Merchandise Inventory Guide: What It Is & Why You Need It

What’s the status of your ecommerce company’s financial health?

To find out, take a look at how quickly your merchandise inventory is being turned into cash. 

By constantly monitoring and managing inventory flow from purchase to sale, along with the value of each SKU, you can devise strategies to improve profits and efficiently meet the growing demand for your company’s products.

Along with fulfilment, inventory management is something ShipBob takes seriously and provides tools and resources to help fast-growing brands manage their merchandise inventory to avoid unnecessary stockout or overstocking costs.

Learn how to fully manage your merchandise inventory, how to calculate your inventory value, and how a partnering with a tech-enabled 3PL like ShipBob can help.

What is merchandise inventory?

Merchandise inventory refers to the value of goods in stock, whether it’s finished goods or raw materials that are ready to sell, that are intended to be resold to customers. Think of it as a holding account for inventory that is expected to be sold soon.

For ecommerce businesses, inventory is a business owner’s most important asset, and its value is accounted for on a business’s balance sheet at the end of an accounting period or fiscal year.

Merchandise inventory includes any goods meant for resale, whether they are in transit from the supplier, in the retailer’s hands, or stored in a warehouse or distribution centre ready to be sold.

Examples of merchandise inventory

Let’s say a furniture store buys desks that will be sold directly to the end customer. The store also buy computers for employees to use regularly. Here, the desks can be categorized as merchandise inventory, but not the computers.

Though both are considered assets, the employee computers are labelled as a “fixed asset” and accounted for separate from inventory when looking at a company’s balance sheet. Merchandise inventory is considered a “current asset” as the business plans to sell the inventory for cash. 

Let’s look at an example of a distributor: ABC Inc. buys motherboards with the intent to sell to a computer manufacturer at a higher price. Though the motherboards are items that are used to make a finished product, the motherboards are still considered merchandise inventory since they are being sold to another business for cash. 

Note: There are merchandising platforms like Toolio that automate critical merchandising workflows, provide real-time insights, and enable cloud-based collaboration.

Why merchandise inventory is important for accounting

Since merchandise inventory is almost always an online brand’s biggest assets, managing and tracking inventory accurately is crucial since it directly impacts a brand’s financial well-being.

Inventory accounting can be a stressful business process to manage, which is why it’s important to consult with a CPA as you grow your business.

However, that doesn’t mean there aren’t resources that a brand can implement to better track merchandise inventory, such as understanding inventory turnover rate and other important inventory reporting metrics.

By making merchandise inventory control and management a priority, you can reduce the risk of inventory shrinkage, stockouts, or carrying too much inventory.

For instance, merchandise inventory turnover is an indicator of how liquid your inventory is. A higher turnover rate shows that money is not unnecessarily tied up in dead stock inventory, which also increases carrying costs. 

Cost of goods sold (COGS), or the cost of procurement logistics, is also factored in to determine gross profit once inventory is sold. 

Accounting for merchandise inventory

Tracking inventory and its value can be done by using several different inventory valuation methods. Each method has its own set of pros and cons, and it really comes down to what method makes sense for your business.

But whatever method you choose, you must follow that method consistently to ensure accuracy when it’s time to report inventory. 

Typically, the inventory valuation methods adopted by retailers are:

• First In, First Out (FIFO): assumes that the first products you received from your manufacturer will be the first ones sold and shipped out to customers.
• Last In, First Out (LIFO): the most recently purchased inventory items are the ones that are sold and shipped out first.
• Specific identification method: tracks each individual item in inventory from purchase to sale.
• Weighted average method: averages out the cost of purchased goods in your available inventory.

Once you choose a method, you will need to decide on a system that determines how frequently you will track inventory value. An occasional physical count is considered a “periodic system,” which is done manually. 

Real-time inventory management is considered a perpetual method, which is more common in inventory accounting as it’s less time-consuming and more accurate, especially if your business requires tracking every item as it moves through your ecommerce supply chain.

“We also have easy ways to manage subscription orders as well as expiration dates and lot numbers, so inventory goes in First In, First Out (FIFO).”

Leonie Lynch, Founder & CEO of Juspy

To provide more clarity, below we cover some common questions business owners have relating to merchandise inventory accounting:

Is merchandise inventory an asset or an expense?

When merchandise inventory is purchased with the intention to sell, it is always considered a current asset. At the end of accounting period or fiscal year, any leftover inventory that is left unsold is reported as “ending inventory” on your balance sheet.

Cost of goods sold (COGS), however, can be found on your income statement as an expense.

Is merchandise inventory a current or non-current asset?

Merchandise inventory is always considered a current asset. If a business accumulates unsellable inventory, then the value of lost inventory is considered an inventory write-off. Nearly any business that maintains inventory on hand will have to write off a portion of it at some point.

However, the goal is to find ways to optimise inventory, such as forecasting demand, in order to keep the value of loss inventory low. 

Is a perpetual inventory method better than a periodic method when accounting for merchandise inventory?

You can either maintain a continuous tally of your merchandise inventory’s value using the perpetual inventory system or update records at regular intervals by implementing a periodic inventory system. 

