The terms ‘inventory’ or ‘merchandise’ or ‘stock-in-trade’ means a completed list of goods that a business has for sale at a given time. But in accounting, the inventory includes even those goods that are in various sages of production, that is, work-in-process or work-in-progress. According to Accounting Standard (AS)-2 (Revised), issued buy ICAI, Inventories are assets: (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of service. Inventories include goods purchased and held for resale, for example, merchandise (goods) purchased by a retailer and held for resale, computer software held for resale or land and other property held for resale. Inventories also include finished goods produced of work-in-progress being produced by the enterprises and include materials, maintenance supplies, consumable and loose tools awaiting use in the production process. The types of inventories are related to the nature of the business. The inventories of a trading concern consist primarily of products purchased for resale in their existing form. It may also have an inventory of supplies such as wrapping paper, cartons, and stationery.

The inventories of a manufacturing concern consist of several types of inventories: raw materials (which will become part of good to be produced); parts and factory supplies; work-in-progress (partially completed products in the factory) and, of course, finished products. Tools are inventory in the hands of tool manufacturer or hardware store but not in the hands of a carpenter. Marketable securities are inventories in the hands of a stock broker or a dealer but not in the hands of a tool manufacture or hardware store but not in the hands of a carpenter. Marketable securities are inventories in the hands of a stock broker or a dealer but not in the hands of a manufacturer. Inventory items are purchased and sold regularly in a trading concern or purchased, put into production, converted into a finished product and sold in a manufacturing business. However, inventories do not include machinery spares which can be used only in connection with an item of fixed assets and whose use is expected to the irregular; such machinery spares are accounted for in accordance with Accounting Standard (AS)-10 : Accounting for Fixed Assets.

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