Does Inventory Affect Profit & Loss?
by Jeffrey Joyner  Updated April 13, 2018

Inventory is an asset and as such, it belongs on your statement of assets and liabilities. Because assets do not appear on the profit and loss statement, the mechanics involved in inventory account can be confusing. If proper accounting steps are followed, inventory does affect your profit or loss. It just does so in a somewhat roundabout way.

Inventory Purchases
When you purchase items for inventory, the transaction will affect your balance sheet, the financial statement that provides a snapshot of your company’s worth based on its assets and liabilities. You record the value of the inventory; the offsetting entry is either cash or accounts payable, depending on the method you used to purchase the goods. At this point, you have not affected your profit and loss or income statement.

Inventory Sold
Over time, you use the items in your inventory to fill customer orders. You record the sales in an income statement account; the offset to sales is either cash or accounts receivable, which are both balance sheet accounts. Because you used inventory from a balance sheet account and recorded sales on your income statement, your profits are overstated unless you make the necessary adjustment. You need to reduce your inventory for the value of the items sold, with the offsetting entry to a cost-of-goods sold account. Your cost-of-goods sold account is an income statement account. You have now affected your profit and loss.