Understanding the difference between inventory and fixed assets
In any business model, be it an MSME or MNC, inventory and fixed assets are the two primary aspects. However, because of their nature, they are often confused with one another and are accounted for incorrectly in the balance sheet. To track the profit and loss of any business and keep the cash flow in place, both inventory and fixed assets must be grouped correctly in the accounting software. In this article, we will help you understand the difference between inventory and fixed assets, which will further help you execute your business activities more seamlessly and accurately.
Inventory is basically an on-hand merchandise and the materials and goods used to create a product for your business. It is recorded on financial statements as a current asset as it is expected to be created into cash within a year of its purchase. Inventory stock is typically categorised as raw materials for manufacturing, work in progress, finished goods and other merchandise and components purchased from suppliers and are recorded at the amount paid to purchase it.
Fixed assets are the assets, which are responsible to generate revenue for business. They are the assets which are owned by the company like plant and equipment and are reported in the balance sheet as non-current assets under the headings, property, plant and machinery. Fixed assets are recorded at their net book value, that is, the original cost, minus accumulated depreciation and impairment charges.
Inventory and Asset Management- Significance and Benefits
Inventory management is extremely crucial to run a business successfully as it directly impacts the cash flow in the system. Since it is not advisable to keep inventory stored for a prolonged period, companies often resort to selling it or using it in production to keep the profits flowing in. With a good inventory management software, you can easily categorise and track the shelf life of the inventory, so you can take a business decision to sell it accordingly. Too little inventory can also adversely affect the business, as you may not have enough products if the demand suddenly shoots up. Thus, an inventory management software will help you a great deal in keeping a close tab on this statistic, preventing unnecessary losses to the business.
Unlike inventory, assets have finite life and continuously depreciate which is why it is crucial to define inventory and fixed assets well and categorise them intelligently. It is extremely important to understand the difference between the two and also track them perfectly, so you have accurate numbers on your financial statements come tax time. Adopting of an inventory and asset management software can make or break a business, thus, investing in a robust software is highly advised.
Inventory and asset management software like Tally.ERP 9 will help you calculate depreciation, monitor maintenance needs and schedule repairs on fixed assets, and also help you avoid running out of inventory at the time of high demand.
Tracking Inventory and Assets
To get a holistic picture of your business at all points, an enhanced inventory and asset management software is required. Accounting software like Tally.ERP 9 will help you use the vital information about your inventory and assets and improve sales and profits. Try and sell your consumable inventory as soon as possible as you wouldn’t want to wait till the depreciated value hits rock bottom. Understand the market demands and put your inventory for resale accordingly. With a robust accounting software, you can track fixed assets together along with your inventory items, so you’re always on top of all your assets at any given point.