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Ajay Mady

Is Inventory a current asset?

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1 Answer

  1. This answer was edited.

    Yes, inventory is a current asset. Before moving to the main part of the question. I would like to familiarise you with few terms such as the meaning of inventory and current asset. I hope this answer will clear all your doubts related to this concept.

    Meaning of Inventory

    In simple terms, Inventory (stock) is a tangible asset which refers to the stock of goods that is either available for sale in the form of finished products or raw material used in the production of goods meant for sale in some future period held by an enterprise.

    For example – A furniture dealer purchases wood, fibreglass, moulded plastic, wrought iron etc., for 1,00,000 from Amazon for manufacturing wooden chairs, sofa sets, dining tables, beds etc., then wood, fibreglass, moulded plastic, wrought iron would be considered as inventory.

    Meaning of Current Asset

    Current asset refers to all the assets of an organization which are expected to be used, consumed or easily sold through business operations within one accounting period (within a year). In simple terms, currents assets represent all the assets which can be encashed with one accounting period. Current assets are also known as short-term assets.

    For example – ABC and Co. purchases office tools and furniture from E bay on credit for 30 days then it will be considered as a bill receivable in the books of E bay. Hence bills receivable is treated as a current asset.

    Moving to the main part of the question

    Inventory as a current asset

    Inventory is treated as a current asset because the organization intends to sell them within one accounting period or 12 months from the date it is recorded in the balance sheet. All the current assets including inventory have high liquidity and convertibility.

    Inventory is a primary source of revenue, especially for wholesale and retail businesses. More than 50% of the working capital revenue is generated from inventory within a year. Therefore, it is recorded under the head – Current Asset.

    In terms of liquidity and convertibility inventory is placed somewhere in the middle of the scale of current assets. It is highly liquid as compared to the non-current asset (say land & building, plant & machinery).

    Placement in the Balance Sheet

    Inventory - Current Asset

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