So, you want to learn
Merchandise Inventory
by Bean Counter's Dave Marshall
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Introduction Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6
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Hello it's me Dave again. For those of you that took my free So you want to learn Bookkeeping! Introductory Tutorial or any of my other bookkeeping tutorials we've already met. This tutorial assumes that you have a basic understanding of some accounting terminology , debits and credits, transaction analysis, and the general ledger and special journals. If not please brush up and take my free So you want to learn Bookkeeping! Introductory Tutorial.

Tutorial Navigation
A menu of all the lessons is presented at the top and bottom of all the lessons. A back and next arrow also allow you to go back to the prior lesson or on to the next lesson.

All lessons and examples in this tutorial are all based on the accrual method of accounting, the double entry method of bookkeeping, and the sole proprietor type of business organization.

What's Covered ?

This Introduction provides an overview of inventories and their importance, and the special journals and records used to record and control this key asset.

Lesson 1 Inventory Methods discusses the periodic and perpetual methods for accounting for merchandise inventory and how inventory transactions are recorded using each method.

Lesson 2 Costing Methods explains the different methods that are used to determine and assign costs to inventory quantities on hand and sold.

Lesson 3 Estimating Inventories discusses the methods used to estimate the value (cost) of merchandise inventory when no physical count has been taken or few detailed records are available.

Lesson 4 Lower Of Cost Or Market explains why this special rule is used for valuing inventory and how to apply it.

Lesson 5 Accounting for Inventory discusses and reviews the accounts, subsidiary ledgers, records, and special journals used to record inventory transactions using the perpetual and periodic inventory methods.

Lesson 6 What You Should Know summarizes and reviews the methods, information, and knowledge needed to adequately record and control one of a wholesale or retail business's largest assets.


Merchandise Inventory consists of goods purchased for the specific purpose of reselling these goods to others. Vehicles are merchandise inventory for a used car dealer; but, are assets classified as Vehicles & Equipment for other businesses. Merchandise Inventory includes only goods that are owned, on hand, and held for sale to customers.

Wholesale and retail types of businesses are examples of businesses that need to account for and maintain records relating to the purchase and sale of these items. Retailers sell products directly to the consumer while wholesalers warehouse and sell large quantities of products to the retailers who in turn sell it to us (consumer).

Their principal business activity is the buying and selling of goods and many of their business transactions relate to these buying and selling activities. Usually the cost associated with maintaining an adequate merchandise inventory represents a significant investment and often is the largest current asset on the balance sheet. Likewise, the cost of goods sold is normally the largest expense item in the income statement.

A typical retail or wholesale business buys inventory to resell and either pays at the time of purchase or better yet is granted credit terms by a supplier(s) and doesn't have to pay for 30 days or whatever terms were agreed upon. Unfortunately, if you don't have it you can't sell it; however, it takes time to sell your inventory and convert the goods into a sale and ultimately back into cash. So, not only are good records needed but also good inventory management procedures (rules) to aid your business in having enough inventory but not too much. Think of your inventory as an investment that gobbles up some of your cash that won't be available to pay other obligations until the inventory is sold and converted back into cash.

Due to the fact that merchandise inventory is often one of your largest assets, it is imperative that you set up a good record keeping system for monitoring and maintaining this asset.

How do we value our inventory ? Normally cost modified by a special rule is what our ending inventory is valued at. Our cost should not only include the direct cost of the product but theoretically should include all of the applicable expenditures and charges directly or indirectly incurred in bringing inventories to their existing condition and location. Additional expenditures that should be included in the cost of our inventory include transportation or freight-in costs and purchasing, storage, and handling expenditures.

In practice, due to the difficulty and the cost involved in trying to assign purchasing, handling, and storage cost to individual items these expenditures are not normally allocated and assigned to our individual products. Transportation (freight-in) costs should be allocated and assigned to products. Many small business due to the hassle of allocating transportation cost to products even exclude transportation costs when not material.

Are there other types of inventories ? Yes, but this tutorial is limited to the discussion of Merchandise Inventory. I know you're curious so the other types of inventories are used with businesses that manufacture products or provide custom products to other businesses and consumers. This area of accounting is called Cost Accounting and just so you know, the other inventories used are Raw Materials, Work-In-Process, and Finished Goods.

What are some special journals and records usually used to keep up with the buying and selling transactions ?

  • Sales Journal
  • Sales Returns and Allowances Journal
  • Accounts Receivable Subsidiary Ledger
  • Cash Receipts Journal
  • Purchases Journal
  • Purchase Returns and Allowances Journal
  • Accounts Payable Subsidiary Ledger
  • Cash Disbursements Journal
  • General Journal
  • Inventory Records and Worksheets
    Periodic System
    Count and Costing Sheets
    Detailed Product Purchase Records (optional but strongly recommended by me)

    Merchandise Inventory Control Account
    Subsidiary Ledger (stock records)
    Count and Costing Sheets
    Cost of Goods Sold Journal (Optional)

Since Special Journals were discussed in my tutorial So,you want to learn Bookkeeping! - Special Journals, only inventory related special journals and records are covered in this tutorial. Although not absolutely necessary, if you are not familiar with these journals or need a quick refresher, I recommend that you take or review Bean Counter's Special Journals tutorial.

I really do hate to get you out of your easy chair and kidnap you away from your television, but it's time to put down your remote (I didn't say lose it), put on your thinking cap, and learn about inventories.
Introduction Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6
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