Merchandise – What is merchandise?
Merchandise is an inventory asset that a retailer, distributor or wholesaler purchases from a supplier to sell for profit.
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Merchandise is an inventory asset unique to businesses that sell or distribute goods that have been purchased in their completed state or require only minor assembly.
Businesses involved with manufacturing may sell finished goods to consumers, but only after they’ve carried out some form of processing or production.
Merchandise in accounting
Within accounting, merchandise is considered a current asset because it’s usually expected to be liquidated (sold, turned into cash) within a year.
When purchased, merchandise should be debited to the inventory account and credited to cash or accounts payable, depending on how the merchandise was paid for.
If the goods are purchased by a customer within the same accounting period as the merchandise is purchased, the cost should be transferred to the cost of goods sold and recorded on the income statement as an expense within the period the sale was made.
If the goods or products aren’t sold within that accounting period, the cost should remain on the balance sheet as a current asset until it’s sold.
If the market value of merchandise falls below its recorded cost, you should reduce the cost to match the current market value, and record the difference as an expense.
To accurately record the total cost of inventory, it’s important to take into account the three places merchandise might be located: in transit from suppliers, in storage, or in a location owned by a third party.
There are several ways to track inventory, but the easiest way is the perpetual inventory system, which has the capacity to track merchandise that’s not currently on site.