What is the difference between inventory versus claiming inventory items as expenses?

[TurboTaxLee · Accepted solution]

Generally speaking, inventory is held as an asset until you sell it. When you sell the unit(s) they are then transferred to your expenses. They are normally expensed under the category Cost of Goods Sold (COGS).

Example:

You buy 100 units of Widgets for a total of $100. These would be held as inventory at $100 with a cost of $1 each on your balance sheet.

Then, say you sell all these 100 widgets for $2 each. You will record a sale (income) of $200 and an expense of $100 for the cost of the widgets. (For simplicity, this transaction does not include sales tax). This will net you a profit of $100 - which is the difference between the gross sale income and the cost of the inventory which you have just expensed.

Hope this is helpful.