Inventory of goods, for trading businesses, holds a key place in accounting analysis as it is mainly responsible for generating profits which is one of the prime objective of a profit-making organisation. The asset of inventory is different from other assets like premises, plant and machinery, motor and vehicles, furniture and fixtures, etc., for a number of reasons. The basic difference is the consideration behind the purchase of inventory.
Definition and Example of Inventory Asset:
“Inventory assets represent items bought with the intention of selling them at a higher price in order to make profits”. On the other hand, assets like premises, plant, vehicles etc., are purchased with a consideration of using them in conducting day-to-day operations of the business and not for selling them again for making profits.
At this point we can infer that a particular item cannot be treated as inventory unless we exactly know the objective of holding that item. Thus a firm that trades in motor vehicles treats the vehicles bought with the intention of selling them to customers as ‘inventory’ and not as a non-current asset of ‘motor vehicle’. But if a vehicle is purchased with the intention of using it for sale deliveries or for staff transportation or for some purpose other than making profit out of its sale, then it will not be termed as “inventory” but will be debited in ‘motor vehicles account’ as an asset.