Yes, inventory is considered a current asset. Show Current assets or short-term assets are accounts that track what a company owns and expects to use within a year. And since inventory is intended to be sold within 12 months, it’s recorded as a current asset in the balance sheet. But why is inventory sold within a year? Are there any exceptions to the rule? That’s exactly what we will be answering in this guide, along with the accounting basics of inventory and current assets. Read on to learn about: What Is Inventory?Inventory, or merchandise, refers to all goods and services that a business offers for sale to its customers. A company’s inventory doesn’t just include the finished products, but also raw materials, and the work in progress. Since inventory is a current asset account, it’s recorded in the balance sheet of the business, along with liabilities and owner’s equity. Every business owner tries to forecast consumer demand to their best ability, to avoid both the excess or lack of inventory. Do you want to learn how to properly manage inventory, and accurately evaluate your stock? Check out our complete guide to inventory management. Types of InventoryAs we briefly mentioned, inventory is made up of three main categories: raw materials, work in progress, and the final product. Raw materials can be commodities such as fabrics, steel, or lumber, or components such as electric motors, wire or microchips, that businesses (extract or) purchase to produce goods. For example, a manufacturing company might need precious metals and steel as raw materials, whereas a bakery would need flour and eggs, and so on. Work in progress refers to all products that are not yet finished or fit for sale. Take the unassembled parts of a bicycle, or unbaked pottery, or a garment half-sewn as examples of work in progress. Finished Goods are products that are ready and fit to sell. This can be anything from a bag of chips to an expensive sports car. If you want to know more about the different inventory expenses for small businesses, head over to our guide on 5 Types of Inventory Costs. What Are Current Assets?Current assets include all assets expected to either be sold or used within a one year time period. Since they’re expected to be used soon, current assets are often referred to as short-term assets. A business needs short-term assets in order to run its daily operations and make invoice payments on time. Some common examples of current assets include:
Current Assets vs Non-Current AssetsAny asset that has a useful life of over a year is considered a non-current asset. Unlike current assets, non-current ones aren’t so easy to convert into cash, since they are used for a longer time period. They include items such as:
Businesses put inventory for sale with a reasonable expectation that it will be sold within the next year. That’s why inventory is listed under current assets. However, there may be cases when some inventory goes unsold, as there’s only so much you can do to predict customer demand, shipment delays, and other challenges. This excess in merchandise results in a loss in revenue and a disturbed cash flow for the business, as the product might spoil, become less fashionable, or its technology might become outdated. Nevertheless, inventory is again considered a current asset, since its useful life doesn’t exceed one year. Frequently Asked Questions#1. Is Inventory a Fixed Asset?Inventory can’t be a fixed asset, since it’s expected to be converted into money within a year. Fixed assets provide benefits for a business for longer than one accounting period (which matches the fiscal year in duration). Fixed assets include large equipment, buildings, land, plant, etc. Inventory is a current asset with a normal debit balance. That means that an increase in inventory will result in a debit entry, whereas a decrease will be recorded as a credit. For more information on debit and credit entries check out our guide to double-entry bookkeeping for small businesses. #3. How Do I Calculate Inventory?One way to calculate inventory at the end of the year is by using the following formula:
#4. How Do I Calculate Current Assets?Current assets are pretty straightforward to calculate, all you have to do is add up all of the balances of the current assets account. As a formula, that would look like this:
Automate Inventory ManagementUse inventory management software like Deskera to track your stock levels in real-time, and establish an efficient inventory management system for your business. Give the software a try right away, with our completely free trial.  Key TakeawaysAnd that’s a wrap! We hope our guide was helpful in answering your questions. To recap, inventory is purchased or produced with the intent of being sold to customers, within a short timespan. And since current assets are items meant to be used or sold within a year, inventory is considered a current asset. Related Articles
The Current Assets account is a balance sheet line item listed under the Assets section, which accounts for all company-owned assets that can be converted to cash within one year. Assets whose value is recorded in the Current Assets account are considered current assets. Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets. Current Assets may also be called Current Accounts.
