Especially at the beginning for small businesses, it’s easy to get inventory and fixed assets confused. Inventory and fixed assets are sometimes treated as assets on a business’s balance sheet, though not all assets are inventory. Knowing the essential differences between inventory and fixed assets helps for better tracking, as well as to help avoid any nasty surprises when it comes to reconciliation at the end of the financial year. Here’s what you need to know to ensure you treat these two important classifications correctly in your accounting practices.
Understanding how inventory and fixed assets are different
Fixed assets or capital assets, are the property your business owns and uses to produce income and revenue, for example, machinery. Typically included in this classification are land, buildings, machinery, office equipment, vehicles, furniture and fixtures used in your business. When it comes to accounting, your business’s fixed assets are reported in the long-term section of your balance sheet, generally under headings like ‘property, plant and equipment’. You record fixed assets at their net book value, that is, the original cost, minus depreciation. These are not part of the business’s normal revenue streams or product lines. They are rarely sold under a year’s time, unless the company is upgrading equipment or selling a facility or, in a worst case scenario, closing. Whereas inventory is your product or it is a component used to create your business’s products. There are generally four types of inventory stock: raw materials for manufacturing, work in process, finished goods and merchandise purchased from suppliers. You record inventory as a current asset on your balance sheet, at the amount paid to purchase it.
Why inventory and fixed assets are important
Managing your inventory is critical to hit sales and profit targets. Having too much stock for lengthy periods can be risky, but having too little stock runs a risk too. Meanwhile, your fixed assets have a finite life and are always depreciating, like how the value on a business vehicle you have purchase depreciates over time due to age, wear and tear. Equipment used for maintaining a business, such as computers and printers, can be treated as a fixed asset. However, items like stationery or consumables can be considered a part of the inventory classification as they are quick moving. It is important to understand the difference between the two and also to track them so you have accurate numbers on your financial statements.
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Tracking inventory and fixed assets
To know how much value your assets are worth at any given time, you’ll need a tracking system.
Many businesses monitor stock quantities daily using an inventory management system because these items need to be replenished and made readily available for use or sale. Due to the nature of how stock is stored, it needs to be tracked by quantity, as well as a common stock keeping unit (SKU), which identifies each product by distinct attributes (i.e. colour, size, brand).
Batch or lot numbers are used to control various items, such as food or medications, so they can be tracked in groups based on expiration dates. In addition, items such as parts and components can be tracked by serial number, barcode or RFID tags.
As these items have long-term business use and enable businesses to produce goods or perform services, they are not consumed in production. The word “asset” has a different meaning in the world of finance and accounting, the phrase “asset tracking,” is used to indicate the monitoring of physical asset movement, not the change in the monetary value of an intangible financial asset.
Systematically tracking assets is necessary across every industry in order to maintain accurate accounting records, as well as real-time visibility of operations.
When selecting a system to track and manage your business’s assets, it is important to understand the difference between inventory and fixed assets. A business should never overlook the importance of maintaining accurate and manageable records of these assets, not only in monetary value but physical movement.