Inventory you have purchased or manufactured that is ready to sell should be tracked on your balance sheet as an asset to your business but most sellers don’t do this. Most sellers account for purchases of inventory as a cost to their business right away instead of waiting for that inventory to be sold before realising the cost.
This is not correct and results in those businesses under declaring their profitability. The reason for this is that come the end of the month, quarter or year when they are looking at their finances, they will see skewed results as they have accounted for all of their inventory as a cost on the date they purchased it rather than the correct way, when it is sold.
Accounting for inventory as an asset and then a cost once it is sold means that you will have a much more accurate picture of how your business is performing month to month.
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