Category: Accounting Basis

Ask the expert:

Accountants are your main expert in regard the categorization of items as fixed assets, inventory, or consumables. It all depends on the nature and intended use within the business.

Fixed Asset

These are assets that are held for long-term use in the production or supply of goods or services, for rental, or for administrative purposes. Fixed assets typically have a useful life of more than one accounting year and are not meant for resale. Examples include land, buildings, machinery, and vehicles.

Inventory

Inventory comprises goods held for sale in the regular course of business, in the process of production for sale, or as materials or supplies to be consumed in the production process or in providing services. Inventory is generally intended for resale or for use in producing goods or services for sale. Examples include raw materials, packaging, any “stock” meant for resell.

Consumable

Consumables are items that are used up or consumed in the normal course of business operations. These are usually low-value items that are expected to be consumed within a short period. Examples include office supplies, stationery, and cleaning supplies.

The item’s purpose, usage, and expected lifespan will ultimately determine the classification.
Consult your accountant or company policies for guidance.

Example:

How would you classify a computer?

• If you are a reseller of computer (eg Amazon), this computer will be an inventory
• If you use this computer to process orders, help production processes etc, the computer will be a fixed asset.
• If the computer has a short life spam (few months and less than a year), then it could be classified as consumable

Conclusion:

When determining the classification, remember that fixed assets are crucial for long-term operations or contribute to revenue generation over an extended period.
Inventory items are goods held for sale or for use in the production process.
Consumables are items that are used up in the ordinary course of business operations, used within one year.

At what cost should I recognised the value of my company’s inventory ?

IAS 2, also known as International Accounting Standard 2, focuses on the valuation of inventory.

It mandates that companies value their inventory at the lower of cost or net realizable value:

– Cost includes the purchase price, direct costs, and specific overheads.
– Net realizable value is determined by subtracting the estimated selling price from any anticipated costs of completion and selling expenses.

The primary objective of IAS2 is to ensure that inventory is reflected at a prudent value on the balance sheet, preventing any potential overstatement of assets. Furthermore, it offers guidance on cost formulas like FIFO (First-In, First-Out) and weighted average cost, which aim to enhance consistency and comparability in financial reporting

To know more –> https://www.ifrs.org/issued-standards/list-of-standards/ias-2-inventories/