The terms “inventory” and “expenses” are often used in a business setting when discussing the purchases made in regards to production, products for sales or raw materials. Each term has a distinct meaning, but the inventory can become an expense if it is not managed in a proper or professional manner. To avoid this, the business owner must know the difference between a company’s inventory and a business expense.
An inventory is a space where products or items are categorized in a neat and organized manner. These items include raw materials for product creation, products ready for sale or items for product replacement for orders being returned to the company. The items in the inventory have a certain value, which gives the inventory a certain asset value. The inventory manager must use control techniques to ensure the value is maintained and controlled, despite the obstacles or troubles he may encounter throughout the business operations.
The definition of “expense” is the costs associated with keeping a business operational. This includes the money spent to increase the chances and efforts of gaining more revenue to increase the company’s profit. Expenses include the payments made for office rent, bills and office supplies, but also include the costs for waste products and unplanned payments for broken machinery.
Asset vs. Expense
Although a company’s inventory is considered an asset due to the worth of the items within, these items are subject to becoming expenses if they are not controlled or protected. For instance, raw materials such as produce have expiration dates to protect the safety of the end users who will purchase the items. If the items are not used before their expiration dates, they are no longer valuable in the inventory and become waste. Waste is an expense for the business, and the total value of the inventory will decrease.
Avoiding Becoming an Expense
One method to avoid changing the inventory from a valuable asset to an expense is to implement control techniques and a management team. Control techniques include using an automated scanning system (a software system that updates the amounts available in the inventory) and conducting quarterly manual counts. The management team is responsible for educating and training employees to recognize expiring inventory and increase the levels of communication.