Key Concepts
Inventory refers to goods bought by a business to sell to its customers. Inventory is a current asset — it is expected to be sold within the next accounting period.
Inventory is different from non-current assets, even though both are assets. The key distinction is purpose:
- Inventory is bought to be sold.
- Non-current assets are bought to be used within the business to generate income.
Whether an item is classified as inventory or as a non-current asset depends on the nature of the business and how that item is used — not on what the item is.
| Trade of business | How the asset is used | Classification |
|---|---|---|
| Furniture store | Furniture sold to customers | Inventory |
| Furniture store | Furniture used in the office | Non-current asset (e.g. Fixtures and fittings) |
Classification depends on purpose, not on what the item is. Ask: does this business sell it (inventory) or use it (non-current asset)?
Item the business sells → wrongly called a non-current asset. Students often assume a sofa must be a non-current asset because it is furniture — classifying it as fixtures and fittings by default. But the same sofa is inventory when the business sells it (e.g. a furniture store), and a non-current asset only when the business uses it. Ask: what does this business do with it?
Item the business uses → wrongly called inventory. The reverse trap: a delivery van that the business uses to run its operations is a non-current asset — not inventory. Only the goods the business buys to sell are inventory.