Merchandise inventory, inventory, or simply goods for sale, includes goods purchased for the purpose of reselling them in the ordinary course of a trading operations.
A bed linens retailer has bed sheets, bed pillows, bedspreads, quilts, comforters, duvets and shams as its merchandise inventory. A vehicle dealer has cars, trucks and vans forming part of his merchandise inventory. The goods that comprise the merchandise inventory depend on the nature of the business of the enterprise.
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The account showing the cost of the products sold during an accounting period is termed cost of goods sold or cost of sales. The unsold goods are referred to as the merchandise inventory, end.
In most businesses except service businesses, the cost of goods sold is an operating expense, the largest deduction from revenue, amounting to as much as 85% to 90% of sales in a profitable supermarket.
The amount reported as cost of goods sold is related to the products as sales is related to the products sold. The matching principle requires that these be the same products.
In some businesses, matching cost of goods sold and sales is easy. For example, a bedspread retailer keeps a record of the cost of each bedspread in his inventory. Thus if he sells two bedspread during a given month, one for which has cost him , and one for which has cost him , he would record his sales revenue for the period as , and his cost of goods sold as .
Two entries in the books are prepared when merchandise is sold. The first entry is to recognize the revenues from sales at selling price, and the second entry is to recognize the related cost of goods sold at cost. The second entry is made to recognize the decrease in the balance of the merchandise inventory account as a result of the sales transaction.
The system used in recording the cost of each individual item in inventory, as in the case of the bedspread retailer is called perpetual inventory.
Since the advent of the computers, bar code scanners, and easy- to- use programs, retailers that contain numerous and fast-moving products in their inventory makes the use of perpetual system more advantageous. Updating the inventory record is greatly facilitated with the use of scanners that can read bar codes.
A separate subsidiary ledger account for each brand, type, style and size of the product is maintained to continuously monitor the increase and decrease in the volume of products in stock. A supermarket or a department store may keep thousands of inventory subsidiary ledger or stock cards.
As a result of the advancement in technology the advantages of using subsidiary accounts outweighs the previous disadvantages. Previously, maintaining an inventory ledger takes time and patience. It is also very expensive as it requires the bookkeeper to manually make postings to the individual stock ledger.
With the perpetual inventory system, information about unit costs are readily available in the inventory subsidiary accounts that makes it easier for a retailer to set selling prices of the products for sale. The retailer can immediately tell which products are available for sale and study the fast-moving or slow-moving products. It also facilitates detection and computation of pilferage or spoilage.
A cash invoice or a charge sales invoice establishes sales transactions. An entity engaged in selling merchandise recognizes an income by crediting sales income, revenue from sales, or simply sales. This account represents the total selling price of all the goods sold in the normal course of the business.
As earlier stated, cost of goods sold is an operating expense. It is computed and reported separately to foreground the amount of gross profit on sales in the income statement.
The gross profit on sales or gross margin is arrived at by deducting cost of goods sold from sales. Although the gross profit margin is a useful means of measuring profitability, it does not represent the overall profitability of the business. To arrive at the profit for the period, the other operating expenses are deducted.
Black Friday LUCID by LinenSpa 8" Memory Foam Firm Viscoelastic Mattress 20-Year Warranty, King 2011 Deals
Nov 24, 2011 10:50:18
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