Inventory is a current asset: the goods a business owns and holds to sell, or to use up making what it sells. So the answer to "is inventory an asset" is yes, at cost, or at net realisable value where that is lower. It turns into an expense only when it is sold, used up or lost.
The IFRS Foundation says it without hedging: "Inventories are assets" and "Inventories are current assets". Four cases change it: goods that are someone else's, goods you take into use, goods worth less than cost and goods worth nothing. None of them makes stock a liability.
Why inventory is an asset
Inventory is an asset because you control it and it will bring in money when it sells. The IFRS Foundation's module on inventories for SMEs defines an asset in one line. It is "a present economic resource controlled by an entity as a result of past events".
Paragraph 13.1 of IFRS for SMEs then lists what counts as inventory. It covers goods:
- held for sale in the ordinary course of business, such as a shop's stock;
- in the process of production for such sale, such as half-sewn uniforms in a tailoring workshop;
- in the form of materials or supplies used up in production or in giving a service, such as the fabric and thread.
Buying stock swaps one asset for another: cash, or a promise to pay, for goods. Profit only moves when the goods leave, as cost of goods sold.
Why it is a current asset, not a fixed one
Inventory is a current asset because it is sold or used up within the business's normal operating cycle. That holds even when a line takes longer than a year to sell.
The IFRS Interpretations Committee settled the point: "it was the nature of inventories in relation to the operating cycle that was relevant to classification". A slow line that has sat for 14 months is still a current asset. Its slowness is a reason to test it for a write-down, not to move it.
A fixed asset is the opposite: something kept 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, as inventory vs fixed assets explains.
Where inventory sits on the balance sheet: a worked example
Inventory sits among the current assets, beside cash and the money customers owe. CFI's guide to the balance sheet lists it there, as raw materials, work in progress and finished goods.
For example, a homeware shop in Durban draws up its balance sheet at the end of June. The figures are illustrative, in South African rand.
| Line | Amount |
|---|---|
| Cash and bank | 60,000 |
| Owed by customers on account | 40,000 |
| Inventory, at cost | 380,000 |
| Current assets | 480,000 |
| Shelving, counters and a fridge (non-current) | 120,000 |
| Total assets | 600,000 |
| Owed to suppliers (a current liability) | 210,000 |
| Owner's equity | 390,000 |
| Total liabilities and equity | 600,000 |
Inventory is 79% of the shop's current assets. An error in the stock figure moves this balance sheet more than an error in any other line.
Buying ZAR 60,000 more stock on credit lifts inventory to ZAR 440,000 and the supplier debt to ZAR 270,000. Equity stays at ZAR 390,000, because the shop swapped a promise to pay for goods.
An asset, but not cash
Lenders discount stock because it takes time to turn into money. The current ratio counts it: 480,000 ÷ 210,000 = 2.29. The quick ratio leaves it out: (480,000 − 380,000) ÷ 210,000 = 0.48.
CFI's guide to the quick ratio gives the reason: "it may take too long to convert inventory to cash to cover pressing liabilities". Without selling stock, the Durban shop could pay less than half of what it owes its suppliers.
How much of your working capital sits in stock is its own measure, the inventory to working capital ratio.
When goods on your shelf are not your asset
Inventory is what you own, not what you hold. Goods that belong to someone else stay off your balance sheet, and your goods elsewhere stay on it.
| Goods | Your inventory? | Why |
|---|---|---|
| Stock a supplier leaves with you, paid for only once sold | No | The supplier still owns it until it sells |
| Goods a customer has paid for and not yet collected | No | They are sold; the sale is already in your books |
| A customer's goods left for repair | No | They belong to the customer |
| Your container on the road from Durban port, once ownership has passed | Yes | You own it, though it is not on the shelf |
| Your stock at another branch | Yes | Count it where it sits |
| A ceiling fan from stock fitted in your own shop | No longer | It moves to fixed assets at its cost |
The first row is consignment inventory, and the purchase terms that decide when goods on the road become yours are in in-transit inventory.
