Accounting for a Merchandising Business

Accounting for a Merchandising
Required Reading: Chapter 11
• Service Business – Business that sell services
rather than goods. Example: Dentist, Roofer,
Travel Agent. To this point in the course, we
have only looked at service businesses.
• Merchandising Business – Business that buys
goods and then sells them at a profit.
Example: Clothing Store, Car Dealer.
Merchandising Terms
• Manufacturer – A business that converts raw
materials to finished goods.
• Wholesaler – A business that buys finished
goods from a manufacturer and sells them to
retailers. Otherwise called a “distributor” or a
• Retailer – A business that buys finished goods
from wholesalers and sells them to the public.
Service vs. Merchandising
• Services are not tangible.
Therefore, there is no inventory
kept. Once the opportunity to sell a
service is past, it is gone forever.
• Merchandise is tangible. Therefore,
inventory that is not sold today can
be sold at a later point, even if that
means taking a reduced price.
• Merchandise inventory has value and it is
owned – it must be accounted for as an ASSET
• Merchandise inventory represents an outflow
of resources to produce revenue, so it must be
accounted for on the INCOME STATEMENT.
Beginning Inventory
Merchandise Purchased
Total goods available for sale
Merchandise Sold
Ending Inventory
The inventory figure here will go on the balance
sheet as a current asset.
Cost of beginning inventory
Cost of merchandise purchased
Cost of ending inventory
Cost of merchandise sold
This figure will go to the income statement in a
new section called “Cost of goods sold”.