What does 'inventory' refer to?

Inventory refers to the goods and materials that a business keeps on hand for the purpose of resale. It is a critical asset for companies that sell products, as it represents the stock available for selling to customers. Proper management of inventory is essential because it affects sales, cash flow, and overall profitability.

When a company purchases or produces goods, these items become part of its inventory until they are sold. Maintaining an accurate record of inventory helps businesses assess their current financial position and plan for future purchasing needs, accordingly aligning with sales targets and market demands.

Understanding inventory is vital for effective accounting practices, as it is recorded as a current asset on the balance sheet and plays a significant role in the calculation of cost of goods sold and overall expenses.