Chapter 2

Types of inventory

Inventory comes in many forms. Understanding the types will help you identify it for valuation and management.

Merchandise you’re reselling

Most retailers have goods on the shelves, plus more out back. That’s all inventory.

Products you’re installing as part of a service

Many types of service businesses sell goods along with their labour. For example, a mechanic typically sells things like gaskets as part of a job. A gardener charges for the fertilisers they apply. A hairdresser may stock and sell hair products. Goods like these are inventory, too.

Goods you’re making (manufacturing)

Manufacturers deal with three types of inventory. They are raw materials (which are waiting to be worked on), work-in-progress (which are being worked on), and finished goods (which are ready for shipping).

You can have many types of inventory

You might sell some products exactly as you bought them, while modifying others. In this instance, you have merchandise and raw materials. It’s easier than you think to overlook inventory. Thinking about the three types can help you identify it all.

Location of inventory

The inventory you own can be in one of four places:

  • On the shelf: It may be on display and ready for sale.
  • In storage: It may be out the back of a shop, in a warehouse, or in a work van.
  • In transit: It may be in a vehicle between supplier and buyer.
  • On consignment: In someone else’s shop, waiting to be sold (some retailers will only buy a product from a manufacturer or supplier after they’ve on-sold it).

Looking after inventory

Knowing what inventory you have, and where it is, will help make you a better business person. You’ll be more aware of where your money is tied up, and you’ll be able to make decisions that protect that investment. Your next step is to work on how you manage inventory.


Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

Guide to inventory

Inventory management is more than just knowing what’s been sold and what you’ve ordered. Find out what else is involved.

  1. What is inventory?

    Your inventory is one of the most important purchases you’ll make. It’s the reason you’re in business.

  2. Types of inventory

    Inventory comes in many forms. Understanding the types will help you identify it for valuation and management.

  3. Inventory management

    A complete overview of your inventory will help your business run smoothly and profitably, so where do you start?

  4. Inventory accounting

    Inventory can be a big expense, and a big earner, so it pays to stay on top of the numbers.

  5. Inventory management systems

    You know inventory is vital to a healthy business. So let’s look at some systems for efficient inventory management.

  6. Inventory management software

    Inventory management software may give you the extra time you need, or the ability to take things to the next level.

  7. Tools and guides for your business

    Now that you’re in business, you want to stay there. Xero’s got resources and solutions to help.

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