Ever wonder how your favorite stores always seem to have what you want when you want it? The secret is inventory management, the backbone of any successful retail business. Retailers that can manage stock levels effectively have the right products available at the right time, keeping customers like you happy while minimizing costs.
As every retailer knows, merchandise inventory is one of the most vital parts of their broader inventory management system. Managing it well helps track stock levels, control costs, and boost overall profitability.
But what exactly is merchandise inventory, and what are the best ways to manage it?
What is merchandise inventory?
All the goods a business has in stock and ready for sale qualify as merchandise inventory. If you run a clothing store, your merchandise inventory would include pants, shirts, and accessories. At a grocery store, it’s things like canned goods, produce, and dairy. The items themselves vary from retailer to retailer, but what makes them fit into this category is that they’re all products in their final state — not raw materials or work-in-process goods.
Understanding merchandise inventory is important because it plays a critical part in the accounting process, often appearing as a current asset on the balance sheet. And tracking it accurately is essential to determining your company’s liquidity and operational efficiency.
Is merchandise inventory an asset?
Yes, merchandise inventory is an asset — specifically a current asset, as it represents goods that your business expects to sell within the near future, typically within one year. Merchandise inventory holds value because you can convert it into cash through sales, which makes it a critical part of your company’s short-term financial health.
As you might have guessed, merchandise inventory appears on your balance sheet under current assets. Its value contributes to your business’s total assets, and you’ll factor it into key financial metrics like working capital. Properly managing and valuing inventory ensures your financial statements accurately reflect the company’s resources and profitability.
Why merchandise inventory matters in accounting
Two crucial financial metrics for retailers are cost of goods sold (COGS) and gross profit. COGS represents the direct costs of producing or purchasing the goods sold during a period, and it’s subtracted from revenue to calculate gross profit. Gross profit, in turn, measures the profitability of a business’s core operations.
Merchandise inventory directly impacts these metrics. As a current asset, it plays a key role in determining COGS on the income statement.
Here’s an example: Overstating your inventory can reduce COGS, making your gross profit seem higher than it really is. On the flip side, understating your inventory could do the opposite, downplaying the real size of your gross profit. But when you manage merchandise inventory effectively, you’ll maintain accurate financial records with a clear view of your actual profitability.
Merchandise inventory methods
Retailers use one of two primary inventory systems to track merchandise inventory — perpetual and periodic. Here’s how each works.
Perpetual inventory system
This method involves continuously updating inventory records as transactions occur. Many businesses use tools like barcode scanners, point-of-sale (POS) systems, and inventory management software to facilitate the process.
Using a perpetual inventory system offers a few key benefits, like real-time tracking, reduced discrepancies, and better data for decision-making. Since retailers like supermarkets and electronics stores usually have high transaction volumes, they’ll often opt for the perpetual inventory system to get the most accurate results.
Periodic inventory system
If you update your inventory records not continuously but periodically — usually monthly, quarterly, or annually — you’re using the periodic inventory system. Businesses that choose this method typically conduct physical counts of their inventory to determine stock levels, calculating COGS at the end of each period.
The periodic inventory system is straightforward and cost-effective, making it a good choice for small businesses or companies with lower inventory turnover ratios. While it doesn’t provide real-time tracking like the perpetual system, it’s often sufficient for businesses that don’t require constant updates. For example, many boutique shops or small-scale retailers with fewer transactions rely on periodic inventory systems to keep things simple and manageable.
How to calculate merchandise inventory
Understanding how to calculate merchandise inventory is essential for tracking stock levels and determining profitability. We’ll start with the merchandise inventory formula before breaking down the calculation step by step:
Merchandise Inventory = Beginning Inventory + Purchases − Returns and Allowances − COGS
The merchandise inventory formula: A step-by-step guide
- Identify beginning inventory: Start with the value of goods available at the beginning of the accounting period.
- Add purchases: Include all inventory purchases made during the period.
- Subtract returns and allowances: Deduct the cost of returned goods or discounts given for defective items.
- Subtract COGS: Deduct the cost of goods sold during the period.
Example: A retailer starts the period with $10,000 worth of inventory, purchases $5,000, has $500 in returns and allowances, and records $7,000 in COGS. The merchandise inventory would be:
$10,000 + $5,000 − $500 − $7,000 = $7,500
In this case, the retailer ends with $7,500 in merchandise inventory. By maintaining accurate records, they can calculate their inventory turnover ratio, which shows how completely (and thus efficiently) they’re selling and replenishing stock — a metric that’s critical for determining whether they’re holding too much or too little inventory.
Merchandise inventory vs. ending inventory
While merchandise inventory is a subset of ending inventory, they’re not identical. Merchandise inventory specifically refers to goods ready for sale, while ending inventory also includes other assets like raw materials or partially completed products.
Examples of merchandise inventory
We’ve touched on a few examples of what might qualify as merchandise inventory. But as we mentioned, what your inventory includes will depend on the kind of business you run. The easiest way to determine the items in your merchandise inventory is to look at the products you have available for immediate sale — things like:
- Retail stores: Clothing, footwear, and accessories.
- Grocery stores: Packaged foods, beverages, and cleaning supplies.
- Electronics stores: Smartphones, laptops, and chargers.
- Bookstores: Fiction, nonfiction, and educational reading materials.
- Pharmacies: Over-the-counter medications and health supplements.
These are some common, easy-to-spot examples, but some businesses face unique challenges when identifying merchandise inventory. A furniture store, for example, might stock bulky items like sofas or dining sets, which require more storage space and careful inventory tracking to avoid tying up too much capital in unsold products. A sporting goods store, on the other hand, might manage inventory that fluctuates based on seasonal demand, like bicycles in the summer or snowboards in the winter.
Optimize your merchandise inventory with Fishbowl
Managing merchandise inventory isn’t the most clear-cut thing to do. But Fishbowl’s inventory management system makes it easier. Fishbowl is the all-in-one inventory management solution designed to help you control stock, warehouse operations, manufacturing workflows, and more. The platform also seamlessly integrates with QuickBooks to promote financial visibility, offering synced tracking and powerful automation tools that help you enhance accuracy, boost efficiency, and streamline inventory tracking.
Are you ready to take control of your stock and gain end-to-end visibility over your operations? Schedule a demo of Fishbowl, the intuitive, scalable, and user-friendly inventory management platform.