Merchandise Inventory: Management Guide (2026)

Merchandise inventory is the total value of products waiting to be sold, whether they’re sitting on your shelves, tucked away in the backroom, or still in transit.

It’s a key line item in retail reports because it represents value tied up in non-cash assets. Keeping track of merchandise inventory is important for monitoring stock levels and determining inventory valuation. That way, you get a full picture of your financial health. 

Here’s what merchandise inventory is and how to calculate it for your business.

What is merchandise inventory?

Merchandise inventory is a current asset on the balance sheet representing finished goods owned by a business and held for immediate sale. It’s inventory that can be stored in a retail store, in one of your warehouses, or even with the manufacturer.

Its defining features are the business’s legal ownership of the items and their readiness for purchase by the end consumer. Finished sweaters stored in your company’s warehouse or bags of dog food displayed at your retail location are both merchandise inventory examples.

Merchandise inventory asset accounting

Merchandise inventory is a balance sheet item. It shows the total cost of all unsold items your company owns. Understanding how this value fits into your financial statements is vital for accurate reporting and checking your company’s overall financial health.

One way to understand your merchandise inventory is through its link to your cost of goods sold (COGS). COGS is the total cost of all products your company sold during a specific time. Merchandise inventory shows the cost of items after you buy them from a supplier but before you sell them to a consumer.

When an item sells, your team subtracts its cost from your merchandise inventory and adds it to COGS. At the end of an accounting period, your accountant calculates the cost of all leftover inventory. They record this number as a current asset on your balance sheet, while COGS numbers are reported as a liability on your income statement.

Examples of merchandise inventory

It’s easy to think of merchandise inventory as the items on your sales floor. But the accounting definition is a bit broader. 

In retail, merchandise inventory includes items that are ready for sale immediately. In manufacturing, it includes items in transit, partly finished goods, and sometimes raw materials. Here are four examples that can be considered merchandise inventory. 

• Products on hand. The most common type of merchandise that’s sitting in your store or stockroom. It can be apparel on racks, boxed electronics in the back, or cosmetics on your shelves. 
• Goods stored offsite or with a 3PL. Even if the product isn’t under your roof, if you own it, it’s your inventory. So, those pallets of your bestselling SKUs sitting in a 3PL warehouse are also part of your merchandise inventory. 
• Seasonal and promotional buys. Items intended for sale during promos also count as merchandise inventory. It doesn’t matter how long the season is—holiday gift sets, back-to-school bundles, or special endcap displays are all grouped into this category. 
• Work-in-process (WIP). Manufacturers’ finished or assembled products also count as merchandise inventory. You could include private label candles that are currently being poured and labeled, or custom gift baskets being assembled into sellable sets.

One question that arises when managing all this inventory is: How do you track it? In a 2025 survey of retail supply chain leaders, only 36% said their organizations consistently achieve accurate, 360-degree, real-time inventory visibility.

Shopify’s inventory tools keep merchandise counts accurate by letting teams monitor stock from the Shopify admin. They can also make real-time quantity adjustments as products move. 

This approach provides clarity that transforms how staff interact with customers. Roxanne Stahl O’Hara, CEO at Alex Mill, highlights the impact of this visibility. 

“Really, it’s the one source of truth ... our stores can see [inventory] in real time as they’re working with a customer on the floor,” says Roxanne. “They can find if they don’t have something in stock in that location, they can immediately find it for them and make sure they get it and fulfill that customer’s wishes right on the spot.”

With multilocation tracking, the same SKU can be managed by a store, warehouse, or fulfillment center. That way, on-hand levels reflect where inventory lives. When inventory changes, Shopify supports reporting with adjustment history and month-end snapshots of what’s been sold. 

What does merchandise inventory include?

Taken together with other items on a company’s income statement and balance sheet, the merchandise inventory figure can help provide a full picture of a company’s financial health. Because it represents assets already owned by a business, it also contains important information about a company’s ability to meet its financial obligations. 

