Question

Merchandise inventory is viewed as a current asset which is purchased for the purpose of selling to customers. In our chapter learning, we have discussed issues related to purchasing, accounts payable processing, and receivables... in our current chapter, we discuss Merchandise Inventory and issues related to the monthly accounting for this topic.

What is an example Merchandise Inventory and what steps are required for the monthly adjustment? Why is an adjustment important to our monthly ledger? Please explain

Answer 1

Merchandise Inventory refers to the goods purchased by a company which it plans to resell to its customers at a higher price. Typically, wholesalers and retailers are the only businesses which hold merchandise inventory.

Distributors, wholesalers and retailers buy goods from the manufacturers and actively trade or merchandise their goods to customers. For the retailers, this inventory is recorded in the balance sheet as a current asset and listed below cash and cash equivalents and accounts receivable.

An example of a merchandise inventory is given below:

When inventory is purchased by a retailer from a manufacturer, the retailer records it as an asset by debiting the inventory account and crediting the cash account or accounts payable account. The inventory is not expensed until is actually sold off.

When a retailer sells $100 of the merchandise inventory to a customer for $500, cash account is debited and revenue account is credited for the same amount. The inventory account is credited for an amount that the retailer paid for the inventory and the COGS is debited with the same amount.

Also, when merchandise is capitalized, when it is purchased and recorded in the balance sheet as a current asset. On its final stage of being sold to a customer, the inventory is transferred from the asset account to the expense account. Thus, it can be said that merchandise inventory account is a holding account for inventory that is waiting ti be sold off.