Inventory is an asset that is intended to be sold in the ordinary course of business. Inventory may not be immediately ready for sale. Inventory items can fall into one of the following three categories:
- Held for sale in the ordinary course of business; or
- That is in the process of being produced for sale; or
- The materials or supplies intended for consumption in the production process.
This asset classification includes items purchased and held for resale. In the case of services, inventory can be the costs of a service for which related revenue has not yet been recognized.
In accounting, inventory is typically broken down into three categories, which are:
- Raw materials. Includes materials intended to be consumed in the production of finished goods.
- Work-in-process. Includes items that are in the midst of the production process, and which are not yet in a state ready for sale to customers.
- Finished goods. Includes goods ready for sale to customers. May be termed merchandise in a retail environment where items are bought from suppliers in a state ready for sale.
Inventory is typically classified as a short-term asset, since it is usually liquidated within one year.