Publicly-owned companies must adhere to generally accepted accounting principles and reporting procedures. Following these principles and practices, financial statements must be generated with specific line items that create transparency for interested parties. One of these statements is the balance sheet, which lists a company's assets, liabilities, and shareholders' equity. Current Assets is always the first account listed in a company's balance sheet under the Assets section. It is comprised of sub-accounts that make up the Current Assets account. For example, Apple, Inc. lists several sub-accountss under Current Assets that combine to make up total current assets, which is the value of all Current Assets sub-accounts. This section is important for investors because it shows the company's short-term liquidity. According to Apple's balance sheet, it had $135 million in the Current Assets account it could convert to cash within one year. This short-term liquidity is vital—if Apple were to experience issues paying its short-term obligations, it could liquidate these assets to help cover these debts. Depending on the nature of the business and the products it markets, current assets can range from barrels of crude oil, fabricated goods, inventory for works in progress, raw materials, or foreign currency. Many assets can be considered current by different businesses throughout all industries. In general, most industries group their current assets into these sub-accounts; however, you might see others:
On the balance sheet, the Current Asset sub-accounts are normally displayed in order of current asset liquidity. The assets most easily converted into cash are ranked higher by the finance division or accounting firm that prepared the report. The order in which these accounts appear might differ because each business can account for the included assets differently. By definition, assets in the Current Assets account are cash or can be quickly converted to cash. Cash equivalents are certificates of deposit, money market funds, short-term government bonds, and treasury bills. To qualify as current assets, these items must not have any restrictions that inhibit their short-term liquidity. Marketable Securities is the account where the total value of liquid investments that can be quickly converted to cash without reducing their market value is entered. For example, if shares of a company trade in very low volumes, it may not be possible to convert them to cash without impacting their market value. These shares would not be considered liquid and, therefore, would not have their value entered into the Current Assets account. Accounts Receivable—the value of all money due to a company for goods or services delivered or used but not yet paid for by customers—is entered in Current Assets as long as the accounts can be expected to be paid within a year. If a business makes sales by offering longer credit terms to its customers, some of its receivables may not be included in the Current Assets account.
If an account is never collected, it is entered as a bad debt expense and not included in the Current Assets account. It is also possible that some receivables are not expected to be collected on. This consideration is reflected in the Allowance for Doubtful Accounts, a sub-account whose value is subtracted from the Accounts Receivable account. Inventory—which represents raw materials, components, and finished products—is included in the Current Assets account. However, different accounting methods can adjust inventory; at times, it may not be as liquid as other qualified current assets depending on the product and the industry sector. For example, there is little or no guarantee that a dozen units of high-cost heavy earth-moving equipment may be sold over the next year, but there is a relatively high chance of a successful sale of a thousand umbrellas in the coming rainy season. For these reasons, you should view inventory with a skeptical eye. Read through the company reports or browse the internet to determine what is going on with a company's inventory—it might also just be standard practice or a trend in the industry for inventory to be at specific levels. Inventory also blocks working capital. If demand shifts unexpectedly—which is more common in some industries than others—inventory can become backlogged. Prepaid expenses—which represent advance payments made by a company for goods and services to be received in the future—are considered current assets. Although they cannot be converted into cash, they are payments already made. These payments free up capital for other uses. Prepaid expenses might include payments to insurance companies or contractors.
