Difference between Inventory and Assets

Inventory and assets are two of the most important elements of financial statements and are the key resources in any business. However, asset is a broader term as compared to inventory, because inventory is a part of the asset. In financial accounting, asset is considered as an economic resource that can be in the tangible or intangible form and is used to produce value for the organization.

So what exactly is Asset and Inventory?

There are four basic elements in financial accounting on the basis of which financial statements are produced. These are assets, liabilities, incomes and expenses. Therefore, asset covers a large number of items that appear on the statement of financial position or balance sheet. There are two broad categories of assets, current assets and non-current assets. Current assets include the items that are reasonably transferable in cash within a period of one year, and non current assets are typically longer term investments and cannot be easily expected to convert into cash within a period of 12 months, such as, goodwill, intellectual properties, property plant and equipment etc.

Inventory, on the other hand, is a part of current assets, like goods and materials, that is held by the business for the purpose of resale. It is one of the most crucial assets of the business because inventory turnover determines how much revenue and subsequent earnings are being generated for the organization and shareholders respectively. It is usually kept by the manufacturing companies to produce the final products for the end users after going through different levels of processing.

Types of Assets

There are two types of assets, tangible and non tangible. Tangible assets are the assets that exist in physical form and include fixed assets as well as current assets like inventories. Whereas, non-tangible assets are the assets that do not exist in physical form. Intellectual property, like copyrights, patents, trademarks, and brand recognition and goodwill are some of the examples of intangible assets.

Types of Inventories

There are three types of inventories, raw material, work in progress and finished goods. The raw material is a basic component of any product. Cotton, for example, is a basic component to produce clothes and plastic is a raw material used in making toys. It is usually found in manufacturing companies for the production of different goods and products. Work in progress, on the other hand, is a partly finished goods. It is a material that is in the process of production. Finished good is the final product that is distributed or sold to the consumers once the manufacturing process is complete. In the above example, cloth and toys are the finished goods.

Current Assets vs. Inventory

Although, inventory is also a current asset, yet, it is not included in calculation of quick ratio and cash ratio despite the fact that it is a vital element of the business that is used to generate revenue. Cash ratio only includes the assets that are cash or cash equivalents. Whereas, inventory is subtracted from the current assets when you are calculating the quick ratio.

Management of Inventory and Other Assets

Inventory management is different from other asset management. Generally, if the amount of the asset is high in the company, it is considered favorable for the company as it increases the liquidity and overall worth of the company. But if the value of inventory is relatively higher, it leaves a negative impact on the company’s reputation, because it shows that you are either ordering too much or you are unable to sell it in the market, and as a result, it reflects poor inventory management.

On the other hand, low inventory balance is also considered bad, because it shows that you do not have enough inventory to meet the demand of your customers, which can eventually lead to lost sales or negative impact on the customers.

Value Changes

When you compare inventory with the fixed assets, there is a difference on the basis of their values that change over time. Fixed assets usually depreciate or amortize in value over a certain period of time and during that period, these assets provide useful services to the business.

Inventory, on the other hand, loses value the longer it is held in the business. This is the reason why retailers usually offer a discount or clearance sale in order to sell out of season or near expiry products. It is a fact that high inventory value strengthens your current and total asset value, but it should be sold as quickly as possible to increase the potential of earning revenue.

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