Accounting: Merchandise Inventory Merchandise Inventory

Accounting: Merchandise Inventory Merchandise inventory is a current asset, and details the cost of the distributor's, wholesaler's, or retailer's goods that have already been purchased for resale (Elliot & Elliot, 2004). None of the goods that are listed in the merchandise inventory can be sold as of the date upon which the balance sheet is created, or those goods no longer qualify (Elliot & Elliot, 2004).

In other words, the merchandise inventory must still be in inventory, and cannot be items that have been in inventory in the past or that have come through the company's inventory channels but have already been sold to others. That is true whether the company is the end retailer, the wholesaler that sells those goods to the retailer, or the distributor of those goods that sends the items to the wholesaler to have them moved down the chain toward the end user.

It is very important that the merchandise inventory is not overstated. If a company overstates its merchandise inventory, that can cause an understatement of the cost of goods sold, along with overstatements of proprietor's capital, net income, and current assets (Elliot & Elliot, 2004). Goods in transit should be included in the merchandise inventory if the title for them has been received (Elliot & Elliot, 2004). At that point they already belong to the company that has purchased them, even if that company is not physically in possession of the goods.

For goods in transit for which the buyer has not yet paid (such as those that are C.O.D.), it is not appropriate to include them in merchandise inventory (Elliot & Elliot, 2004). If those goods are lost, stolen, or damaged, they are the responsibility of the seller until the buyer has paid and/or the title to the goods has been transferred to that buyer.

With goods that are in transit, the buyer may not want to assume the risk for them until they reach their destination at the buyer's specific location or a warehouse or other facility designated by that buyer. Only once the title has been transferred to the buyer can that buyer include the goods to which that title belongs in merchandise inventory (Elliot & Elliot, 2004). To do otherwise would create problems with the company's accounting. Cosigned goods are also included in the merchandise inventory (Elliot & Elliot, 2004).

Even though they are out on consignment, they are still a part of the goods that belong to the company (Elliot & Elliot, 2004). If these goods have not been included in the company's inventory, it becomes difficult to account for their sales and can cause serious problems with accounting. Not including cosigned goods would make it appear as though those goods have already been sold, but there would be no income for them.

When they did sell, the income would appear to come from goods that were not shown in inventory. That can take time and effort to sort out, and can leave the company looking as though it was trying to hide something when, in fact, it simply listed its goods incorrectly. By making sure that cosigned goods stay as a part of merchandise inventory, a company can avoid many types of accounting problems.

Damaged goods do not belong in a company's merchandise inventory because they will not be sold (Elliot & Elliot, 2004). If they cannot be sold (due to the damage), they have no place in an inventory of the goods the company has for.