Back in the old days, TTB Agents were assigned to distilleries in 6 month rotating shifts, and they worked at your facility full-time, maintaining their own set of locks and keys as well as records of production. In 1980, deregulation was all the rage, and "agent supervision" went away with the stroke of a pen.
In it's place, the government instituted a "Liquid Accounting" structure based on three "accounts": Production, Storage and Processing. A simplified overview of these accounts follows:
All spirits in your distillery's bonded premises must reside in one of the three liquid accounts.
There are rules (27 CFR 19 Subparts K, L and M) which govern the allowable transactions in each of the three liquid accounts. Your monthly reports of operations are prepared separately for each liquid account.
In general, the flow of bulk liquid goes: Production » Storage » Processing. You may not go "backwards" along this path, except for the special case of redistillation. You may transfer spirits from Processing or Storage "back" to Production if (and only if) you will redistill them.
Broadly speaking, Production is for fermentation and (re)distillation. As soon as you have collected Hearts from your still, they should be assigned to a Storage vessel - all finished spirits must leave the Production account and land in Storage or Processing, as soon as is feasible.
The Storage account is just what it says on the tin. It's used for storing spirits for a longer term. Traditionally, barrels of spirit are aged in the Storage account, and Transfer in Bond transactions are also typically/traditionally carried out in Storage. However, regulations do not specify when you must use the Storage account (instead of Processing). Unofficial guidance on TTB.gov states:
“Generally, storage is when you hold bulk quantities of product without specific plans for further processing.”
Processing is the account used for operations like blending/mingling, adding flavors/ingredients, filtering/stabilizing, carbonation, bottling/canning and more. Spirits which have had ingredients added to them (like flavors, juice, coloring, honey/syrup/sugar) may only exist in the Processing account. Whenever spirit undergoes a transformation (for example, GNS becoming Orange Flavored Vodka through the addition of orange juice), that process should be carried out entirely in the Processing account.