Meaning of the term inventory
The word inventory was first recorded in 1601. The french term inventaire, or "detailed list of goods," dates back to 1415.
The terms ‘inventory ‘ or ‘merchandise’ or ‘stock-in-trade’ means a complete list of goods that a business has for sale at a given time. But in accounting, the inventory (or inventories) includes even those goods that are in various stages of production, that is, work-in-process or work-in-progress. According to Accounting standard (AS)-2 (Revised), issued by ICAI, Inventories are assets :
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.
Thus inventories include
(i) goods purchased and held for resale, for example, merchandise (goods) purchased by a retailer and held for resale, computer software held for resale or land and other property held for resale.
(ii) Finished goods produced for sale,
(iii) Work-in-progress being produced by the enterprises.
(iv) Materials, maintenance supplies; consumable and loose tools awaiting use in the production process.
The types of inventories are related to the nature of the business. The inventories of a trading concern consist primarily of products purchased for resale in their existing form. It may also have an inventory of supplies such as wrapping paper, cartons, and stationery. The inventory of a manufacturing concern consists of several types of inventories: raw materials (which will become part of goods to be produced); parts and factory supplies; work-in-process (partially completed products in the factory) and, of course, finished products. However inventories do not include machinery spares which can be used only in connection with an item of fixed assets and whose use is expected to be irregular; such machinery spares are accounted for in accordance with Accounting Standard (AS)-10: Accounting for Fixed Assets. Thus tools are inventory in the hands of a tool manufacturer of hardware store but not in the hands of a carpenter. Similarly marketable securities are inventories in the hands of a stock broker or a dealer but not in the hands of a manufacturer. Inventory items are purchased and sold regularly in a trading concern or purchased, put into production, converted into a finished product and sold in a manufacturing business.
Check your progress
Problem 1 A Ltd sells gents clothes and accessories. Out of the following items, which will be included in its inventories: Cotton shirts (2) Synthetic shirts (3) Pants (4) Belts (5) Investment into a business of similarnature(6)Ties
The reasons for keeping stock
There are three basic reasons for keeping an inventory:
1. Time - The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amount of inventory to use in this "lead time"
2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods.
3. Economies of scale - Ideal condition of "one unit at a time at a place where user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory.