Accounting glossary

Inventory

What inventory is, the FIFO and weighted-average valuation methods, and per-country small-business simplifications for UK/AU/CA/NZ/SG in 2026.

By ExpenseFlow team
· 18 May 2026

Definition

Inventory (sometimes “stock” in UK practice) is goods held by a business for sale in the ordinary course of operations or for use in producing such goods. It is presented as a current asset on the balance sheet at the lower of cost and net realisable value, and released to cost of sales on the income statement as the goods are sold. The two permitted valuation methods under modern accounting standards are FIFO (first-in-first-out) and weighted average; LIFO is disallowed.

What inventory means in practice

For a bookkeeper in a product business, inventory is the largest single account on the balance sheet for most retailers, wholesalers, and manufacturers. Tracking it accurately requires three disciplines: receiving (every purchase posts to inventory at cost), issuing (every sale moves inventory to COGS at the appropriate per-unit cost), and counting (a periodic physical count reconciles the system balance to the actual on-hand quantity).

The mismatch between the system balance and the physical count is the “stock variance”, and it appears at every count. Causes range from honest miscount to shrinkage (damage, theft, expiry). A large or persistent variance signals an operational problem that goes beyond bookkeeping. The variance is posted as a COGS adjustment in the period of the count.

A practical example: a UK retailer with a 31 March year-end. The system balance at 31 March 2027 shows 380,000 of inventory. The physical count finds 372,000. The 8,000 variance is posted as a COGS adjustment (debit COGS 8,000, credit inventory 8,000), reducing gross profit for the year by 8,000. The bookkeeper investigates: 5,000 is explained by damaged goods being written off through the year that were not posted; 3,000 is unexplained shrinkage (suspected theft or miscount).

How inventory works by country

United Kingdom

FRS 102 Section 13 governs inventory: lower of cost and net realisable value. Cost includes purchase price (net of trade discounts), conversion costs (direct labour and a systematic allocation of production overheads), freight inwards and import duties. FIFO and weighted average permitted; LIFO not allowed under FRS 102 or full IFRS. The chosen method must be applied consistently across periods.

Australia

AASB 102 mirrors IAS 2. Small business simplified inventory rules apply for businesses with turnover under AUD 10 million and inventory variation under AUD 5,000 between opening and closing: these businesses can effectively ignore inventory movements for tax purposes (purchases become deductions when paid, no opening or closing adjustment required). For accounting purposes the small business simplification does not apply; all reporting entities follow AASB 102.

Canada

ASPE Section 3031 (for private companies) and IAS 2 (for IFRS adopters) both apply. CRA’s section 10 of the Income Tax Act requires inventory to be valued at the lower of cost and fair market value (equivalent to net realisable value under the accounting standards). The CRA accepts both FIFO and weighted average; consistency is required.

New Zealand

NZ IAS 2 mirrors IAS 2. Small business taxpayers can use the simplified trading stock rules if year-end stock is under NZD 10,000 and the difference from prior year is under NZD 5,000: these businesses can effectively ignore stock for income tax purposes. For accounting purposes all entities follow NZ IAS 2.

Singapore

SFRS(I) 2 mirrors IAS 2. FIFO and weighted average permitted. Stock obsolescence write-downs to net realisable value are deductible for tax when properly documented with evidence of the impairment (slow-moving stock lists, damage reports, market-price changes).

Inventory sits between purchases and COGS:

  • COGS is the income-statement account that inventory feeds when goods are sold.
  • The balance sheet is where inventory appears under current assets.
  • Working capital calculations include inventory as a current asset.
  • Reconciliation of the inventory control account against the physical count is a standard period-end discipline.
  • Gross profit is directly affected by inventory valuation accuracy.
  • Stock variance adjustments are posted via a journal entry.

See also

For the COGS account that inventory feeds, see the COGS entry.

FAQ

See the answered questions above for FIFO vs weighted average, net realisable value, and counting cadence.

Questions, answered

Common questions

Which inventory valuation method should I use?

FIFO (first-in-first-out) or weighted average. The choice depends on the business: FIFO produces more recent cost on the balance sheet and older cost in COGS, which is closer to current replacement cost in inflationary periods. Weighted average smooths cost across periods. Both are permitted under FRS 102, IAS 2, AASB 102, NZ IAS 2, and SFRS(I) 2; the chosen method must be applied consistently. LIFO is disallowed under all five frameworks.

What is net realisable value?

The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs to make the sale. If NRV is below cost (because inventory has become obsolete, damaged, or the selling price has dropped), the inventory must be written down to NRV. The write-down hits the income statement as part of cost of sales.

How often should I count inventory?

Once per year minimum (the annual physical count at year-end, required for the statutory accounts). Most businesses with material inventory count monthly or quarterly using cycle-counting (counting a subset each period rather than the whole stock at once). Continuous cycle-counting is more accurate than an annual count and reduces year-end disruption.

Keep exploring

COGS (Cost of goods sold)

The direct cost of producing the goods or services sold during a period: raw materials, direct labour, sub-contractor fees, and freight inwa

Balance sheet

A financial statement presenting a snapshot of what a business owns (assets), what it owes (liabilities), and the residual interest of its o

Working capital

The difference between current assets and current liabilities on the balance sheet, representing the short-term operating liquidity of the b

Reconciliation

The bookkeeping process of confirming that the balance shown in the accounting system for a given account matches an independent source, mos

Gross profit

Revenue minus the direct cost of producing the goods or services sold (cost of sales or COGS), representing the margin available to cover op

Journal entry

The fundamental unit of double-entry bookkeeping: a dated record that debits one or more accounts and credits one or more others by equal am

Track inventory without spreadsheets

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