Which of the following is an inventory account for a merchandising company?
By constantly monitoring and managing inventory flow from purchase to sale, along with the value of each SKU, you can devise strategies to improve profits and efficiently meet the growing demand for your company’s products.
Show
Along with fulfillment, inventory management is something ShipBob takes seriously and provides tools and resources to help fast-growing brands manage their merchandise inventory to avoid unnecessary stockout or overstocking costs. Learn how to fully manage your merchandise inventory, how to calculate your inventory value, and how a partnering with a tech-enabled 3PL like ShipBob can help. What is merchandise inventory?Merchandise inventory refers to the value of goods in stock, whether it’s finished goods or raw materials that are ready to sell, that are intended to be resold to customers. Think of it as a holding account for inventory that is expected to be sold soon. For ecommerce businesses, inventory is a business owner’s most important asset, and its value is accounted for on a business’s balance sheet at the end of an accounting period or fiscal year. Merchandise inventory includes any goods meant for resale, whether they are in transit from the supplier, in the retailer’s hands, or stored in a warehouse or distribution center ready to be sold. Examples of merchandise inventoryLet’s say a furniture store buys desks that will be sold directly to the end customer. The store also buy computers for employees to use regularly. Here, the desks can be categorized as merchandise inventory, but not the computers. Though both are considered assets, the employee computers are labeled as a “fixed asset” and accounted for separate from inventory when looking at a company’s balance sheet. Merchandise inventory is considered a “current asset” as the business plans to sell the inventory for cash. Let’s look at an example of a distributor: ABC Inc. buys motherboards with the intent to sell to a computer manufacturer at a higher price. Though the motherboards are items that are used to make a finished product, the motherboards are still considered merchandise inventory since they are being sold to another business for cash. Note: There are merchandising platforms like Toolio that automate critical merchandising workflows, provide real-time insights, and enable cloud-based collaboration. Why merchandise inventory is important for accountingSince merchandise inventory is almost always an online brand’s biggest assets, managing and tracking inventory accurately is crucial since it directly impacts a brand’s financial well-being. Inventory accounting can be a stressful business process to manage, which is why it’s important to consult with a CPA as you grow your business. However, that doesn’t mean there aren’t resources that a brand can implement to better track merchandise inventory, such as understanding inventory turnover rate and other important inventory reporting metrics. By making merchandise inventory control and management a priority, you can reduce the risk of inventory shrinkage, stockouts, or carrying too much inventory. For instance, merchandise inventory turnover is an indicator of how liquid your inventory is. A higher turnover rate shows that money is not unnecessarily tied up in dead stock inventory, which also increases carrying costs. Cost of goods sold (COGS), or the cost of procurement logistics, is also factored in to determine gross profit once inventory is sold. Accounting for merchandise inventoryTracking inventory and its value can be done by using several different inventory valuation methods. Each method has its own set of pros and cons, and it really comes down to what method makes sense for your business. But whatever method you choose, you must follow that method consistently to ensure accuracy when it’s time to report inventory. Typically, the inventory valuation methods adopted by retailers are:
Once you choose a method, you will need to decide on a system that determines how frequently you will track inventory value. An occasional physical count is considered a “periodic system,” which is done manually. Real-time inventory management is considered a perpetual method, which is more common in inventory accounting as it’s less time-consuming and more accurate, especially if your business requires tracking every item as it moves through your ecommerce supply chain.
To provide more clarity, below we cover some common questions business owners have relating to merchandise inventory accounting: Is merchandise inventory an asset or an expense?When merchandise inventory is purchased with the intention to sell, it is always considered a current asset. At the end of accounting period or fiscal year, any leftover inventory that is left unsold is reported as “ending inventory” on your balance sheet. Cost of goods sold (COGS), however, can be found on your income statement as an expense. Is merchandise inventory a current or non-current asset?Merchandise inventory is always considered a current asset. If a business accumulates unsellable inventory, then the value of lost inventory is considered an inventory write-off. Nearly any business that maintains inventory on hand will have to write off a portion of it at some point. However, the goal is to find ways to optimize inventory, such as forecasting demand, in order to keep the value of loss inventory low. Is a perpetual inventory method better than a periodic method when accounting for merchandise inventory?You can either maintain a continuous tally of your merchandise inventory’s value using the perpetual inventory system or update records at regular intervals by implementing a periodic inventory system. To tell which is better, here is a comprehensive list of differentiating factors: Periodic inventory systemPerpetual inventory systemInvolves a physical inventory audit at the end of an accounting period, and in this system, each purchase and sale is not recordedUpdates accounting balances in real time, as items are added or removed from the warehouseMore prone to inaccuracy due to human errorEnables accurate accounting of inventory on handPerforms SKU management manuallyAutomates SKU trackingCannot help with daily decision-making for your businessOffers a real-time view of COGS, turnover rate, and other helpful inventory metrics to improve day-to-day decision makingIs used by small businesses that have low order volumesIs used by businesses, small and large, to manage growing volumes of stockCalculating the value of merchandise inventoryTo better illustrate how merchandise inventory value and COGS are calculated, let’s take the example of a footwear merchandiser who:
To arrive at the value of merchandise inventory, multiply the amount of unsold inventory with the cost of each unit. Merchandise inventory value = Inventory cost of each unit x unsold inventory amount Merchandise value = 100 x 20 = $2000 This merchandise inventory value, which is usually considered the same as the ending inventory, is then entered into the balance sheet. Next, you calculate the COGS (direct costs of producing merchandise inventory for sale) with the following formula: COGS = (Beginning inventory + Purchased inventory value) – Merchandise inventory value If you were to apply this formula to the example of the shoe retailer, the result would be: COGS = (1000 + (50 x 100)) – 2000 = $4000 Finally, using the COGS, you can calculate profits thusly: Profit = Total sales – COGS Profit = (40 x 200) – 4000 = $4000 How ShipBob makes it easy to track & account for your merchandise inventoryGrowing an online business requires your attention to focus on revenue-driving initiatives, making it hard to oversee logistics operations. ShipBob is a best-in-class 3PL that offers a tech-enabled logistics network. With ShipBob, you can outsource fulfillment and still have full visibility into operations with access to built-in inventory management tools.
