You buy $3,000 worth of product in January. You record it as an expense. January looks like a brutal month. Then you sell it all in February and March — and those months look wildly profitable, even though the money was already spent. Your P&L is telling you a story. It's just not the right one.
This is what happens when inventory gets treated like an office supply run.
The Bottom Line on Inventory
Inventory is an asset — something your business owns that has value — until the moment it's sold. At that point, it becomes a cost. That distinction sounds technical, but it has a direct impact on what your financial reports show and whether you can trust them to make decisions.
When you expense inventory the moment you buy it, your costs spike every time you restock and your profit looks artificially high every time you sell through. The two events — buying and selling — get recorded in completely different periods, and your P&L stops reflecting what's actually happening in the business. A good month can look terrible. A slow month can look great. Neither picture is real.
The correct approach is to record purchased inventory as an asset on your balance sheet first. When it sells, the cost moves from the balance sheet to your P&L as Cost of Goods Sold — matching the expense to the revenue it generated. That matching is the whole point. It's what makes your gross margin meaningful and your profitability numbers trustworthy.
The most common version of this mistake I see isn't malicious — it's just the path of least resistance. Someone sets up their books, sees an expense account, and starts coding everything there. It works well enough until they need to know how profitable a product line actually is, or until a lender asks for a balance sheet that makes sense. By then, the cleanup is months of work instead of a conversation.
If you carry any inventory at all — products, materials, supplies you resell — it's worth a quick check on how it's currently being recorded. Your bookkeeper will know what to look for in about five minutes.
BLG's Quick Take
Inventory sitting on your shelf is worth something. The moment you expense it on arrival, you've told your books it's worthless — and your P&L will lie to you accordingly every single month until you fix it.
This Month's Number
If you carry inventory, pull up your balance sheet and look for an inventory asset line. Is it there? Does the number seem reasonable given what's currently on your shelves? If you don't see it — or if the number looks off — that's the conversation worth having with whoever manages your books.
This Week's Bottom Line
Inventory is an asset until it sells, not an expense the day you buy it. Recording it correctly keeps your P&L accurate, your gross margin meaningful, and your balance sheet honest. If you're not sure how yours is being recorded, that's worth a five-minute check. 💚💚💚
From the Desk of BLG
When you're ready to hand this off to someone who lives and breathes this stuff, we're here. First conversation is always on us.
— The Bottom Line Guy