Merchandise Inventory, End
The Merchandise Inventory, End is the overall value of the actual inventory stocks held on hand and physically accounted for, after conducting thorough physical inventory procedures.
In a computerized business environment, the accuracy of the results of actual physical counting can be tested against computer generated records of individual inventory stock listings. In retail operations, each piece of merchandise bought at the store is automatically deducted against the individual inventory list, every time the cashier enters the barcode as an item sold in a computerized business machine. This type of inventory method is called perpetual inventory.
Hence, computer generated inventory records can furnish ready references of the stock levels, used as basis for requiring stock replenishments. At year end, the quantity of stock inventory for every product being sold, as disclosed by a computerized system of recording inventory movements, will be verified upon physical inventory count.
Any resulting difference will have to be investigated for possible errors or pilferage. A computer generated list that shows higher figures may be construed as unauthorized or unaccounted removal of stocks since there are no corresponding sales entries taken-up by the computerized cash register.
On the other hand, if the physical inventory reveals a greater number than the computer generated inventory list, it is possible that some purchases were not properly recorded in the Purchases or Merchandise Inventory account. The results of investigations as well as management’s recommendations, will dictate how the inventory differences will be taken-up in the books of accounts. This is a critical point in determining the actual value of Merchandise Inventory, End as a sub-component of the Cost of Goods Sold formula.
The periodic inventory method of the actual merchandise on hand is conducted as of a specific cut-off date, which is usually at year-end. This is to determine how much of the inventory stocks carried over from the previous year plus the procurements made during the year still remains in the warehouse. The accounting entry should carefully consider the costs assigned to the inventory, since the effect will be carried over to the succeeding year of operation.
In further explaining the Cost of Goods Sold formula, its related accounting entries and their effects in the general ledger books, the reader may further refer to a separate article entitled Examples of T Accounts, which made use of this particular topic as example.