When you’re starting out, it’s easy to get inventory and fixed assets confused. Here’s what you need to know to ensure you treat these two groups correctly in your accounting practices.
Difference between inventory and fixed assets
First and foremost, to make the most out of your inventory and fixed assets, you need to understand how they differ:
- Fixed assets are property your business owns and uses to produce income, like machinery, for example. In your accounting, fixed assets are reported in the long-term section of your balance sheet, typically under headings like ‘property, plant and equipment’. You record fixed assets at their net book value, that is, the original cost, minus accumulated depreciation and impairment charges.
- Inventory is your product and goods used to create it. There are generally four types: 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 profit targets. For many companies, turning over inventory, by selling it or using it in production, is a primary revenue source. Having too much inventory for long periods can be risky, as products can spoil, become damaged over the time you store and don’t sell them, or simply become obsolete. However, by having too little inventory, you may not have enough products to sell if market demand is up and you could risk your business losing sales and market share. Meanwhile, your fixed assets have a finite life and are always depreciating, like how the value on a commercial vehicle you’ve purchase depreciates over time due to wear and tear. Equipment used to keep the business going, like computers and maintenance on printers, can be treated as a fixed asset. However, things like stationery or consumables can be considered a part of inventory 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 come tax time.
Adopting a tracking system
The key to managing inventory and fixed assets is to adopt a robust tracking system as part of your accounting process. A tracking system enables you to calculate depreciation, monitor maintenance needs and schedule repairs on your fixed assets. For inventory, it helps you avoid running out of stock and can even control theft of your goods.
Using tracking to boost profits
Once you’ve learned the difference between the two, the next step to make the most of your inventory is to use the information you gain through tracking to improve sales and profits. Watch out for items that sell well and need regular restocking, slow sellers that you should consider putting on sale, and items that have increased sales – you can capitalize on these by increasing orders during relevant periods, for example. Cloud-based accounting software like QuickBooks Online can help you better manage your inventory and help you accurately track your fixed assets together with your inventory items, so you’re always on top of all your assets at any one point. It pays to understand what makes up your fixed assets, and especially what makes up your consumable inventory, which loses value the longer it is held in the business. While it is a fact that the more inventory you have, the higher your current and total asset value, your inventory should be sold as quickly as possible to earn revenue.