Inventories and Trade Receivables

What is it?

Inventories and trade receivables are current assets and it includes assets such as raw materials, work-in-progress, finished goods, stores and spares, packing materials etc. which are intended for consumption or sale in course of normal operating cycle. Inventories are related to items which are expected to be consumed in the manufacturing process being raw material, work-in-progress or the items which are held for the purpose of trade or sale, such as inventory of finished goods or stock-in-trade.

Current assets also include trade receivables which are expected to be realised within 12 months from the Balance Sheet date.

Trade receivables are that part of the amount receivable which pertains to amounts due on account of goods sold or service rendered in the normal course of business. Therefore, the amount due under contractual obligation such as - insurance claim, sale of property, sale of plant and machinery, reimbursement of expenditure etc. cannot be considered as trade receivables.

The inventories include raw materials, work-in-progress, finished goods and by-products in the case of a manufacturing entity. In the case of a trading entity, it includes stock-in-trade i.e. the goods acquired for the purpose of trading. Even if the entity is a manufacturing unit but still doing some trading activity, and if any stock remained at the close of the year, it is shown as “stock-in-trade”. Similarly, 159 the amount of stock relating to stores and spares, fuels, packing materials, loose tools, scrap, etc. are required to be shown separately and form part of the inventories.

Inventory also includes Goods-in-transit, as ownership is transferred to the entity, upon delivery of goods, but since the same has not arrived at the business premises (destination), they are shown as goods-in-transit.

Do you know?

Inventories

The inventory primarily held for the purpose of trade requires to be treated as current, even if the same is not expected to be realised within the operating cycle. For example, if the operating cycle is of 6 months and the entity has excess finished goods inventory, which is not expected to be realized in 6 months, the same is still considered as “current”, as the goods are sold as a part of normal operating cycle.

Trade receivables

Trade receivable also require to be classified between current and non-current. A trade receivable is considered as current, if it is likely to be realized within 12 months from the balance sheet date or operating cycle of the business.

The trade receivables are required to be classified as per Chart 10:

CHART 10 in which director is a partner or shareholder. Non-current trade receivables

W.e.f. 1st April, 2021 based on amendment in Schedule III to the Companies Act, the trade receivables are to be shown based on ageing periods – less than 6 months, 6 months to 12 months, 1-2 years, 2-3 years and more than 3 years.

CHAPTER 15