For many businesses, inventory is a large part of the firm’s capital assets. In addition, an accurate tally of the goods and raw materials available is required for financial statements such as a company’s balance sheet. These factors make careful measurement of inventory value essential. Accountants use multiple measures, including net and absolute inventory, to better track the cost of inventory and quantities actually available for sale.
Two Metrics for Inventory Value
Absolute, or total, inventory is the cost of all of the goods and raw materials a company should have on hand if there are no losses due to spoilage or other factors. That’s rarely the case, so accountants also measure net inventory. Net inventory is the total inventory minus allowances for reserve inventory and allocated goods and materials. In other words, net inventory is what a business actually has available for sale. Reserve inventory is an allowance made by accountants for damaged, missing and obsolete items that must be written down in value. Accountants also exclude from net inventory the value of items allocated to promotional events or earmarked for specific customers.
- BusinessDictionary.com: Inventory
- Accounting Tools: What Is Inventory Reserve?
- Financial Terms: Net Inventory
- Masao Nakamura, Sadao Sakakibara and Roger Schroeder. "Adoption of Just-in-Time Manufacturing Methods at U.S.- and Japanese-Owned Plants: Some Empirical Evidence," pages 230-231. IEEE Transactions on Engineering Management, 1988.
- Electronic Code of Federal Regulations. "Regulation S-X, 17 CFR Part 210: Sec. 210.5-02 Balance sheets." Accessed Aug. 1, 2020.
Based in Atlanta, Georgia, William Adkins has been writing professionally since 2008. He writes about small business, finance and economics issues for publishers like Chron Small Business and Bizfluent.com. Adkins holds master's degrees in history of business and labor and in sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.