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:
- Production Business
- Trading Business.
1. Production Business: –
In this type of business, The business brought goods to produce further goods.An example is 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:
- Raw Material
- Work In Progress
- 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 is 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:
- Wood Tables made by the carpenter.
- Book printed by Sultan Cand Publisher
- The car produced by Tata Motors.
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. An example is shown below.
- Furniture store-bought Table from Carpenter to sell it to end-user or consumer.
- Books Seller bought Books from Sultan Cand Publisher to sell it to end-user or consumer.
Placement of an inventory in the balance sheet: –
The placement of an inventory in the balance sheet should be 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, _______
|Current Liabilities||Current Assets|
|Trade Creditors||Cash in hand|
|Bills Payable||Cash at Bank|
|Advance/Unearned Incomes||Bills payable|
|Short term loans||Sundry Debtors|
|Non-Current Liabilities||Prepaid Expenses|
|long terms loans||Accrued Incomes|
|Add: Net profit||Land|
| interest on Capital
||Plant & machine|
|Less: Drawings||Furniture & fixture|
You can also read the following topics : –
- Assets – Meaning, Definition, Types and Examples
- Liabilities – Meaning, Types and Examples
- What is Capital – Meaning and Example
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