Inventory plays an integral role in the efficient functioning of many business operations. It is the tangible items that a business purchases, manufactures, or otherwise acquires in anticipation of using them in the future. It is a source of raw materials for companies that produce products and plays an important role in the supply chain by allowing businesses to have the necessary products available when their customers order them.

Inventory is typically divided into three categories: raw materials, work-in-progress (WIP), and finished goods. Raw materials are the raw or unfinished materials used to manufacture a product; for example, fabric for clothing, lumber for furniture, or chemicals for creating cleaning solutions. Work-in-progress, also known as work-in-process, consists of partially completed products in the production process. Finished goods, sometimes referred to as finished products, are the completed products ready for sale.

Inventory is recorded on the balance sheet of a company and is reported as a current asset. In addition to recording the purchase price of the inventory, the company must also record the cost of carrying the inventory, such as storage costs, insurance, and any other costs associated with the inventory. In order to accurately reflect the true cost of the inventory and ensure accurate accounting, the company must also record any write-downs made, such as obsolete and damaged goods.

Inventory is typically valued using one of three methods: first-in, first-out (FIFO), last-in, first-out (LIFO), and weighted average. Under the first-in, first-out method, inventory is recorded and valued based on the cost of the inventory items purchased or manufactured first and therefore, the first items purchased or manufactured are the first items sold. The last-in, first-out method, conversely, records and values inventory based on the cost of the last items purchased or manufactured and therefore, the last items purchased or manufactured are the first items sold. Lastly, in the weighted average cost method, inventory is averaged based on the costs of all the items purchased or manufactured, regardless of when they were purchased.

Inventory management, which is the process of ordering, storing, and tracking inventory, is an important aspect of managing inventory in an efficient and cost effective manner. This is done by anticipating and predicting future demand, placing orders with suppliers, properly storing goods, tracking the goods, and ensuring that the right amount of inventory is available when customers need it. Many businesses are now taking advantage of emerging technologies, such as automated alerts, data analysis, and inventory tracking software, to manage inventory more effectively. By properly managing inventory, businesses can save money, reduce errors, and improve customer service.

Inventory plays an integral role in the efficient functioning of many companies. It gives businesses the ability to have the necessary products on hand for when their customers need it. To ensure accurate accounting and cost effectiveness, businesses must classify inventory into three categories and value it using one of three methods. In addition, businesses must also properly manage their inventory using up-to-date technologies to reduce costs, errors, and ultimately, improve customer service.