Accounting For Stock/Inventory: What Is Stock And Why Hold Stock ( Part 1)

WHAT IS STOCK/INVENTORY?

Stock/Inventory forms part of the operating cycle of the business. The enterprise purchases stock from the supplier in raw material form, convert it into work in progress and finally finished goods for resale to customers.

Stock/inventory is part of the Current Asset Category of the Balance Sheet.

To define stock, it is :

Assets:

1. held for sale in the ordinary course of business;
2. in the process of production for such sale; or
3. in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Inventories encompass goods purchased and held for resale including, for example, merchandise purchased by a retailer and held for resale, or land and other property held for resale.

Inventories also encompass finished goods produced, or work in progress being produced, by the entity and include materials and supplies awaiting use in the production process.

WHY HOLD STOCK?

• To ensure that sufficient goods are available to meet anticipated demand;
• To absorb variations in demand and production;
• To take advantage of bulk purchasing discount;
• To stock-pile anticipating that there might be possible shortages in the future;
• To enable production processes to flow smoothly and efficiently;
• To hold stock like an investment especially in times of inflation where price trend is moving up