Final answer:
Inventory is recognized as an asset when purchased, not as an expense. It is recognized as an expense when sold as 'cost of goods sold' on the income statement.
Step-by-step explanation:
In accounting, inventory is recognized as an asset when it is purchased, not as an expense. This is because inventory represents goods that a company intends to sell to generate revenue. Expenses, on the other hand, are costs incurred in the process of generating revenue. When inventory is sold, it is recognized as an expense called 'cost of goods sold' and is deducted from revenue to calculate profit.
For example, if a company purchases inventory worth $1,000, it would be recorded as an asset on the balance sheet. When the company sells the inventory for $2,000, $1,000 would be recognized as an expense ('cost of goods sold') on the income statement. The remaining $1,000 is the profit from selling the inventory.