Merchandise inventory refers to the goods that a retailer or wholesaler has purchased to sell to customers. It is a current asset on a company’s balance sheet and can be a significant portion of its total assets. So, knowing how to calculate merchandise inventory will help you thrive if you’re interested in a profession in accounting.
To help you grasp this accounting subject, we define merchandise inventory in this article, go over what it entails, several merchandise inventory methods, how to calculate it, and other information you should know.
What Is Merchandise Inventory?
The word “merchandise inventory” in accounting refers to a business’s available and marketable products. It is regarded as an asset, occasionally referred to as simply inventory. The inventory of goods retail businesses sell is shown on the company’s balance sheet. It determines the overall value of a business’s tangible goods on hand and is offered for sale.
A balance sheet, on the other hand, summarizes a company’s financial situation at a specific time. A balance sheet contains the company’s liabilities, entire value, net worth, assets, and goods inventory.
Investors evaluate a company’s worth and financial health using information from a balance sheet, such as an inventory of goods.
What Merchandise Inventory Covers
A company does not always keep merchandise inventory. But it’s frequently the biggest inventory asset for a business.
#1. Finished Products that are Ready for Sale are Included in the Goods Inventory
The primary condition for merchandising inventory is that it must consist of items or assets
prepared for sale to customers. They don’t need any additional production or polishing.
#2. Materials for Packaging the Finished Goods
The numerous packaging requirements and expenses for sending the product to the client, such as boxes, labels, and freight fees, are also considered when keeping track of merchandise inventory.
#3. Consignment Items
Consignment stock refers to goods that the reseller keeps but that the supplier still legally owns. As part of the inventory of goods, several items are included.
Products That Don’t make up Merchandise Inventory
#1. Products that Have Been Sold
Products that have been sold are among the items that do not belong in the category of merchandise inventory. A product can no longer be included in the merchandise inventory after being sold to a customer. Due to the sale, it is now included in the company’s income and
#2. Raw Substances and Parts
Since raw materials and parts cannot yet be sold to customers, they are not classified as merchandise inventory. These products must undergo additional production steps before being designated “for sale. Goods in progress.
How to Track and Calculate Merchandise Inventory
A store has to know the beginning merchandise inventory value, the total amount spent on extra merchandise inventory, and COGS to compute the ending merchandise inventory after an accounting period.
To determine a company’s item inventory, perform these steps:
#1. Compile Data
To execute merchandise inventory estimates, start by acquiring the necessary information. Usually, you can find this data on a business’s income statement or balance sheet. Look for this information in the COGS section.
#2. Establish the Initial Merchandise Stock
You may calculate the initial merchandise inventory using this information. This calculation displays the inventory value of a business at the start of an accounting period.
#3. Calculate the Merchandise Inventory
Calculate the goods inventory after you are aware of the starting stock. This calculation displays the inventory of a business less the cost of goods sold during the same time frame.
#4. Calculating the Initial Inventory of Merchandise
The inventory value at the beginning of the period—before any additional items are purchased, or any current inventory is sold—is known as the beginning (or opening) merchandise inventory. The ending merchandise inventory value from the prior period serves as the starting inventory for the current period.
#5. Calculating the Inventory of Merchandise
The amount spent on extra inventory during that time is added to the starting inventory by the company. The COGS is then subtracted.
#6. Determine Net Income
One of the most crucial financial indicators for merchants to consider is net income.
To determine whether you are overpaying for products or underpricing stock, compare your ending inventory value to your net income.
You are holding more money in inventory than you have made in sales; for instance, if your ending inventory is $25,000, but your net income is just $20,000 per month, stock overpayments can be a problem. Consider bargaining with suppliers or raising product prices to improve the net income ratio before ending inventory.
#7. Prepare Upcoming Reports
The ending inventory listed on your balance sheet is the beginning inventory for the following year after the current year ends. Inaccurate calculations or employing multiple techniques (more on that later) can lead to problems.
Examples of Merchandise Inventory
If it’s available for purchase right now, it qualifies as inventory. If you walk into any warehouse retail store or explore an online store, you’ll see dozens of instances.
Here are a few traditional illustrations of merchandise inventory:
#1. Manufactured Furniture
Manufactured furniture is a common form of inventory created in a manufacturing facility. Completed furniture items like tables and chairs are examples of this type of inventory.
#2. Supermarket Products
Supermarket products include everything from cereal to toilet paper; this is considered merchandising inventory.
#3. Purchaser Electronics
Purchaser electronics merchandise inventory in the electronics sector includes computers, televisions, gaming consoles, and USB sticks that can be purchased from a retail store for electronic products.
#4. Goods Featured on Amazon
Consumers can buy merchandise inventory online when it is sold through eCommerce platforms like Amazon (or Shopify, WooCommerce, and Magento).
Accounting for Merchandise Inventory
The amount, price, and value of inventory products offered for sale must be tracked for purposes of merchandise inventory accounting. After being sold, the things add to the COGS formula, which provides insights into your company’s profitability.
A set of rules guarantees the accuracy, comparability, and dependability of merchandise inventory accounting. Let’s examine some of the fundamentals.
#1. Recording of Products
When a product is bought, its cost is deducted from the company’s cash or accounts payable and recorded as an asset.
#2. Valuations
Accounting relies heavily on understanding how to value your inventory. There are various methods for determining worth; nonetheless, it’s crucial to remain consistent throughout time to consistently compare “apples to apples.” If you switch accounting systems, you must document and make corrections.
#3. The Rule of the Lower Cost or Market
According to this accounting principle, a company must record its inventory at the lowest market value. It is frequently relied upon when inventory costs may be lowered for various reasons, such as when consumables are drawing close to their expiration date. The entire inventory amount will be lower than if the commodities are valued at an “average” cost.
#4. Disclosures
Financial books may demand disclosures about certain regulations, such as the valuation method employed, to guarantee transparency surrounding the statistics. By doing this, businesses are prevented from inflating their numbers, and the public may compare the worth of their inventory to other items on the market.
What is Merchandise Inventory?
The value of things in stock—whether finished products or raw materials prepared for sale—intended to be resold to customers is referred to as merchandise inventory. Consider it as a holding account for stock that will shortly be sold.
What is an Example of Merchandise Inventory?
Merchandise inventory includes everything a merchant keeps on hand to offer customers, including clothes, computers, cars, cheese, and crackers.
Is Merchandise Inventory an Inventory?
The value of things in stock—whether they are finished products or raw materials prepared for sale—intended to be resold to customers is referred to as merchandise inventory. Consider it a holding account for stock that will shortly be sold.
What Iteam Makes Up Merchandise Inventory?
The price the retailer or other reseller paid for the products out of their pockets is included in the goods inventory, along with any additional expenses the business incurred, such as shipping, insurance, and storage. “
What is not Included in the Merchandise Inventory?
All three inventory categories are considered current assets, but you should exclude the bare essentials when determining the value of just your merchandise inventory. Inventory of work in progress. Merchandise that has been sold.
How Do You Record Merchandise Inventory?
Accounts payable are debited for unsold goods inventory during a specific accounting period. Any new inventory purchases will also result in a debit from accounts payable and a credit to the inventory account.
Conclusion
The financial viability of retailers, distributors, and wholesalers depends on effectively tracking and maintaining their merchandise inventory. Utilizing inventory management software can assist businesses in reducing costs, boosting profitability, and enhancing customer happiness.
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