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.
What Does Merchandise Inventory Mean?
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.
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.