You can learn more about how ShipBob works by taking a 3D tour of one of our fulfillment centers: For a closer look inside how our 3PL software works, here is a high-level overview of how ShipBob can help you optimize your supply chain and keep track of inventory. Real-time stock monitoringHow much merchandise inventory or stock availability do you have across all storage facilities? Where is it located? How much is it worth? What condition is it in? From the ShipBob dashboard, you can easily track inventory and manage SKUs, so that you have complete inventory visibility in real time. This will help you accurately monitor inventory flow, storage and inventory warehousing costs, and average units on hand by date. ShipBob connects with all leading ecommerce platforms in minutes. Once you connect your store and sync your products, you can:
Inventory optimizationHopefully as you grow your business, you will see your order volume increase. But this can make it more difficult to track inventory in real time, accurately forecast demand, and optimize storage. ShipBob’s fulfillment technology provides built-in inventory optimization solutions, which provides valuable insights that help you better forecast demand, strategically allocate inventory, and track storage and inventory warehousing costs across fulfillment centers.
Analytics and reportingPart of our full-stack 3PL services is providing a free analytics and reporting tool that helps predict future customer demand and optimal stock levels. You can use our powerful analytics and reporting tool to get answers to questions like:
Using these insights you can improve warehousing and logistics productivity, which in turn reduces costs and transit time, avoids stockouts, and helps you to consistently meet customer expectations. With ShipBob, you can easily expand into new fulfillment center locations and sales channels to establish a multichannel strategy. Instead of pulling inventory data and information from multiple sources, ShipBob tracks it all for you in one dashboard. If you’re looking for a more robust solution, ShipBob integrates with leading inventory management solutions, as well as provides Developer API for a more custom tech stack.
To learn more about how ShipBob can help you manage your supply chain, click the button below to start the conversation with our team. Request Fulfillment Pricing Merchandise inventory FAQsHere are the top questions people have about merchandise inventory. How is merchandise inventory classified on a balance sheet?Merchandising inventory is considered a “current asset” in the balance sheet that shows the current value of sellable inventory. Is merchandise inventory a long-term asset?No, merchandise inventory is a current asset that is expected to be sold. A long-term asset is property a business owns (or leases that is used for operational purposes). Is merchandise inventory a debit or credit?Any unsold merchandise inventory in a particular accounting period is recorded as a debit to accounts payable. And new inventory purchases will be recorded as a credit to the inventory account and a debit to accounts payable. What is included in the merchandise inventory account?Merchandise inventory is the account on a balance sheet that reflects the total amount paid for products that are yet to be sold. As a current asset, merchandise inventory is basically a holding account for inventory that's waiting to be sold.
What is the inventory account that a merchandising company maintains in its accounting books?Merchandise Inventory.
This is a Balance Sheet account. It's an asset. Under a perpetual system, it is continuously updated. It is increased for purchases (and returns from customers) and decreased for sales.
Which of the following is an inventory account for manufacturing companies?Manufacturing companies have three inventory accounts: raw materials inventory, work-in-process inventory and finished goods inventory. Raw Materials inventory includes all the direct and indirect materials purchased but not yet used in the manufacturing or production process.
What type of account is a merchandising inventory account in merchandising business transactions?▼ Merchandise Inventory is an asset account that is decreasing. You receive full payment for the sale AFTER the discount period, which is what you had anticipated. You receive reduced payment for the sale WITHIN the discount period, which is what you had anticipated. ▲ Cash is an asset account that is increasing.
|