Inventory is, in business, goods and materials that a company holds for the ultimate purpose of resale (either a finished good as is, or raw materials used in manufacturing).
For accounting purposes, numerous methods may be used to value inventory at any period in time. The article inventory valuation discusses the most common methods used.
In order to accurately measure what a company has in stock at any given time, two main methods are used: perpetual inventory and periodic inventory.
With the advent of modern business technology, perpetual inventory is commonplace as a means of determining item count and value. However, due to inventory shrinkage (differences between the accounting records and the actual number of items on hand, due to such issues as error, loss, destruction, or theft), occasionally (usually once a year near the end of the fiscal year) a physical inventory is still required.
God's World Garden Center sells a premium plant food, SuperPlant.
At the beginning of the year the center had 30 units of SuperPlant in inventory. During the year it purchased 200 units and sold 150. Therefore, according to its accounting records, the center should have 80 units in inventory.
However, a count at year end revealed only 75 units. The difference was due to the following factors:
- A problem with the barcode reader at the register caused Tina, the clerk, to manually enter a sale of one unit; however, she did so only as "general merchandise" instead of entering the UPC.
- Mark, the store manager, used two units on the store's plants out front, but forgot to tell Maggie, the accounting clerk, that he used them.
- Dan, in inventory, accidentally dropped one unit, and didn't tell anyone because he was afraid he'd lose his job.
- Jane, a customer, stole one unit.