Inventory vs Assets
Assets are the resources owned by the company , and these assets can be classified as fixed assets and current assets. Inventory is a specific type of current asset which can be classified into raw materials, work in progress and finished goods. Although both are categorized as assets, they are treated differently in financial statements. This article takes a look a t the difference between assets and inventory.
What are Assets?
Assets are the resources owned by the company, and it can be categorized as financial resources (capital, shares), physical resources (buildings, furniture, machines and equipments), human resources (employees, executives, managers) , etc.
For accounting purposes, all the resources have been classified as fixed assets and current assets.
Fixed assets
Assets which are expected to have a useful life of more than one year is considered as fixed assets.
Eg: Tangible assets -Property, plant and equipment, furniture and fixtures, vehicles and machinery.
Intangible assets – Goodwill, Intellectual property, etc .
According to IASB framework, the basic requirements for the fixed assets to be recorded in the financial statement of the company can be indicated as follows:
• The possibility of having inflows of economic benefits to the entity.
• The reliability of the measured cost/value of the asset
The value of the fixed assets depreciates over time. Therefore, the invested capital for purchasing the fixed assets cannot be rectified in future which can be determined as a sunk cost.When preparing the financial statements, the net book value of the fixed assets is indicated in the balance sheet.
Current Assets
Assets which have the possibility of converting to cash within one year can be considered as current assets. For eg: Inventory, accounts receivables, cash in hand, cash at bank, prepaid expenses, etc.
What is Inventory?
Inventory can be classified into three main categories as raw materials, work in progress and finished goods which are considered as current assets which can be converted into cash within a shorter period (less than one year). The turnover of inventory represents one of the primary sources of revenue generation and earnings for the company’s shareholders and the owners. Therefore, when preparing the financial statements, inventory is indicated in the balance sheet, under the heading of current assets.
The key factor regarding the fixed assets is that they have been purchased for the production and therefore, they are not held for resale. Assets that are held for resale must be accounted undercurrent assets rather than the fixed assets. So, for example, if a company involves in the automobile business, the cost of vehicles must be accounted under current assets – inventory as they are held with the purpose of reselling. However, any vehicles other than those held with the purpose of reselling must be classified under fixed assets such as delivery trucks and employee vehicles.
Photos By: Peter Baskerville (CC BY-SA 2.0), State Farm (CC BY 2.0)
Further Reading:
- Difference Between Equity and Assets
- Difference Between Capital and Asset
- Difference Between Liability and Asset
- Difference Between Inventory and Stock