Quite often, stock and inventory are used interchangeably but they have different meanings.
It’s important to understand that using the two terms interchangeably is technically incorrect and may be misleading when it comes to the financial health of the company.
Following is what you need to know about the differences between stock and inventory.
What You Need to Know About Inventory
Inventory refers to the finished product that’s ready to distribute, the work in progress goods which is not completely converted into finished products and the raw material used to create the finished product.
In most cases, inventory is mostly found in manufacturing companies.
There are usually costs involved in maintaining inventory at optimum levels, which are decided by the top management.
Inventory is captured in the accounting books in 3 different ways.
These include the weighted average method, Last In First Out (LIFO) and First In First Out (FIFO) methods.
Note that each method has its own implications on the income statement especially if there are fluctuations with the prices in the raw material.
It’s important to understand that changing the inventory accounting methods frequently can be considered as a manipulation of the income statements.
What You Need to Know About Stock
Stock refers to the finished product that is ready to sell in the market.
Note that stock can also include raw material if the company is responsible for selling raw material.
The value of the stock depends on the cost of acquisition or the market price, depending on whichever is less.
When stock is sold, it will be deducted from the balance sheet but added to the profit and loss statement as revenue.
The Main Differences Between Stock and Inventory
Here are some of the notable differences between stock and inventory according to the various parameters where they are used.
1. The Context
Inventory is often used for accounting purposes to determine the current raw materials, goods considered to be work in progress and finished products.
On the other hand, stock is used in the business context as it’s used to ascertain the bottom line of the business.
When valuing inventory, it is determined using the cost incurred by the company using methods such as LIFO, FIFO and Average cost method.
Stock, is valued at the market price which is the selling price at which the finished goods are sold to the customers.
Inventory is valued before the end of the financial reporting period. It is valued less frequently compared to stock.
On the other hand, stock is valued frequently at intervals. In most cases, it can be valued on a daily basis since it determines the bottom line of the company.
4. The Revenue
Inventory takes into account all the assets of a business used to produce the goods it sells. Also, inventory is useful in determining the sale price of stock.
As mentioned, stock is used to determine the total amount of revenue generated by the business.
If there’s more stock sold, the business will have higher revenues.
As mentioned, inventory is valued at least once every year.
That’s because inventory is usually replenished quite often to make sure there is adequate stock for the business to stay afloat.
Furthermore, sale of inventory will create a cash infusion into the business but it is not considered as revenue.
It is only when stock is sold that revenue increases.
There are cases where inventory is often confused with assets. However, some assets have different classes.
The best way to differentiate inventory, stock and assets is by determining what stays in the business besides the sales made to customers.
It’s prudent to keep all the distinctions separate to maintain accurate bookkeeping records.
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