Merchandise inventory definition
/What is Merchandise Inventory?
Merchandise inventory is goods that have been acquired by a distributor, wholesaler, or retailer from suppliers, with the intent of selling the goods to third parties. This can be the single largest asset on the balance sheet of some types of businesses.
Accounting for Merchandise Inventory
If these goods are sold during an accounting period, then their cost is charged to the cost of goods sold, and appears as an expense in the income statement in the period when the sale occurred. If the goods are considered not sellable, then they are charged to expense at once through the cost of goods sold. If the goods are not sold during an accounting period, then they are classified as an inventory asset.
If the market value of merchandise inventory declines below its recorded cost, then you must reduce the recorded cost down to its market value and charge the difference to expense, under the lower of cost or market rule.
Presentation of Merchandise Inventory
Merchandise inventory is classified as a current asset on the balance sheet, since it is assumed to be sold within the next year. It may also be paired with a reserve for obsolete inventory, which is a contra asset account. This reserve is an estimate of the amount of merchandise that will have to be written off.
Related AccountingTools Courses
Accounting for Merchandising Operations
How to Track Merchandise Inventory
Merchandise inventory may be located in three areas: in transit from suppliers (under FOB shipping point terms), in the company's storage facilities, or on consignment in locations owned by third parties. When compiling the total cost of inventory for recordation at month end in the company's accounting records, you need to include all of the merchandise in all three of these locations. Doing so is easiest with a perpetual inventory system, which maintains up-to-date balances of all unit quantities. A less reliable method is the periodic inventory system, under which a period-end physical count is needed to verify quantities on hand.
What is Merchandise on Hand?
Merchandise on hand is the cost of those goods currently available for sale. It does not include any inventory that is currently in transit to the retail location or which has been returned and has not yet been inspected to see if it can be resold. However, it does include all finished goods inventory.
In accounting and financial reporting, merchandise on hand is classified as a current asset on the balance sheet, as it represents goods that can be sold to generate revenue within a short period, usually within a year. Tracking merchandise on hand is important for managing stock levels, fulfilling customer demand, and determining the cost of goods sold.