Merchandise inventory is essentially the goods, which the distributor, retailer or wholesaler acquires from the suppliers, with an intention of selling them to 3rd parties. If the goods are sold off during an accounting cycle, then the costs of these goods are charged to the price of the goods that have been sold and it is treated as expenditure in the income statement in the cycle in which the sale took place. If these very goods aren’t sold in an accounting cycle, then the prices of these goods are registered in the form of a current asset and they continue to feature in the balance sheet till the time they are all sold off.
In case the value of the merchandise inventory falls below its registered cost in the market, then one should bring the registered cost down to its existing value in the market.
Merchandise inventory could be located in 3 different areas including, in transit from suppliers, in the storage facilities of the company or on the consignment in the locations that are owned by 3rd parties. At the time of compiling the complete inventory cost for the purpose of recording it at the end of the month in the financial records of the company, one must incorporate the entire merchandise in each of the 3 areas.
Accounting for Merchandise Inventory
There are basically two methods of accounting for merchandise inventory which includes:
Perpetual Method: This particular method is utilized to record the inventory on hand. Unlike, the periodic procedure of accounting for merchandise inventory, the perpetual procedure is updated continuously throughout the accounting period as and when inventory is purchased. In this method, the average cost of goods cost is multiplied by the units that are sold from the inventory during the time it is being accounted for and then transferred in the form of expenditure to the income statement of the merchant.
Periodic Method: In this method, the merchandise inventory accounting calculations are done as and when the entity’s accounting period ends. The period of accounting typically coincides with the usual accounting periods for business (on 3st March). A physical auditing of inventory is carried out and further computing is done against the prices of the goods at that particular time.