Inventory becomes an expense when it is sold
Inventory is generally an asset while goods are held for sale or used in production. When sold, its carrying cost becomes cost of goods sold (COGS). For a service business the equivalent line may be cost of revenue or cost of services. These labels depend on the business and presentation.
The basic inventory rollforward is ending inventory = beginning inventory + purchases or production costs − COGS − other reductions. Other reductions can include write-downs, shrinkage or disposals. A decrease in inventory is not always a sale.
A small store
Opening inventory is $4,000. The store buys $10,000 of goods and ends with $3,000. With no other changes, COGS is 4,000 + 10,000 − 3,000 = $11,000. If sales are $18,000, gross profit is $7,000 and gross margin is 38.9%. The purchase cash payment need not equal COGS because inventory and supplier credit bridge the difference.
Manufacturing cost can include direct materials, direct labor and appropriately allocated manufacturing overhead. Selling and administrative spending is generally a period expense, not part of unsold inventory. Classification must follow the relevant accounting rules rather than a wish to improve gross margin.
Write-down rules depend on the cost method and framework. An inventory value that cannot be recovered may need reduction before a sale occurs. “We haven't sold it yet” is not enough to justify an inflated asset.