Inventory is almost always an asset for accounting purposes. An asset is an item that will provide an economic benefit at some point in the future. A liability is an item that represents a financial deficit or debt. Inventory production is usually closely correlated to demand, and so inventory usually sells quickly after being produced, making it an asset. However, inventory that is left unsold may become a liability if the cost of storage is high or if the inventory deteriorates and becomes unsellable.
Is Inventory a Liability or an Asset? FAQs
Inventory is considered to be an asset as it represents items that are owned and have value.
Inventory is typically classified as a current asset on the balance sheet, which means it can be converted into cash within one year of the date of the balance sheet.
The main factor influencing whether inventory is classified as an asset or liability depends on its ability to generate income in the future. If it has the potential to do so, then it will generally be considered an asset rather than a liability.
Inventory can be classified into three main categories: raw materials, work-in-progress, and finished goods.
Inventory is typically valued at its cost or market value, whichever is lower. This means that any decreases in inventory value due to obsolescence or market conditions will not be reflected on the balance sheet until it is sold or written off.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
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