Merchandise inventory is the goods a business has bought to resell unchanged and not yet sold, such as a phone shop's phones. It is carried at cost as a current asset until each item sells. Then its cost becomes cost of goods sold, and the gap to the selling price is gross profit.
This guide shows what counts, what goes into the cost, and the month's formula, worked for a Lagos electronics shop in naira. It ends with the retail method, which values a supermarket's stock from its shelf prices.
What counts as merchandise inventory?
Merchandise inventory is what you own and hold to sell, wherever it sits. Ownership decides it, not location: goods on a truck can be yours, and goods on your shelf can be someone else's.
| Goods | Merchandise inventory? | Why |
|---|---|---|
| Stock on the shop floor and in the store room | Yes | Bought to sell, not yet sold |
| Stock at another branch | Yes | Count it where it sits |
| Goods on the way from the supplier, once ownership has passed | Yes | Yours, though not yet on the shelf |
| A supplier's goods you pay for only once sold | No | The supplier still owns them |
| Goods a customer has paid for but not collected | No | They are already sold |
| Customer returns you can resell | Yes, back at cost | They return to stock |
| Damaged or expired goods | Only at what they will still fetch | Written down, or written off if worthless |
| Goods you make yourself | No: finished goods | Merchandise is bought, not made |
The ownership cases are explained in is inventory an asset. The shipping terms that decide when goods on the road become yours are in in-transit inventory.
What goes into the cost of merchandise inventory
Merchandise inventory is carried at its landed cost: everything paid to bring the goods to your shelf. The IFRS Foundation's module on inventories sets it out in paragraph 13.6. Cost is the purchase price, import duties, taxes you can't recover, and transport and handling, less trade discounts.
Selling costs stay out (paragraph 13.13), and so does VAT you reclaim. Delivery to your customers is a selling cost, not part of the stock.
For example, an electronics shop in Lagos imports 100 Bluetooth speakers. The figures are illustrative: not a real shop's, nor a real duty rate.
| Cost | NGN |
|---|---|
| Supplier's price, 100 × 21,000 | 2,100,000 |
| Sea freight and insurance | 180,000 |
| Import duty | 270,000 |
| Clearing and port charges | 100,000 |
| Transport from the port to the shop | 50,000 |
| Landed cost: 27,000 a speaker | 2,700,000 |
Each speaker costs NGN 27,000 on the shelf, not the NGN 21,000 on the invoice. Pricing from the invoice would overstate the margin on every speaker sold by NGN 6,000.
How to calculate merchandise inventory
Merchandise inventory at the end of a period is what you started with, plus what you bought, minus the cost of what you sold. Turned round, the same sum gives the cost of goods sold from a count.
Ending merchandise inventory = Beginning inventory + Net purchases − Cost of goods sold
Cost of goods sold = Beginning inventory + Net purchases − Ending inventory
Net purchases are purchases at landed cost, less purchase returns and discounts.
For example, the Lagos shop starts the month with 40 speakers that cost NGN 23,500 each. The 100 imported speakers arrive at NGN 27,000 each, and the shop sells 110 at NGN 38,000.
| Line | FIFO | Weighted average |
|---|---|---|
| Beginning inventory, 40 speakers | 940,000 | 940,000 |
| Purchases, 100 speakers | 2,700,000 | 2,700,000 |
| Goods available, 140 speakers | 3,640,000 | 3,640,000 |
| Cost of goods sold, 110 speakers | 40 × 23,500 + 70 × 27,000 = 2,830,000 | 110 × 26,000 = 2,860,000 |
| Ending inventory, 30 speakers | 30 × 27,000 = 810,000 | 30 × 26,000 = 780,000 |
| Sales, 110 × 38,000 | 4,180,000 | 4,180,000 |
| Gross profit | 1,350,000 | 1,320,000 |
The weighted average is 3,640,000 ÷ 140 = NGN 26,000 a speaker. FIFO shows NGN 30,000 more profit this month, because its cost of sales uses the older, cheaper speakers first.
Check the formula against the count: 940,000 + 2,700,000 − 810,000 = NGN 2,830,000, the FIFO cost of goods sold. Had the shelf held 28 speakers, not 30, that sum would hide the 2 missing ones inside the cost of goods sold.
Merchandise inventory costing methods
A cost formula decides which purchase price each sale carries when you bought the same item at different prices. Under IFRS, a merchant uses FIFO or weighted average for interchangeable goods, and specific identification for one-off items.
| Method | How it works | Who uses it |
|---|---|---|
| FIFO | The oldest units count as sold first | Shops that sell the oldest stock first, as it rotates on the shelf |
| Weighted average | Every unit carries the average cost | Shops with frequent deliveries at moving prices |
| Specific identification | Each item carries its own cost | Used cars, jewellery and other one-off pieces |
| LIFO | The newest units count as sold first | Not permitted under IFRS (paragraph 13.18); allowed under US GAAP |
Pick one formula and keep it for all similar goods. Which gives the higher profit while prices rise is worked in FIFO vs LIFO, and all the methods in inventory valuation methods.