Many companies categorize liquid investments into the Marketable Securities account, but some can be accounted for in the Other Short-Term Investments account. An example would be excess funds invested in a short-term security, putting the funds to work but keeping the option of accessing them if needed. If current assets are those which can be converted to cash within one year, non-current assets are those which cannot be converted within one year. On a balance sheet, you might find some of the same asset accounts under Current Assets and Non-Current Assets. This is because those same types of assets might be tied up for a longer period, such as a marketable security that cannot be sold in one year's time or which would be sold for much less than their purchase price. Property, plants, buildings, facilities, equipment, and other illiquid investments are all examples of non-current assets because they can take a significant amount of time to sell. Non-current assets are also valued at their purchase price because they are held for longer times and depreciate. Current assets are valued at fair market value and don't depreciate. The total current assets formulation is a simple summation of all the assets that can be converted to cash within one year. If a current asset subcategory is not listed in this formula, you can add it to Other Liquid Assets. You gather the current asset information from a balance sheet and add it. Typically, it is already totaled up for you on the balance sheet under Total Current Assets: Current Assets = C + CE + I + AR + MS + PE + OLA where: C = Cash CE = Cash Equivalents I = Inventory AR = Accounts Receivable MS = Marketable Securities PE = Prepaid Expenses OLA = Other Liquid Assets \begin{aligned} &\text{Current Assets = C + CE + I + AR + MS + PE + OLA}\\ &\textbf{where:}\\ &\text{C = Cash}\\ &\text{CE = Cash Equivalents}\\ &\text{I = Inventory}\\ &\text{AR = Accounts Receivable}\\ &\text{MS = Marketable Securities}\\ &\text{PE = Prepaid Expenses}\\ &\text{OLA = Other Liquid Assets}\\ \end{aligned} Current Assets = C + CE + I + AR + MS + PE + OLAwhere:C = CashCE = Cash EquivalentsI = InventoryAR = Accounts ReceivableMS = Marketable SecuritiesPE = Prepaid ExpensesOLA = Other Liquid Assets Leading retailer Walmart Inc.'s (WMT) Total Current Assets for the 2021 fiscal year was $90 billion:
In comparison, for FY 2021, Microsoft Corp.'s (MSFT) Total Current Assets was $184.4 billion:
The total current assets figure is of prime importance to company management regarding the daily operations of a business. As payments toward bills and loans become due, management must have the necessary cash. The dollar value represented by the total current assets figure reflects the company’s cash and liquidity position. It allows management to reallocate and liquidate assets—if necessary—to continue business operations. Creditors and investors keep a close eye on the Current Assets account to assess whether a business is capable of paying its obligations. Many use a variety of liquidity ratios, representing a class of financial metrics used to determine a debtor's ability to pay off current debt obligations without raising additional funds. The following ratios are commonly used to measure a company’s liquidity position. Each ratio uses different Current Assets sub-accounts compared against the value of a company's Current Liabilities account:
The cash ratio is the most conservative as it considers only cash and cash equivalents. The current ratio is the most accommodating and includes various assets from the Current Assets account. These multiple measures assess the company’s ability to pay outstanding debts and cover liabilities and expenses without liquidating its fixed assets.
Current Assets is an account where assets that can be converted into cash within one fiscal year or operating cycle are entered. Non-Current Assets is an account where assets that cannot be quickly converted into cash—often selling for less than the purchase price—are entered.
The Current Assets account can be found on a firm's balance sheet. Common examples of Current Assets accounts include:
Current assets generally fall under one of six sub-accounts in the Current Assets account: Cash and Cash Equivalents, Inventory, Accounts Receivable, Marketable Securities, Prepaid Expenses, and Other Liquid Assets. However, other current asset accounts are specific to industries and businesses, such as Non-Trade Receivables, Restricted Cash, Net Receivables, or Current Deferred Assets.
Of the many types of Current Assets accounts, three are Cash and Cash Equivalents, Marketable Securities, and Prepaid Expenses. Current assets are any asset a company can convert to cash within a short time, usually one year. These assets are listed in the Current Assets account on a publicly traded company's balance sheet.
The assets considered current vary by industry, but generally, they fall into these sub-accounts: Cash and Cash Equivalents, Marketable Securities, Accounts Receivable, Inventory, and Other Liquid Assets. |
Why is inventory considered a current asset?
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