Which account type should be selected to track inventory items in Xero?

To effectively track inventory items in Xero, the correct choice is to select an Inventory Asset Account. This type of account is specifically designed for managing inventory and allows businesses to record the value of their inventory on hand, which is vital for financial reporting and analysis.

When inventory items are purchased, their cost is recorded as an asset until they are sold. Once the inventory items are sold, the cost is then transferred to an expense account known as Cost of Goods Sold (COGS), impacting the financial statements accordingly. By using an Inventory Asset Account, companies can accurately monitor their inventory levels, evaluate stock movement, and assess the financial impact of their inventory on their overall business performance.

The other account types, such as Income or Cash Accounts, do not serve the purpose of tracking inventory as they are meant for different functions—recording revenue or cash flow, respectively. An Expense Account would track costs, but it does not reflect the value of inventory that is still held by the business. Therefore, using an Inventory Asset Account is essential for properly managing and reporting on stock in Xero.