cost.
Are spare parts inventory or fixed assets?
Usually inventory. Major spare parts and stand-by equipment you expect to use over more than one period are fixed assets.
Want your stock and your equipment in one system? Create a free ArmPOS account and add the products you sell with their cost and stock. The Starter plan is free and needs no card, and pricing shows what each plan includes.
