Is Inventory a Current Asset? (Answered)

Key Takeaways

• Inventory is a current asset because it’s expected to be sold, used, or converted into cash within a year.
• Proper inventory classification improves cash flow forecasting, financial analysis, and borrowing potential.
• There are several types of inventory (raw materials, work-in-progress, finished goods), and all are considered current assets.
• Mistakes in inventory valuation or classification can distort your balance sheet and decision-making.
• Inventory management directly affects your profitability, tax liability, and operational efficiency.
• Lenders and investors closely examine inventory values to assess financial health and short-term liquidity.
• Consistent tracking and valuation methods ensure accurate reporting and smarter business decisions.

It’s Not Just Stuff on a Shelf

If you’re in a field service business like HVAC, electrical contracting, plumbing, or any trade that relies on stocked parts and supplies, you’ve probably asked (or at least wondered), “Is inventory a current asset?”

Spoiler alert: Yes, it is. But, as always in accounting, the truth comes with caveats, need for context, and some highly relevant reasons you should care. Misclassifying or misunderstanding inventory doesn’t just mess up your balance sheet—it can throw off your cash flow, wreck your profit calculations, and trip you up during loan applications or tax time.

In this in-depth guide, we’ll walk you through what inventory means in the context of a service-based business, how to treat it properly in your books, and how mastering your inventory management can be a game-changer for your businesses’ profitability and long-term stability.

What Is Inventory?

Inventory refers to the items your business holds for the purpose of resale, use in production, or consumption during service delivery. It’s a blanket term that can include:

• Parts and materials (copper piping, circuit breakers, HVAC filters, etc.)
• Tools and supplies (used by your business or sold)
• Units of product waiting for installation (mini-split systems, furnaces, electrical panels, etc.)

In short, if you bought it with the intent of using it on a job or sell it to a customer—and it hasn’t been used yet—it’s inventory. Even consumables like adhesives, gaskets, and protective wraps can fall under this category if they are job-specific.

Inventory is not limited to what’s sitting in your warehouse or truck. It can also include materials staged on-site for upcoming jobs or even products in transit, depending on the terms of purchase.

Is Inventory a Current Asset? Absolutely. Here’s Why.

A current asset is anything your business expects to convert into cash or use up within one year of the balance sheet date. That includes:

• Cash
• Accounts receivable
• Inventory
• Prepaid expenses
• Short-term investments

Because inventory is expected to be sold, installed, or consumed in the regular course of business within a year, it qualifies as a current asset.

Field Example:

Say you stock 50 tankless water heaters for the next 6 months of installs. Until they’re installed, those water heaters sit on your books as inventory. Once installed and invoiced, they convert into cost of goods sold (COGS) and then revenue once paid.

If, on the other hand, that stock sits untouched for 18 months, it may need to be reclassified or written down as obsolete inventory.

The 3 Main Types of Inventory (All Current Assets)

Understanding the three core types of inventory is critical for correct classification and valuation.

1. Raw Materials

These are components you haven’t yet used. For example:

• Copper wiring
• Sheet metal
• PVC piping
• Thermostat wires

These items are often bulk purchased and pulled as needed, and they make up the base layer of your production pipeline.

2. Work-in-Progress (WIP)

Used mostly in manufacturing or long-cycle jobs:

• An HVAC system half-installed
• A control panel being wired in your workshop
• A job partially completed over multiple site visits

Tracking WIP accurately requires more effort but offers better job cost insights.

3. Finished Goods

Items ready for installation or sale:

• A packaged A/C unit
• Water softeners in stock
• Assembled control boards for dispatch

All three are current assets until they’re consumed or sold. Once used, they move from the balance sheet to the income statement.

Where Inventory Sits on Your Balance Sheet

On a standard balance sheet, inventory typically sits under current assets:

Sample Balance Sheet Snapshot:

Accurate inventory figures make your current asset total—and by extension, your working capital—more reliable. That’s crucial when applying for credit, evaluating solvency, or calculating liquidity ratios like the current ratio or quick ratio.

How Inventory Affects Profitability

Inventory doesn’t just sit on a shelf looking pretty. It plays a vital role in your profitability.

Step-by-Step:

1. Inventory Purchased → current asset
2. Inventory Used/Sold → becomes COGS (expense on the income statement)
3. Inventory Left Over → remains on the balance sheet as an asset

Why It Matters:

• Understating inventory inflates expenses (COGS), reducing net income
• Overstating inventory does the opposite, making profits look better than they really are
• Errors here can mislead owners, tax authorities, and potential investors

Regular audits, tight internal controls, and proper inventory management software help keep these figures clean and reliable.

