Glossary · Also called Stock
Inventory
The goods a business holds to sell, or the materials it will turn into goods to sell.
What it means
Assets held for sale in the ordinary course of business, or in the process of production for such sale, or as materials to be consumed.
Example
Unsold stock on the shelves at the year end is closing inventory.
Why it matters
Closing inventory reduces cost of sales and appears as a current asset; valuing it correctly affects profit.
In practice
Closing inventory appears in two places. It is deducted in the cost of sales calculation in the income statement. The same figure is shown as a current asset in the statement of financial position. It is valued at the lower of cost and net realisable value. This follows prudence, so expected profit on unsold goods is never counted early.
Suppose a trader has opening inventory of RM5,000, buys RM20,000 of goods and counts RM4,000 of goods still unsold at the year end. The RM4,000 closing inventory reduces cost of sales and becomes next year's opening inventory.
Students often confuse inventory with cost of sales. Inventory is the stock still on the shelves at a point in time. Cost of sales is the cost of the stock already sold during the period. Only goods held for resale count as inventory, not equipment the business keeps to use.
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Related terms
Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 4.5 Valuation of inventory (page 15).
Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.
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