The terms stock and inventory are used interchangeably, but in actuality, the terms have two separate meanings. Although the difference is rather subtle, from an accounting standpoint, it’s very important to your small business. In order to give an accurate accounting of items the business owns, learn the difference between the two terms and use them correctly.
Inventory includes a small business’s finished products, as well as the raw materials used to make the products, the machinery used to produce the products and the building in which the products are made. In other words, anything that goes into producing the items sold by your business is part of its inventory.
Stock is the finished product that is sold by the business. In some cases, stock is also raw materials, if the business also sells those products to its customers. For example, a car dealership’s stock includes cars, but also can include tires, engine parts or other car accessories.
Differences Between Inventory and Stock
While stock deals with products that are sold as part of the business’s daily operation, inventory includes sale products and the goods and materials used to produce them. For example, the cars, car parts and accessories are sold during normal business practices, but the machines that run diagnostic tests on cars or the car lot itself are not. Inventory takes in account all of the assets a business uses to produce the goods it sells and determines the sale price for the stock. The stock determines the amount of revenue a business generates. The more stock that is sold, the higher the revenues.
For accounting purposes, counting inventory items is done generally once a year, but for stock, the numbers are tracked daily. This is mostly because inventory is replenished as needed to ensure there is an adequate stock for the business to keep its doors open. It is usually not necessary to count the number of tires a car dealership has daily, but it is very important to know how many cars are left on the lot. Also, although the sale of assets can create in infusion of cash into the business, this money is not considered revenue. Only the sale of the stock itself is included in the revenue total.