Accounting for a Merchandising Business Required Reading: Chapter 11

Terms 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 “middleman”. 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.

Therefore….. Merchandise inventory has value and it is owned – it must be accounted for as an ASSET on the BALANCE SHEET AND… Merchandise inventory represents an outflow of resources to produce revenue, so it must be accounted for on the INCOME STATEMENT.

Inventory 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.

AND… 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”.