How Is Inventory Different From Other Assets of the Business?

by John Freedman

Even though it is found in the assets portion of the balance sheet at many small businesses, inventory has some unique properties that make it different from other assets. Accounting rules for inventory differ from other assets, and investors treat this balance differently. Understanding how inventory differs from other assets can help you ensure that you account for inventory the right way.

Conversion to Cash

Inventory is usually considered a current asset, because you normally sell through inventory in a year or less. However, inventory sits in the middle of the liquidity spectrum. Liquidity is the ability of an asset to be converted to cash, and inventory is less liquid than short-term investments and accounts receivable. However, inventory is more liquid than long-term assets, such as property, machinery and long-term investments. Because inventory is a current asset but is not always easily sold, investors can have difficulty determining how they should consider inventory when analyzing financial statements. When assessing a company's ability to meet creditor demands, some investors will count inventory as a source of payment, but others will not.


Valuation of inventory is unique compared with the other assets on the balance sheet. For the most part, assets are held at historical cost. For example, the cost recorded on the company's balance sheet for land is the price of the land, regardless of the value. However, inventory is held at the lower of cost or market price. This means that company management will initially record the inventory at its cost but must also must assess whether the inventory remains salable at a price greater than the amount paid for the goods originally. If not, the company must record an adjustment. This adjustment is known as a lower of cost or market adjustment and reduces the company's profit when it is booked.

Intent to Hold

Inventory is one of the few physical assets that a company generally does not intend to hold for any period of time. Most physical assets, such as machinery, supplies and equipment, are designed to be used by the company. While companies may decide to sell these assets at some point, this is not the intent at purchase. However, companies purchase inventory solely with the intent to resell to customers. In fact, the intent to resell must exist for a good to be classified as inventory. For example, a car retailer would hold cars in the company's inventory account. However, when that car is sold to another company, the same car will be recorded as equipment for the customer.

Internally Generated

Inventory is the only asset that can be internally generated that is allowed to be recorded by a company. Manufacturing companies create finished goods inventory by combining materials, labor and other overhead costs into products for resale. As the good is manufactured, the company incurs costs and records the asset. However, this is not the case with other assets. For example, if your company provides consulting services, as the company grows, you will start accumulating a customer list, which has value to the company. However, even though this list has future benefit to the company, generally accepted accounting principles do not allow you to record this asset on the company's books.

References (1)

  • Intermediate Accounting: Donald E. Kieso, et al.

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