Work in progress (WIP) and finished goods are broad classification terms used in accounting for inventory to specify the status of inventory on a company's balance sheet. Not all inventory accounted for on a company's balance sheet consists of products that are ready for sale. Inventory, from an accounting perspective, includes the inputs and materials needed to make the complete product, the final product ready for sale and everything in between. WIP and finished goods help management, investors and other interested parties identify the status of a company's inventory in greater detail.
The difference between WIP and finished goods is based on inventory's stage of relative completion, which, in this instance, means saleability. WIP refers to the intermediary stage of inventory in which inventory has started its progress from beginning as raw materials and is currently undergoing development or assembly into final product. Finished goods refers to the final stage of inventory, in which the product has reached a level of completion where the subsequent stage is the sale to a customer.
The terms "work in progress" and "finished goods" are relative terms made in reference to the specific company accounting for its inventory. They are not absolute definitions of actual materials or products. It's incorrect to assume that finished goods for one company would also be classified as finished goods for another company. For example, sheet plywood may be a finished good for a lumber mill because it's ready for sale, but that same plywood is considered raw material for an industrial cabinet manufacturer.
As such, the difference between WIP and finished goods is based on an inventory's stage of completion relative to its total inventory. WIP and finished goods refer to the intermediary and final stages of inventory life cycle, respectively.