Items That Make Up Merchandise Inventory – reselling | merchandise inventory | consignment
Items That Make Up Merchandise Inventory
Merchandise Inventory
When you go into a store and see all the items that store has available for sale, you know each of those items are part of the store’s merchandise inventory. What most people don’t know is that there is more to merchandise inventory than this. Before we discuss what else is part of merchandise inventory, let’s define the term itself.
The term merchandise inventory refers to items that are acquired by a distributor for the purpose of resale to a third party. Not only are the items that you see on display in a store considered merchandise inventory, but there are also three more things that are considered to be part of merchandise inventory. They are goods in transit, goods in consignment, and goods damaged or obsolete.
Goods in Transit
We will start our discussion on the merchandise inventory with goods in transit. Technically, goods in transit are items that have been ordered by a business but not yet received. Does that mean that everything a business has ordered at the time that merchandise inventory is recorded in the accounting records should be counted as well? Most definitely not. For goods in transit, the question of ownership comes into play.
Ownership of items that are in limbo between being shipped and received lies in the terms in which the items were shipped. Items that are shipped FOB shipping point are items whose ownership is transferred from the seller to the buyer as soon as items ship. FOB destination are items whose ownership transfers from the seller to the buyer when the items are received by the buyer. In order for goods in transit to be recorded in the accounting records of a business before receipt, they must have been shipped FOB shipping point. Let’s look at an example of this concept.
Mary owns a furniture store. She orders 10 new armchairs for the store with the terms FOB shipping point from Norman Custom Furniture. On the same day, she orders 10 sofas from Hatti Wholesale Furnishings. The sofas are ordered with shipping terms FOB destination. It’s the end of the accounting period, and Mary has to record her merchandise inventory in her accounting records. Neither the armchairs nor the sofas have been received yet.
Which of these items need to be counted as merchandise inventory for the current accounting period? The answer here is the 10 armchairs. Why? Because ownership of the chairs transferred to Mary when the items shipped based on the shipping method that was agreed upon between Mary and Hart’s Custom Furniture.
So, why didn’t the sofas count as merchandise inventory on Mary’s accounting records? Because Mary has different shipping terms with Hatti Wholesale Furnishings. The order she placed with Hatti has the shipping terms FOB destination, meaning that ownership of the sofas remained with Hatti until the sofas are received. When Mary receives those sofas, at that time ownership will then transfer to Mary.
Goods in Consignment
Goods in consignment are another category of items that fits into merchandise inventory. These types of goods are items that are delivered from one business to another business for the purpose of allowing the second business to sell the items on a commission basis. In this type of relationship, the business that owns the goods is called the consignor, and the business that sells the goods for commission is called the consignee. Even though the goods given to a consignee by a consignor are physically located in the consignee’s business, the ownership of those items remains with the consignor. Is all this consignor/consignee business confusing to you? Well, don’t worry. This next example will bring it all together.
Mary has decided that she would like to expand the items that she sells in her furniture store. Her friend Tim makes coffee tables and end tables out of reclaimed wood. She offers to let Tim put some of his pieces in her store on a consignment basis. She doesn’t purchase the items, but she does sell the items. She makes 10 percent commission on every item that she sells for Tim.
Who is the consignor here? What about the consignee? Who has ownership of the consigned items? The consignor here is Tim since he is the one who has made the items. The consignee is Mary since the items are at her store, yet she didn’t purchase them. Tim retains ownership of the items he places with Mary on a consignment basis. When it comes time to value merchandise inventory, Tim counts any items that are at Mary’s furniture store on his accounting records, and Mary does not.
Goods Damaged or Obsolete
Another thing that is common among every merchandising business are damaged and obsolete goods. These are the types of goods that have been damaged while in inventory or are no longer being made. A business has two ways to handle damaged or obsolete goods. If they can be sold at a reduced price, then the goods are counted in merchandise inventory at their net realizable value. The net realizable value of a good is its sale price minus any selling costs that were incurred in the sale of the item. If an item can’t be sold, then that item is not counted as merchandise inventory in the accounting records. Let’s go back to Mary’s Furniture for an example.
Mary has two sofas and three recliners that are damaged. She also has one loveseat that is obsolete. She can sell one sofa, one recliner, and the loveseat at a discounted price. Two of the recliners are too damaged to sell. Which of the items will be counted in her merchandise inventory, and which will not? Since the one sofa, one recliner, and loveseat can be sold, they are counted in the merchandise inventory, but at a lower value
Lesson Summary
Merchandise inventory refers to items that are acquired by a distributor for the purpose of resale to a third party. When discussing what makes up merchandise inventory, the most important thing that you can learn is that merchandise inventory is much more than just what you see when you enter a store. There are three more categories of items that are included in merchandise inventory: goods in transit, goods in consignment, and goods damaged or obsolete.
Goods in transit are items that have been ordered by a business but not yet received. Though many items fit the goods in transit category, only those that are shipped FOB shipping point are included in merchandise inventory counts. Why? Because items shipped FOB shipping point are items whose ownership is transferred from the seller to the buyer as soon as items ship.
Some items are ordered with shipping terms of FOB destination. FOB destination are items whose ownership transfers from the seller to the buyer when the items are received by the buyer.
Items that are considered goods in consignment are also part of the merchandise inventory of a business. Goods in consignment are items that are delivered from one business to another business for the purpose of allowing the second business to sell the items on a commission basis. In this type of relationship, the business that owns the goods is called the consignor, and the business that sells the goods for commission is called the consignee. The ownership of the consigned goods remains with the consignor until the time of sell.
Items that are considered damaged or obsolete goods are the types of goods that have been damaged while in inventory or are no longer being made. Some of these goods may be able to be sold at a discounted price, and some will not be able to be sold at all. If the goods are able to be sold, then they are counted in merchandise inventory and valued at their net realizable value, which is the item’s sale price minus any selling costs associated with the sale. If the item can’t be sold, it is not counted in merchandise inventory.