Inventory vs supplies comes down to use, not to what the invoice calls the goods. Inventory is what you sell, what you make into something you sell, and what you use up in a service you sell. Supplies are everything you use up to run the business itself, such as cleaning products, till rolls and stationery.
That third part of inventory is the one most guides miss. Under IFRS, a salon's hair relaxer and a garage's engine oil are inventory, not supplies. This article gives the test, a table of everyday items, a worked example in KES and the way to keep each kind in ArmPOS.
The test IFRS uses
IFRS defines inventories as assets held for sale, assets being made for sale, and a third group. Its words are "materials or supplies to be consumed in the production process or in the rendering of services". That is paragraph 13.1 of IFRS for SMEs, and IAS 2 uses the same definition.
The IFRS Foundation's own teaching module gives the service case directly. A business that repairs computers holds cables used in its repairs, and the module's answer is: "The electronic cables are inventory."
So ask three questions about any purchase:
- Will a customer buy it as it is? Then it is inventory: goods for resale.
- Will it become part of something a customer buys? Then it is inventory: raw materials or packaging that goes out with the product.
- Will it be used up in a service a customer pays for? Then it is inventory too, even if you call it supplies.
If the answer to all three is no, it is a supply. It is used to run the shop, and it never reaches a customer as part of what they pay for.
Inventory or supplies: everyday items sorted
The table applies the test to purchases an African shop or service business makes every month.
| Item | Inventory or supplies? | Why |
|---|---|---|
| Bags of maize flour a shop sells | Inventory | Held for sale |
| Bottles and labels a juice maker fills | Inventory | Become part of the product sold |
| Hair relaxer and shampoo a salon uses on clients | Inventory | Used up in a service the client pays for |
| Engine oil and filters a garage puts in customers' cars | Inventory | Used up in a service the customer pays for |
| Paper and toner a print shop uses on customers' jobs | Inventory | Used up in the service sold |
| Carrier bags handed to customers | Supplies | A cost of selling, which IFRS keeps out of inventory |
| Till receipt rolls | Supplies | Used to run the till, not sold |
| Cleaning products for the shop floor | Supplies | Used to run the premises |
| Office stationery and printer paper | Supplies | Used for administration |
| Generator fuel for the shop's lights | Supplies, a running cost | Keeps the premises open, not part of anything sold |
A bottle of shampoo can sit in two places. On the retail shelf it is goods for resale; on the wash basin it is inventory used in a service. Only the salon's own cleaning products are supplies.
How each is recorded in the accounts
Inventory is an asset until it is sold or used, and then its cost moves to cost of sales. Supplies are an expense, but not always on the day you buy them.
AccountingCoach explains the rule for supplies. The cost used up in the period is an expense, and what is still on hand at the end is a current asset. If the amount on hand is insignificant, you may expense supplies when you buy them.
Most small shops expense supplies on purchase, and that is fine. The mistake is treating service inventory the same way, which the next example shows in shillings.
A worked example: a salon in Nairobi
For example, a salon in Nairobi starts the month with nothing in stock and buys four kinds of goods. The figures are illustrative, not a real salon's.
| Goods | Bought | Left at month end | Class |
|---|---|---|---|
| Hair products sold to clients on the retail shelf | 40,000 | 28,000 | Inventory: goods for sale |
| Relaxers, shampoos and treatments used on clients | 25,000 | 9,000 | Inventory: used up in services |
| Cleaning products for the salon | 3,000 | not counted | Supplies |
| Receipt books and stationery | 2,000 | not counted | Supplies |
Done correctly, the month shows KES 12,000 of products sold, KES 16,000 of products used on clients, and KES 5,000 of supplies expense. The balance sheet carries KES 37,000 of inventory: 28,000 on the retail shelf and 9,000 at the wash basins.
Done the common way, all KES 25,000 of service products is expensed as "supplies" on purchase. The month's costs come out KES 9,000 too high, the stock on the balance sheet KES 9,000 too low, and nobody counts the wash basins. Shrinkage there stays invisible.
For salons and workshops in Kenya or anywhere else, the fix is a monthly count of what is used on clients, set out below.
How to keep inventory and supplies in ArmPOS
ArmPOS holds inventory as products with stock, and supplies as expenses. The steps use the screens in the Help center.
- Goods you sell. Add each one as a product with its Product Cost, opening stock and a Stock Alert. Every sale takes it off stock.
- Goods you use up in a service. Add them as products too, in a category of their own such as "Used on clients" (see categories, brands and units). If your plan allows a second warehouse, you can keep them in one of their own.
- Count them each month. Count Stock makes a counting sheet for one warehouse and one category. Then remove what was used with a Subtraction adjustment and a note, such as "Used on clients, October".
- Read the month's usage. The Stock Adjustment Report totals the quantity removed, with each adjustment's cost.
- Supplies that run the shop. Record them as expenses under a category such as "Supplies". The Expense Report totals them, and Profit and Loss takes them off your profit. Expenses sit under Accounting, which comes with some plans only.
If your accountant keeps the books in another system, export the reports they need, such as the Sales Report, to Excel and hand them over. How a POS and the accounts share the work is in POS and accounting integration.
Tracking supplies without overbuying
Supplies run out like stock does, and a shop with no till rolls cannot print a receipt. Track the few that stop work when they run out, and ignore the rest.
For the supplies that matter, keep a minimum level and reorder when you reach it. It is the same method you use to avoid overstocking or running out of stock on the shop floor. Five steps for this are in how to keep track of consumables.
Equipment is a third category: a hair dryer or a till printer used for years is neither inventory nor supplies. See inventory vs fixed assets.
Frequently asked questions
Are supplies considered inventory?
Supplies used up in making a product or in a service you sell are inventory under IFRS. Supplies used to run the business, such as cleaning products and stationery, are not.
Are supplies an asset or an expense?
Both, at different times. Supplies still on hand at the end of a period are a current asset, and the part used up is an expense. Small amounts can be expensed when bought.
Is packaging inventory or supplies?
Packaging that goes out as part of the product, such as bottles, labels and bread bags, is inventory. Carrier bags and shipping boxes are a cost of selling, so they are supplies.
Do supplies go on the balance sheet?
Only if a significant amount is still unused at the end of the period. Then it shows as a current asset, and the rest has gone to expenses.
Ready to keep what you sell and what you use apart? Create a free ArmPOS account, add your products with their cost, and give the goods you use on customers a category of their own. The Starter plan is free and needs no card.
