Why Don’t We Depreciate Inventory? (Explained)

No one can deny the importance of assets in the business world. Because assets create profit and also grow the business from a low to a high level.

Assets have different types, but the most important are current and fixed assets. Fixed assets work for a long period of time, and current assets work in day-to-day business operations.

Inventory

Inventory included in the current asset works for a short period of time. Inventory refers to the finished and final goods. Inventory is the raw material and also goods that work in process.

Inventory works when the demand for the product is increased rapidly, and goods are not produced at that speed to handle the increasing demand for the goods.  Hence, Inventory is the stock that can easily be supplied to handle the increasing demand for goods.

Deprecation

Depreciation is the wear and tear of the assets. But all the assets are not depreciated. There is the specific cost of the goods calculated annually for which goods are depreciated. This cost is called depreciation cost. 

Why Inventories Are Not Depreciated?

Some assets are not depreciated, and inventory is one among these assets. Many people ask the question of why inventories are not depreciated.

There are a few reasons which explain why inventories are not deprecated.

Inventions Are Current Assets

Inventory is part of the current assets. Current assets are for a short period of time, i.e., less than a year. All the current assets which have less than a year or a maximum of a year time interval are not depreciated.

Inventories Are the Raw Material

Inventories are the raw material, and the raw material is not deprecated. The raw material is even appreciated for many reasons like a flood, increasing the cost of material, devaluation of the currency, increasing prices of the goods with time, and many more reasons. That is why inventory is never deprecated.

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Inventories are Finished Goods, Ready for Sale

Inventories are finished goods that are ready for sale. These inventories cannot be sold at any time when the demand for goods increases. Deprecation is not applied for those inventories or goods ready for sale and can be sold at any time.

Inventories are the Work in Process      

Inventories are the work in process. The work in process is actually passed from the raw material to get the product’s final shape.

So, those products which are in process deprecation costs do not apply to those products. Because in the future, the products that are working in the process will increase the product’s cost instead of decreasing.

Inventory Has No Wear and Tear

Deprecation is the cost of the wear and tear of the products. Hence, inventory is the raw material and the work process, so there is no wear and tear in the inventory. That is why inventory has no deprecation cost, and it is also not depreciated.

Inventory Cost is Increasing Day By Day Due to Devaluation of Money

The cost of inventory is increasing day by day due to the devaluation of the currency. When a currency has devalued, the prices of goods are increased.

Hence, depreciation is not applied to those products for all these goods in which prices are increasing instead of decreasing.

Conclusion

Inventory is one of the assets that increase the company’s profit during the shortage of the product or increase demand for the product. Hence, inventory is appreciated instead of depreciated.

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