What it means
Inventory describes the role a resource plays in the business. A shop's goods for customers are inventory. Materials waiting to enter production and partly completed products can also fall within the concept. The business must identify what belongs in the relevant category before deciding its accounting value.
The same physical object may have a different role in another business. A computer held by a retailer for resale is different from the computer used by its accounts team. Its purpose, rather than its brand or purchase price alone, helps explain the distinction.
Under IAS 2, ordinary inventories within its scope are generally measured using the lower of cost and net realisable value. This is a valuation principle, not permission to use the shelf selling price as the accounting cost.
Why it matters
Inventory affects both operational decisions and the financial picture. An inaccurate quantity may cause a business to promise delivery of goods it cannot supply. An unrealistic value can make the stock balance look stronger than the goods' condition or sale prospects support.
Counting and valuation answer different questions. A count records what is physically present; a valuation considers the relevant costs and recoverable selling amount. It is useful to flag damaged, obsolete, consignment or third-party goods separately so that the accountant can assess them correctly.
A stock record should also explain movements. Receipts, sales, returns and write-offs help connect the previous count to the current one. Simply replacing yesterday's quantity with today's count hides the reason for a shortage and makes later investigation harder.
Example in practice
Illustrative example: A retailer buys 100 identical items at R80 each. Assume that is the full relevant unit cost and ignore VAT, delivery charges and other adjustments. It sells 60 items, leaving 40 physically present. Before considering any damage or loss in value, the remaining stock cost is R3,200.
During the count, five remaining items are found damaged. Counting them still establishes that they exist, but it does not establish that each should retain an R80 accounting value. The retailer records their condition and the evidence about what could be recovered through sale, after relevant completion or selling costs. The accountant can then assess the necessary adjustment.
The example shows why a single number such as “40 units” is incomplete. Quantity, cost and condition explain different parts of the inventory balance. Photos and supplier correspondence can support an investigation, but they do not replace the valuation judgement.
What it is not
Inventory is not every asset on the premises. Machinery used to manufacture products normally has a different purpose from the products being manufactured. Goods stored for another party are not automatically the business's own stock.
Inventory purchases are not automatically the same as cost of sales for the period. IAS 2 connects the expense for sold inventory with the related revenue; unsold qualifying stock may remain an asset. A bank payment alone cannot show how much stock has been sold.
Stock value is also not projected revenue. Adding intended selling prices together can help a sales forecast, but it does not establish the inventory amount for financial reporting or prove that all goods will sell at those prices.
Sources and review
Checked on 30 September 2026. Use the linked official guidance for current requirements and forms.
- IFRS Foundation: IAS 2 Inventories
Supports inventory cost, recognition of expense on sale and the lower-of-cost-and-net-realisable-value principle within IAS 2 scope. Illustrative amounts omit tax and special industry rules.
- IFRS Foundation: IAS 16 Property, Plant and Equipment
Supports the distinction between equipment used by a business and goods for resale, and the need for recognition and measurement under the applicable standard.
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