On the balance sheet, incorrect inventory amounts affect both the reported ending inventory and retained earnings. Inventories appear on the balance sheet under the heading “Current Assets”, which reports current assets in a descending order of liquidity.
Why is inventory important in accounting?
Every company that sells physical goods needs to determine the value of its inventory for accounting purposes. Since inventory typically accounts for a large portion of business assets, the way it's valued can significantly affect the company's profits, tax liability and asset value.