This inventory includes the amount the retailer or other reseller paid for the items themselves, as well as additional costs incurred by the company such as shipping, insurance and storage.
For a merchandising company, Merchandise Inventory falls under the prepaid expense category since they purchase inventory in advance of using (selling) it. They record it as an asset (inventory) and record an expense (cost of goods sold) as it is used.
Tracking merchandise inventory is very important for retailers, wholesalers, or distributors in order to accurately calculate their assets, expenses and overall profitability. For many companies, merchandise inventory is one of the biggest assets recorded on the balance sheet.
There are two types of inventory systems:
1. periodic cost of inventory sold is determined at the end of the fiscal period by means of a physical inventory
2. perpetual cost of inventory sold determined after each sale by means of a computerized system. Under a perpetual system, it is continuously updated. It is increased for purchases (and returns from customers) and decreased for sales.
Merchandise Inventory
