The inventory accounts used in businesses vary greatly depending on the types of businesses. Here we have three of the most common business types; service firms, merchandising firms, manufacturing firms.
Let's learn more about them and their activities.
Service firms make up the largest sector of the U.S. economy. They provide only services and basically carry no inventory or in an immaterial amount. Their largest expense tends to be salary and benefits. You can see some examples here but clearly there are many more.
Merchandising firms can be either wholesalers or retailers. Wholesalers are merchandisers who sell to retailers. They do not sell directly to consumers, so their business model is sometimes called B2B, which stands for "Business to Business." Retailers are merchandisers who sell to consumers. Their business model is sometimes called B2C, which stands for "Business to Consumers."
They use one inventory account, which you learn about the Financial Accounting, and we called it "Merchandise Inventory" or "Finished Goods Inventory: or just plain "Inventory." Their largest expense tends to be cost of goods sold. You can see some examples here, but clearly there are many more. These are just the ones I shopped at this week.
Manufacturing companies use labor and other inputs - like plant and equipment - to convert raw materials into finished products. They sell their products to retailers or wholesalers primarily, but also to consumers via outlet stores etcetera. Their largest expense tends to be cost of goods sold. They use three inventory accounts; Raw Materials, Work-in-Process and Finished Goods Inventory. You can see some examples here but clearly there are many more.
The Raw Material inventory account is used to account for all raw or component materials that will be used in production. It is an inventory account, which makes it a current asset found on the balance sheet. The Work-in-Process inventory acccount sometimes called "Work-in-Progress" and most commonly abbreviated as WIP or "wip," is used to account for all partially completed inventory items at the end of the period. If, at the end of the period, an item has been started in production but not yet completed, it is accounted for in this account. WIP is inventory account, which makes it a current asset, found on the balance sheet.
The finished goods inventory account sometimes abbreviated as FGI, is used to account for completed inventoried items. When you learned about accounting for inventory in your Financial Accounting course, this is the account you were using. So you already know that FGI is an inventory account which makes it a current asset found on the balance sheet and that concludes this short video on the different types of inventory accounts and the types of businesses that use them.