Inventory Valuation Methods

Choosing how you value inventory affects both your balance sheet and income statement.

1. FIFO (First-In, First-Out)

Assumes older inventory is sold first.

• Common when prices rise over time
• Results in lower COGS and higher taxable income in inflationary periods
• Aligns well with physical flow of goods in most service businesses

2. LIFO (Last-In, First-Out)

Assumes the most recently purchased inventory is sold first.

• Higher COGS during inflation, lowering taxable income
• Not allowed under International Financial Reporting Standards (IFRS) but OK in the U.S.
• May not reflect actual product flow, but can offer tax benefits

3. Weighted Average

Spreads the total cost evenly across units.

• Simpler for high-volume, low-cost items (like screws, wire nuts, etc.)
• Easiest method to automate in accounting software

Each method has tax, reporting, and business impact—choose based on your priorities.

Common Inventory Mistakes to Avoid

Even smart business owners get tripped up by inventory. Here’s what to watch for:

Mistake #1: Misclassifying Tools as Inventory

Tools that are reused (wrenches, drills) are fixed assets, not inventory. If it lasts more than a year and doesn’t get sold, don’t put it in inventory.

Mistake #2: Not Writing Off Obsolete Inventory

That outdated circuit board you’ve had since 2019? If it’s never going to be used or sold, write it off. Keeping it inflates your assets artificially.

Mistake #3: Forgetting to Count WIP

In-progress jobs often have materials tied up. Ignoring WIP underreports assets and costs.

Mistake #4: Mixing Personal and Business Inventory

Don’t use business inventory on your personal house project—or at least record it properly. Mixing them skews financial records and may raise red flags with your CPA (or the IRS).

Mistake #5: Using Different Valuation Methods Inconsistently

Switching between FIFO and LIFO at will is a no-go. Be consistent and document your method in your accounting policy.

Managing Inventory Like a Pro

Managing your inventory well isn’t just an accounting win—it’s a competitive advantage.

Best Practices:

• Use Inventory Software: Ditch the spreadsheets. Automate inventory tracking with tools like QuickBooks, ServiceTitan, or Aptora.
• Perform Regular Counts: Do cycle counts monthly or quarterly. Reconcile with your records.
• Set Par Levels: Always have a minimum stock level of fast-moving items.
• Track Turns: Calculate your inventory turnover rate:

Higher turnover = less money sitting on shelves.

• Integrate With Purchasing: Link inventory management with purchasing systems to reorder items automatically when stock hits a threshold.
• Train Your Team: Make sure everyone handling inventory knows how to log, track, and audit it properly.

Why Lenders and Investors Care About Inventory

Banks love current assets. The more liquid your assets, the more comfortable they feel lending to you.

How It Helps:

• Increases working capital
• Improves current ratio (Current Assets / Current Liabilities)
• Shows you’re organized and financially disciplined
• Demonstrates your business can operate efficiently and fulfill obligations

Just don’t inflate numbers to impress. Lenders see through that during due diligence.

So, Is Inventory a Current Asset? Yes. And It’s a Big Deal.

Inventory is absolutely a current asset, and treating it like one gives you better control over your cash flow, profitability, and borrowing strength. Keep it well-managed, properly classified, and updated regularly. Whether you’re stocking mini-splits or breaker boxes, tracking inventory right keeps your business lean, profitable, and growing.

And remember: Your inventory system isn’t just an expense tracker—it’s a window into how efficiently your business runs.

Get Serious About Inventory

If you’re still managing inventory in your head, on paper, or in a spreadsheet from 2014, it’s time to level up. Take an afternoon this week to audit your inventory, clean up your records, and start tracking properly. Not only will you tighten up your books—you’ll sleep better knowing exactly where your money is. And hey, if you’re using field service software like Aptora’s Total Office Manager, you’re already halfway there.

A smarter inventory system today means fewer surprises tomorrow.

FAQs

1. Is inventory considered a liquid asset?

Not exactly. Inventory is a current asset, but not as liquid as cash or receivables. It needs to be sold before it becomes cash.

2. How often should I update my inventory records?

Ideally, monthly. At a minimum, do it quarterly. Real-time updates through software are even better.

3. Can inventory become a non-current asset?

Not really. If inventory hasn’t moved in over a year, it may be obsolete and should be written off—not reclassified.

4. Does inventory affect my taxes?

Absolutely. Ending inventory value affects your COGS, which in turn affects your taxable income.

5. Where does inventory go when used on a job?

Once used, it moves from the balance sheet (inventory) to the income statement as COGS. That’s when it becomes an expense.