If you run any sort of retail business and you don’t use an online source like dropshipping, you have what’s called inventory. That means that you pay for or create that item, then it sits somewhere to be sold either tomorrow or down the line, which makes you need to treat inventory as a current asset.
If you’re a new business owner, regardless of what kind of business you run, chances are there are a lot of unfamiliar finance terms that you’ll need to know but just haven’t had a chance to use yet in your day-to-day life.
While I am not an accountant or finance professional, I’m pretty familiar with many of these terms as a business owner. So, let’s talk about inventory as a current asset.
What is Classified as Inventory?
In short, inventory is everything that your business possesses for sale. Whether or not the product is finished doesn’t matter.
That means if you’re a candle maker and you have wax, wicks, and glass jars but you haven’t put your candles together, all of those items are still considered inventory. However, they are not finished goods but are instead raw materials.
Likewise, if you’re a clothing retailer and you just got a shipment of 50 new shirts from your overseas supplier you have just added 50 shirts to your inventory count.
Why is Inventory a Current Asset?
Both of the terms inventory and current assets are accounting terms. Accounting terms essentially dictate how you classify and qualify items and cash when you do your financials or file your taxes.
A current asset is cash or another asset that you can turn into cash within one year. That means you either have the cash-on-hand and accessible or you can get it in a relatively quick manner.
Other current assets include things like cash, cash equivalents, accounts receivables marketable securities, prepaid liabilities, and other liquid assets. And, as we mentioned above, we also consider inventory as a current asset.
Why do we consider inventory as a current asset? That’s because your stock industry can, in theory, be put on the shelves and sold sometime within the next year.
This doesn’t mean that the time has to be sold within the next year but that it can be sold quickly and converted into cash. So, we talk about inventory as a current asset because of how quickly it can become cash.
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