To tell which is better, here is a comprehensive list of differentiating factors:

Periodic inventory system	Perpetual inventory system
Involves a physical inventory audit at the end of an accounting period, and in this system, each purchase and sale is not recorded	Updates accounting balances in real time, as items are added or removed from the warehouse
More prone to inaccuracy due to human error	Enables accurate accounting of inventory on hand
Performs SKU management manually	Automates SKU tracking
Cannot help with daily decision-making for your business	Offers a real-time view of COGS, turnover rate, and other helpful inventory metrics to improve day-to-day decision making
Is used by small businesses that have low order volumes	Is used by businesses, small and large, to manage growing volumes of stock

Calculating the value of merchandise inventory

To better illustrate how merchandise inventory value and COGS are calculated, let’s take the example of a footwear merchandiser who:

• Had 10 units of beginning inventory worth $1000 
• Bought 50 units of shoes from a supplier at $100 a pair
• Sold 40 pairs at $200 per pair
• Had 20 pairs left over at the end of the accounting cycle 

To arrive at the value of merchandise inventory, multiply the amount of unsold inventory with the cost of each unit. 

Merchandise inventory value = Inventory cost of each unit x unsold inventory amount

Merchandise value = 100 x 20 = $2000

This merchandise inventory value, which is usually considered the same as the ending inventory, is then entered into the balance sheet.

Next, you calculate the COGS (direct costs of producing merchandise inventory for sale) with the following formula:

COGS =  (Beginning inventory + Purchased inventory value) – Merchandise inventory value

If you were to apply this formula to the example of the shoe retailer, the result would be: 

COGS = (1000 + (50 x 100)) – 2000 = $4000

Finally, using the COGS, you can calculate profits thusly:

Profit = Total sales – COGS

Profit = (40 x 200) – 4000 = $4000

How ShipBob makes it easy to track & account for your merchandise inventory

Growing an online business requires your attention to focus on revenue-driving initiatives, making it hard to oversee logistics operations. 

ShipBob is a best-in-class 3PL that offers a tech-enabled logistics network. With ShipBob, you can outsource fulfilment and still have full visibility into operations with access to built-in inventory management tools.  

“I felt like I couldn’t grow until I moved to ShipBob. Our old 3PL was slowing us down. Now I am encouraged to sell more with them. My CPA even said to me, ‘thank god you switched to ShipBob. ShipBob provides me clarity and insight to help me make business decisions when I need it, along with responsive customer support.”

Courtney Lee, founder of Prymal

You can learn more about how ShipBob works by taking a 3D tour of one of our fulfilment centres:

For a closer look inside how our 3PL software works, here is a high-level overview of how ShipBob can help you optimise your supply chain and keep track of inventory. 

Real-time stock monitoring

How much merchandise inventory or stock availability do you have across all storage facilities?

Where is it located? How much is it worth? What condition is it in? 

From the ShipBob dashboard, you can easily track inventory and manage SKUs, so that you have complete inventory visibility in real time. This will help you accurately monitor inventory flow, storage and inventory warehousing costs, and average units on hand by date. 

ShipBob connects with all leading ecommerce platforms in minutes. Once you connect your store and sync your products, you can:

• View real-time inventory levels by SKU.
• Set reorder points for each SKU based on the quantity at which you wish to be alerted to restock.
• Bundle different SKUs for promotions.
• Merge the same product across ecommerce platforms.

Have different SKUs kitted and assembled before they are shipped.“We utilise ShipBob’s Inventory API, which allows us to programmatically retrieve real-time data on how many units of each product are currently stored at ShipBob’s warehouses. We currently use this API to generate custom reports to tie this inventory data into our accounting platforms.”

Waveform Lighting Team

Inventory optimisation

Hopefully as you grow your business, you will see your order volume increase. But this can make it more difficult to track inventory in real time, accurately forecast demand, and optimise storage.

ShipBob’s fulfilment technology provides built-in inventory optimisation solutions, which provides valuable insights that help you better forecast demand, strategically allocate inventory, and track storage and inventory warehousing costs across fulfilment centres.

Analytics and reporting

Part of our full-stack 3PL services is providing a free analytics and reporting tool that helps predict future customer demand and optimal stock levels. You can use our powerful analytics and reporting tool to get answers to questions like: 

• What were my historical stock levels at any point in time in any location?
• How many days do I have left until a SKU will be out of stock?
• By when do I need to reorder inventory for each product?
• How often is each product sold across channels?
• Which items are not generating sales and incurring high ecommerce warehousing fees?
• And much more.

Using these insights you can improve warehousing and logistics productivity, which in turn reduces costs and transit time, avoids stockouts, and helps you to consistently meet customer expectations. 

With ShipBob, you can easily expand into new fulfilment centre locations and sales channels to establish a multichannel strategy. Instead of pulling inventory data and information from multiple sources, ShipBob tracks it all for you in one dashboard.

If you’re looking for a more robust solution, ShipBob integrates with leading inventory management solutions, as well as provides Developer API for a more custom tech stack.

“I used to have to pull inventory numbers from three places everyday and move all the disparate data into a spreadsheet. ShipBob has an analytics tab in their dashboard with all of this information, which is great for end-of-month reconciliations. It’s really nice to not have to operate three 3PLs.”

Wes Brown, Head of Operations at Black Claw LLC

To learn more about how ShipBob can help you manage your supply chain, click the button below to start the conversation with our team.

Merchandise inventory FAQs

Here are the top questions people have about merchandise inventory.

How is merchandise inventory classified on a balance sheet?

Merchandising inventory is considered a “current asset” in the balance sheet that shows the current value of sellable inventory. 

Is merchandise inventory a long-term asset?

No, merchandise inventory is a current asset that is expected to be sold. A long-term asset is property a business owns (or leases that is used for operational purposes). 

Is merchandise inventory a debit or credit?

Any unsold merchandise inventory in a particular accounting period is recorded as a debit to accounts payable. And new inventory purchases will be recorded as a credit to the inventory account and a debit to accounts payable.