Inventory vs Supplies: Key Differences & Tracking Tips

The various types of assets employed by the business can be challenging to manage, especially when trying to classify supplies vs inventory. These two play different roles in an enterprise, and their correct differentiation is very relevant in proper management and financial reporting. In this article, we shall look at the critical differences between supplies and inventory, examine in greater detail how they are accounted for, and highlight best practices to apply in their management. By the end, you should have a better idea of how to track and optimize supplies and inventory for the smooth running of business.

The terms “supplies” and “inventory” are often used interchangeably in business, though they serve different purposes within company operations. To effectively manage and have competent financial reporting, one must know how to differentiate between the two types.

Supplies are things consumed in the course of ongoing operations. Although they are tangible and represent assets, supplies differ from inventory because supplies are not held for resale. Examples include office supplies such as paper, pens, and cleaning materials. The answer to the question “Are supplies an asset?” depends on their classification—usually, they are considered current assets until they are used, after which they become an expense.

Their classification, however, depends upon their nature in that the usual stock usually consists of current assets until they are consumed and then become an expense.

Inventory, on the other hand, is those items that a business sells or uses in the production of goods for resale. Inventory includes raw materials, work-in-progress, and finished goods. For example, inventory for a furniture store includes wood and nails used in production, and completed chairs ready for sale. Inventory is the largest asset for many businesses, and the management of inventory is very important to a company’s profitability.

This means that the basic difference between supplies vs inventory involves their purpose: supplies make the operations possible, while inventory is directly linked to revenue generation. Proper differentiation between these categories aids in making appropriate decisions regarding purchasing, storing, and financial planning.

Both inventories and supplies require proper tools and strategies for their effective management. The term inventory management would, in general, involve maintaining a record of stock and forecasting the demand to ensure that the optimum amount is available at the right time. Just-in-time inventory and Economic Order Quantity are some techniques that can help businesses to efficiently manage their levels of inventory to meet demand without necessarily holding excess inventory.

Inventory management software is probably one of the most important enablers in giving visibility to stock levels, therefore helping a business make informed purchasing and production decisions. Examples include barcode scanning, RFID technology, and cloud-based inventory systems that improve stock accuracy and reduce labor costs. This, therefore, means that with such adoption, there is the potential for businesses to minimize stockouts, cut unneeded inventory, and enhance overall efficiency.

With supply management, the concern is to have enough materials to enable the continuance of operations without interruptions. It is especially important to keep inventory for small businesses. It may include establishing reorder points, implementing supplier management systems, and maintaining good relations with vendors. Accounting inventory supplies using a hand-held computer facilitates the tracking process for easy monitoring of the usage level to prevent running out of vital supplies.

Another important practice in supply management involves periodic audits. Unlike inventories that are usually counted at the end of an accounting period, supplies may not be subjected to as much scrutiny. Periodic checks, however, will prevent waste and ensure that supplies are being used with the economy.

It’s equally important to spell out clear policies on the use of supplies. For instance, having clearly defined policies on who can requisition supplies, what constitutes a worthwhile use of company time and resources for procurement, and how approval chains are set up, will go a long way in reducing wastage. Training employees on the judicious use of supplies and encouraging resourceful practices can also be done hand in glove with more efficient supply management.

Data analytics can play a very important role in developing better management practices for both inventory and supplies. Companies will be in a position to build far more accurate forecasts of demand by studying usage trends, seizing opportunities for cost savings, and fine-tuning their supply chain strategies. In addition, this will also create an ability to recognize various inefficiencies that relate to over-consumption or underutilization of supplies and inventory, respectively.

Unlike inventory, supplies and supplies expense have very different accounting treatments. Supplies in accounting often arise as current assets at purchase and then are expensed when consumed. This means they first show on the balance sheet, then later move to the income statement as an expense upon consumption.

Supplies are usually classified as operating expenses, and their consumption has to be correctly monitored to ensure that the operational expense of a company is accurately reflected. For instance, office supplies like paper and toner are immediately consumed upon usage and ultimately decrease the net income of the business. Proper tracking will mean that all these expenses are included in the budgeting and financial planning so that the business may make informed decisions on where to cut expenses and, therefore, understand what their operational costs are.

In accounting, where inventory is concerned, it presents more complex treatments. This is because, under the three-stage accounting model, an inventory is recorded as an asset on the balance sheet until its selling happens, and only when the sale has occurred is it treated as an expense-cost-of-goods sold. This difference in accounting treatment is important to financial reporting and taxes because it influences a company’s profitability and its tax liabilities.

Inventory accounting methods, such as First-In, First-Out (FIFO), or Last-In, First-Out (LIFO), play a significant role in determining the value of inventory and the cost of goods sold. The selection of an appropriate method may have a profound effect on the financial statements, particularly when prices continue to fluctuate. Good inventory accounting works to ensure that the financial records of a company correctly show the cost and value of goods on hand, which is an important determinant of profitability.

The other critical aspect of accounting for inventory encompasses inventory valuation. The business has to intermittently appraise its inventory to ascertain its current market value and make sufficient provisions for the inventories that may have become obsolete or damaged. This process is generally referred to as a write-down of inventory. It helps ensure that one’s financial statements correctly reflect the present value of inventory-very important for investors and stakeholders.