Inventory
Definition
Inventory is goods a business holds to sell. It is an asset on the Balance Sheet. The cost of inventory becomes Cost of Goods Sold when the items are sold.
Example
A business buys 10 items at $40 each. The $400 is inventory (an asset). When 3 items are sold, $120 moves from inventory to Cost of Goods Sold.
Why It Matters
Inventory ties up cash. Tracking it accurately is essential for knowing what the business has and for calculating gross profit correctly.