How do you account for merchandise inventory?

The cost of any merchandise inventory sold during an accounting cycle is reported as an expenditure on the income statement for the cycle in which the sale was made. Any merchandise inventory not sold during an accounting cycle is registered as a current asset and included in the balance sheet until it’s sold.

What is the journal entry for merchandise inventory?

When companies sell merchandise inventory, the transaction requires two journal entries: the first entry records the revenue from the sale at the selling price and the second entry decreases the inventory account and records the expense of the sale at cost.

How do you write a merchandising income statement?

To summarize the important relationships in the income statement of a merchandising firm in equation form:

Net sales = Sales revenue – Sales discounts – Sales returns and allowances.
Gross margin = Net sales – Cost of goods sold.
Total Operating Expenses = Selling expenses + Administrative expenses.

What is merchandising in accounting?

Merchandising companies purchase goods that are ready for sale and then sell them to customers. Merchandising companies include auto dealerships, clothing stores, and supermarkets, all of which earn revenue by selling goods to customers.

What is an example of merchandising business?

A merchandising business sells goods, also known as merchandise. Good examples of merchandising businesses include retail clothing, grocery stores and bookstores. Some businesses produce the goods they sell, while other merchandise businesses buy and sell goods they’ve purchased wholesale.

What type of account is a merchandising inventory account in merchandising business transactions?

current asset
Merchandise inventory (also called Inventory) is a current asset with a normal debit balance meaning a debit will increase and a credit will decrease. To determine the cost of goods sold in any accounting period, management needs inventory information.

How do you record return of merchandise?

When merchandise is returned, the sales returns and allowances account is debited to reduce sales, and accounts receivable or cash is credited to refund cash or reduce what is owed by the customer. A second entry must also be made debiting inventory to put the returned items back.

Which income statement format is more applicable for a merchandising business?

The multi-step income statement is used to report revenue and expense activities for a merchandising business. It is an expanded, more detailed version of the single-step income statement. The most significant cost that a merchandise business incurs is the cost of acquiring the inventory that is sold.

Is merchandise an asset or expense?

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.