What counts as inventory
BDC groups inventory into raw materials, work in process, finished goods and supplies used to support operations. A retailer mostly holds finished goods bought for resale. A manufacturer holds all three production stages. The CRA’s cost of goods sold section asks self-employed filers to include raw materials, goods in process and finished goods in their inventory figures.
Inventory is a business asset rather than an expense at the moment you buy it. The cost reaches the income statement only when the goods are sold, which is why a large stock purchase does not by itself reduce profit.
An illustrative example
A small shop starts the quarter with $10,000 of stock, buys another $15,000 and has $12,000 left at quarter end. The balance sheet reports $12,000 of inventory, and $13,000 of cost moves through cost of goods sold. The numbers are round and for illustration only.
The $15,000 purchase also used cash. That is why a growing business can look profitable while the bank balance falls: money has been converted into stock that has not yet sold.
Counts and records
The CRA expects an actual stock count at the end of each fiscal period, unless you use a perpetual inventory system with periodic counts and a written record of each count. Inventory records should be kept with your other business records. The opening figure for a year must match the prior year’s closing figure.
BDC notes that most businesses have gaps between what the system says and what is on the shelf, and suggests regular physical counts and a reliable recording system so decisions rest on accurate numbers. It also warns that unsold stock ties up cash and carries costs such as storage, insurance and the risk of becoming obsolete.
What to discuss with your accountant
Ask how your stock should be valued, how often to count it, and what to do with damaged or slow-moving items still on the books. Our inventory valuation entry explains the two methods the CRA describes for income tax.
Bring supplier invoices, the count sheets and any adjustment notes. Goods taken for personal use are not business inventory, so tell your accountant if you have taken any.
Sources & editorial notes
Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.
- What is inventory?BDC
- Self-employed Business, Professional, Commission, Farming, and Fishing Income (T4002): Chapter 2 – IncomeCanada Revenue Agency
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