What is Inventory – Types of Inventories – Example

What-is-Inventory

Inventory meaning that Material or Items which are owned by the business for further production of goods and for sale. To understand the meaning of Inventory more simply, first we have to divide the business into two types. These are shown below: 

Types of Business: 

  1. Production Business 
  2. Trading Business. 

1. Production Business: –

In this type of business, The business brought goods to produce futher goods. Example are shown below.

  • Carpenter bought wood to make furniture.
  • Tata Motor bought iron or steel to produce Cars.
  • Building Bought Bricks and Cement to build a Building. 
  • Sultan Cand Publisher used paper to print a book. 

The inventory can be divided into three types. These are shown below: 

  1. Raw Material 
  2. Work In Progress 
  3. Finished Goods/Products
1. Raw Material 

The products that are used by business to make final products are known as raw material for business. Examples are shown below: 

  • For carpenter Woods are Raw Material.
  • For Tractor company Iron are Raw Material.
  • For Sultan Cand Publisher papers are Raw Material.
2. Work In Progress:

Work In Progress means that product on which some part of the work is pending at the end of the Financial year or the day when we are calculating the value of Inventory. This will not be treated as Raw Material or not a Finished Product because neither it can be used to make another product nor It is not ready to Sell. Examples are shown below: 

  • A carpenter making a table but at the end of the day, or last day of the financial year the polishing work on it is pending.
3. Finished Goods/Products

The Products which are ready to sell are known as Finished Goods/Products. Examples are shown below: 

2. Trading Business 

In this type of business, The business brought goods to sell them to the end user or consumer. In short, Trading Business means sale and purchase of goods. Example are shown below.

  • Furniture store bought Table from Carpenter to sell it to end user or consummer.
  • Books Seller bought Books from Sultan Cand Publisher to sell it to end user or consummer.

Placement of a inventory in the balance sheet: –

The placement of a inventory in the balance sheet should shown under the group Current Assets. This is shown in the following format of the balance sheet and highlighted with orange colour: –

Name of the Entity
Balance Sheet as on 31st March, _______
Liabilities  Amount Assets  Amount 
Current Liabilities    Current Assets   
Trade Creditors    Cash in hand   
Bills Payable    Cash at Bank  
Outstanding Expenses    Inventories   
Advance/Unearned Incomes   Bills payable   
Short term loans    Sundry Debtors   
Non-Current Liabilities    Prepaid Expenses   
long terms loans   Accrued Incomes   
Debentures    Fixed/Non-Current Assets  
Capital   Building   
Add:  Net profit    Land   
   interest on Capital
  Plant & machine   
Less:  Drawings    Furniture & fixture   
   Net Loss    Goodwill   
       
       

You can also read the following topics : –

Thanks Please share with your friends  

Comment if you have any question

Check out Financial Accounting Books @ Amazon.in