The last row follows paragraph 13.21 of IFRS for SMEs: inventory allocated to another asset is accounted for under that asset's rules. Goods taken for cleaning or packing, rather than for years of use, become supplies.
When inventory is worth less than it cost
Stock stays an asset only up to what it will bring in. IAS 2 measures it at the lower of cost and net realisable value: the expected selling price, less the costs to finish and sell.
For example, the Durban shop holds 25 kettles of a discontinued model that cost ZAR 450 each. They now sell for ZAR 300, less ZAR 40 to deliver, so each is worth ZAR 260.
The shop writes them down by 25 × ZAR 190 = ZAR 4,750, as an expense of June. Inventory falls to ZAR 375,250, and equity falls by the same ZAR 4,750.
That cut is an inventory write-down. Stock is cut from its cost to its net realisable value: what it will sell for, less the costs to sell it.
Shops that keep cost and the cut apart use an inventory reserve. That is an allowance account that holds the write-downs on stock still held, so the inventory account keeps showing cost.
Expired or smashed goods take an inventory write-off. Stock that is gone or worth nothing comes off the books at its full cost.
"Inventory depreciation" is not an accounting entry: stock is never depreciated. People mean value lost to expiry, damage, fashion or newer models.
A write-down can come back. Paragraph 13.19 of IFRS for SMEs requires a reversal "in some circumstances", such as a selling price that recovers. Stock never goes back above its original cost.
Can inventory be a liability?
No. A liability is something you owe; inventory is something you own. When people call stock a liability, they mean it costs money to keep and ties up cash.
- The debt is the liability. The ZAR 210,000 the Durban shop owes its suppliers is a liability; the goods it bought are not.
- Holding costs are expenses. Rent, insurance, spoilage and interest on loans taken for stock are expenses of each month. Together they are your inventory holding cost.
- Dead stock is a weak asset. Write it down to what it will fetch, then clear it at that price.
- Stock can secure a loan. IFRS for SMEs asks you to disclose "the total carrying amount of inventories pledged as security for liabilities" (paragraph 13.22). The loan is the liability; the stock stays your asset.
How to see your inventory as an asset in ArmPOS
ArmPOS values your stock at cost from the products and purchases you record. These are the screens in the Help center's guides.
- See the asset value. Reports › Inventory Valuation multiplies each product's Stock on Hand by its Cost to give its Asset Value, with the total at the bottom. Pick a Warehouse to see one branch.
- Find stock to test for a write-down. The Stock Aging Report sorts what you hold by how long ago it came in. The Dead Stock Report lists lines that haven't moved in 30, 60 or 90 days.
- Take lost goods out. Damages › Create Damage removes broken or expired stock and keeps a note of why. It books nothing in Accounting, so post the value there as a journal.
- Read the balance sheet, if you use Accounting. Accounting › Balance Sheet adds up assets, liabilities and equity on a date (Financial statements). Its Inventory account, 1200-INV, rises with each purchase, but sales don't reduce it. Post the month's cost of goods sold first (Chart of accounts and journal entries).
Accounting comes with some plans only. ArmPOS values stock this way for shops in South Africa and every other country it serves.
Frequently asked questions
Is inventory a current asset or a fixed asset?
A current asset. It is sold or used up within the operating cycle, while a fixed asset is kept to use for more than a year.
Is inventory an expense?
Not while you hold it. Its cost becomes an expense, cost of goods sold, when it is sold, and a loss when it is damaged, expires or goes missing.
Is inventory a liquid asset?
Less liquid than cash or money owed to you, because it must be sold first. That is why the quick ratio leaves it out.
Is inventory part of working capital?
Yes. Working capital is current assets less current liabilities, and in a shop like the Durban one, stock is the largest current asset.
Does inventory count for tax?
Yes, through closing stock, which sets taxable profit on a profit-based tax. Each country values it by its own rules, compared in how inventory affects taxes.
Know what your stock is worth today, line by line. Create a free ArmPOS account, add your products with their cost and stock, and open Inventory Valuation. The Starter plan is free and needs no card.
