Is Inventory an Expense? NO! Here is Why.

As the manager of a microloan program I review dozens of small business financials every month.  One of the most common mistakes I see that really hurts a company’s chances of securing a microloan is when they categorize their inventory purchases as an expense.

When you purchase inventory, it is not an expense.  Instead you are purchasing an asset.  When you sell that inventory THEN it becomes an expense through the Cost of Goods Sold account. 

So what happens when you categorize your inventory as an expense immediately?

1. You will understate your assets because your inventory won’t actually show up as inventory on the balance sheet.
2. You will overstate your expenses so it may look like you are not making a profit even though you actually are.

Both of these things will make it harder for you to get a loan.  So make sure to get this small accounting issue correct before you apply for a loan or an investment.