The retail method: valuing a big shop's stock from shelf prices
The retail method values merchandise inventory from selling prices, for shops with too many lines to cost one by one. Paragraph 13.16 of IFRS for SMEs allows it when the result approximates cost. In its words, "the retail method measures cost by reducing the sales value of the inventory by the appropriate percentage gross margin".
Staff count the shelves at the prices on the tags, which they know, rather than at cost, which they often don't. You then take off the gross margin, department by department.
For example, a mini-supermarket in Lagos counts its stock at shelf prices at the end of June. The figures are illustrative.
| Department | Counted at shelf prices | Gross margin | At cost |
|---|---|---|---|
| Groceries | 6,000,000 | 15% | 5,100,000 |
| Drinks | 3,000,000 | 20% | 2,400,000 |
| Toiletries | 2,000,000 | 30% | 1,400,000 |
| Household goods | 1,000,000 | 35% | 650,000 |
| Total | 12,000,000 | 9,550,000 |
Using the shop's overall margin of 25% instead gives 12,000,000 × 0.75 = NGN 9,000,000, which is NGN 550,000 too low. The stock holds more low-margin groceries than the shop's sales do, so one margin for everything misstates it.
Example 41 in the IFRS module adds a caution. Goods bought from an irregular supplier at a higher price are costed at that recent purchase price, if the amount is material. Goods marked down below cost need an inventory write-down.
Where merchandise inventory shows in the accounts
Unsold merchandise sits among the current assets on the balance sheet, usually as "Inventories". Sold merchandise moves to the profit and loss as cost of goods sold, against the sales it earned.
The entries for buying, selling and losing stock are worked month by month in inventory accounting.
Track merchandise perpetually, so each sale updates stock as it happens, and count to check the records. A periodic system works out the cost of goods sold once a period and hides losses inside it. Perpetual vs periodic inventory compares the two.
How to keep merchandise inventory accurate
Accurate merchandise records come from five habits, each done the day it is due.
- Receive against the order, and enter the landed cost the same day.
- Count a section each week, so every line is counted at least once a month.
- Record returns and damage as they happen, so losses show on their own line.
- Train staff on the till and on receiving. A skipped scan or an unrecorded delivery is where many record errors start.
- Set a reorder point on every line you restock, so you buy before the shelf empties. How to avoid overstocking and stockouts shows how to set it.
How to track merchandise inventory in ArmPOS
ArmPOS keeps each product's cost, price and stock, so it gives the value at cost directly. These steps use the screens in its Help center guides.
- Add each product with its Product Cost, Retail Price and opening stock in each warehouse (Add your first products).
- Record each delivery as a purchase. The status received adds the stock. The pencil on a line sets its Product Cost for that purchase, so enter the landed cost (Record a purchase).
- Send faulty goods back with a Purchase Return. It takes them out of stock and records what the supplier owes you (Return goods to a supplier).
- Take customer returns back. A return set to Received puts the items back in the sale's warehouse (Returns and refunds).
- Record broken or expired goods as a Damage, which takes them off stock and keeps the record (Record damaged stock).
- Count and correct. Count Stock makes a sheet for one warehouse and category, and an adjustment corrects the difference (Count and adjust stock).
- Read the value. Inventory Valuation multiplies each product's stock on hand by its cost. Stock Inventory Valuation shows the stock at cost and at selling price, with the Potential Profit between them (Stock reports).
- Read the profit. Reports › Profit and Loss shows Net Profit (FIFO) and Net Profit (Average Cost) side by side (Reports to check every day).
The retail method is for shops that know only their shelf prices. With each product's cost recorded, Inventory Valuation gives the figure at cost without estimating.
Frequently asked questions
Is merchandise inventory an asset?
Yes, a current asset, carried at cost until the goods are sold. Its cost becomes an expense, cost of goods sold, as each item sells.
What is the difference between merchandise inventory and inventory?
Merchandise inventory is one kind of inventory: goods bought to resell unchanged. A maker's inventory also holds raw materials, work in progress and finished goods, as types of inventory shows.
Does merchandise inventory include freight?
Yes. Freight and insurance to bring goods to your shop, import duty and clearing are part of the cost. Delivery to your customers is a selling cost and stays out.
How do you find ending merchandise inventory?
Count it and price the count at cost, or work it out: beginning inventory plus net purchases, minus the cost of goods sold. A gap between the two is a loss to trace.
Is merchandise inventory the same as cost of goods sold?
No. Merchandise inventory is what you still hold, while cost of goods sold is what the goods you sold cost you.
Price your last delivery at landed cost, line by line, and compare it with the invoice price you use today. To keep every product's cost, stock and margin in one place, create a free ArmPOS account and record that delivery as a purchase.
