Definition: Merchandise inventory is goods that a company purchases and plans to resell to customers at a higher price. Typically, retailers and wholesalers are the only businesses with merchandise inventory. Manufacturers produce inventory, but they don’t purchase it and resell it. Thus, a manufacturer’s inventory isn’t considered merchandise inventory. Retailers, wholesalers, and distributors buy goods from manufacturers and
actively market or merchandise the goods to customers. The distinction between a retailer’s customer and a manufacturer’s customer is that a retail customer is the end user of the product. Retailers record their inventory on the balance sheet as a current asset and usually listed below cash and accounts receivable. Here’s an example of the typical merchandiser’s operating cycle and the journal entries required. When a retailer purchases inventory from a manufacturer, it is recorded as an asset by debiting the inventory account and crediting cash or accounts payable. Notice that inventory is not expensed until it is actually sold. Here is the entry to record a bulk
inventory purchase by a retailer early in the year. Later, when the retailer sells $100 of that merchandise inventory to a customer for $500, the cash account is debited and the revenues account is credited for the same about. The inventory account is credited for the amount the retailer paid for the inventory and the cost of goods sold account is debited for the same account. Basically, all merchandise is capitalized when it is purchased and recorded on the balance sheet as a current asset. When it’s later sold to a customer, the inventory is transferred from the asset account to an expense account. You can think of the merchandise inventory account as a holding account for inventory that is waiting to be sold.
What Does Merchandise Inventory Mean?
Financial statement reporting of merchandise inventory
Merchandise inventory is reported as a current asset on the balance sheet as follows.
Christopher Corporation | ||
Assets | ||
Current Assets | ||
Cash and Cash Equivalents | $10,000 | |
Accounts Receivable | $55,000 | |
Less: Allowance for Uncollectible Accounts | 5,000 | 50,000 |
Merchandise Inventory | 270,000 | |
Total Current Assets | $330,000 | |
Property, Plant, and Equipment | ||
Land | $70,000 | |
Buildings | 220,000 | |
Machinery and Equipment | 340,000 | |
Total Property, Plant, and Equipment | $630,000 | |
Other Assets | 10,000 | |
Total Assets | $970,000 | |
Liabilities and Stockholders' Equity | ||
Liabilities | ||
Current Liabilities | ||
Accounts Payable | $135,000 | |
Income Taxes Payable | 25,000 | |
Wages Payable | 10,000 | |
Total Current Liabilities | $170,000 | |
Long-term Liabilities | 340,000 | |
Total Liabilities | $510,000 | |
Stockholders' Equity | ||
Common Stock | $350,000 | |
Retained Earnings | 110,000 | |
Total Stockholders' Equity | $460,000 | |
Total Liabilities and Stockholders' Equity | $970,000 |
The effects of merchandise inventory on the income statement are shown as the cost of goods sold, which is usually the largest expense of merchandising companies.
Christopher Corporation | |
Sales | $600,000 |
Cost of Goods Sold | 360,000 |
Gross Profit | $240,000 |
Operating Expenses | |
Supplies Expense | $13,000 |
Wages Expense | 131,000 |
Insurance Expense | 15,000 |
Rent Expense | 24,000 |
Uncollectible Accounts Expense | 12,000 |
Total Operating Expenses | $195,000 |
Operating Income | $45,000 |
Other Revenues and (Expenses) | 1,000 |
Income Before Taxes | $46,000 |
Income Taxes Expense | 16,000 |
Net Income | $30,000 |
Financial Reporting Summary
The following table summarizes the relationships among the major topics examined in this and previous chapters. The numbers in parentheses refer to the chapters in which the topics were discussed.
Resources | = | Sources of Resources | ||
Assets | = | Liabilities | + | Stockholders' Equity |
Current Assets | Revenues |