Failing to account for these items accurately can lead to significant operational hurdles. As Jean Wu, co-founder at Que, notes on the Shopify Masters podcast, “We had a pretty big inventory problem in the beginning where we oversold or we miscounted so we essentially sold customers things that we don’t have, so that was the last thing you want to do.”

Here’s what the merchandise inventory calculation takes into account:

• Inventory costs. Merchandising inventory includes all inventory ready to be sold to customers, regardless of which storage facility it’s located in. Typically, this figure is the amount of money that a business has paid to a manufacturer or merchandise supplier to obtain the inventory. 
• Packaging and shipping costs. The merchandise inventory calculation also includes costs to your business associated with inventory packaging, shipping, and insurance.
• A portion of consignment inventory.Consignment items are products owned by a third party that you’re selling for a share of the profits. To calculate the amount of money that consignment goods contribute to your merchandise inventory, calculate the total cost of the goods and then subtract how much you’d pay the consignor. What you’re left with is the share that your company will make upon sale.

Merchandise inventory tracking methods

Businesses can use either the periodic or the perpetual method to track merchandise inventory. Here’s an overview of each retail term:

Periodic inventory method

The periodic merchandising inventory method involves manually counting all inventory at set intervals, such as quarterly, monthly, or after a busy sales period. 

The periodic inventory system is more popular with small businesses, which tend to have fewer inventory items. These businesses are also more likely to house all of their inventory in one or two locations, making a physical inventory count easier to complete. 

Perpetual inventory method

The perpetual merchandising inventory method uses software tools to monitor a company’s inventory levels in real time. Business owners can use automated inventory management software to keep track of inventory purchases, individual sales, and even returns. These systems can also track inventory in real time across physical stores, warehouses, and ecommerce channels simultaneously.

Although the perpetual inventory system requires more ongoing maintenance than the periodic method, it also allows business owners to know how much inventory they own at any given point. This in turn can help ensure they don’t run out of products and improve forecasting for future orders. 

How to calculate ending merchandise inventory

1. Choose your inventory valuation method
2. Calculate beginning merchandise inventory
3. Track inventory changes during the reporting period
4. Calculate ending inventory

Merchandise inventory accounting involves calculating the total cost of all merchandise inventory at the end of a particular accounting period so that you can include it on your company’s balance sheet. Here’s how to calculate yours.

1. Choose your inventory valuation method

Businesses use different inventory valuation methods. Three of the most popular methods are known as first in, first out (or FIFO); last in, first out (LIFO); and weighted average cost (WAC).

FIFO

The FIFO valuation method assumes that older inventory items are sold before more recently purchased inventory items. If you purchased your first 30 items in January and your second 30 items in February and sold 45 items over those two months, the FIFO method assumes that the 15 items left in stock were purchased during February. If your supplier costs changed between orders, you’d use the February number to determine the cost of the 15 items left in your merchandising inventory.

LIFO

LIFO assumes that recently purchased inventory items are sold first. In this case, the business in the above example would use January costs to determine the value of the 15 items remaining in stock. The LIFO method is permitted under US generally accepted account principles (GAAP), but it’s typically not allowed outside of the US.

WAC

The WAC method uses an item’s average cost over a given reporting period. To use the WAC method, you’d simply average merchandise costs across January and February and multiply the average figure by 15 to represent the 15 items remaining in stock.

Changing inventory valuation methods is complicated, so best practices include adopting one valuation method and sticking with it over time.

2. Calculate beginning merchandise inventory

To calculate existing inventory figures without manually counting all of your company’s inventory, you need to have access to a few specific pieces of inventory information. The first is beginning inventory, which refers to your merchandise inventory figure at the start of the accounting period in question. You can find it on your company’s balance sheet for the last reporting period. 

You can also calculate beginning inventory numbers based on your current merchandising inventory figure. If you don’t have either, you’ll need to perform a manual count of inventory items and multiply the total number of items by item cost according to your selected inventory valuation method. The result will be your ending merchandising inventory figure, and you can use the merchandising inventory equation in step four to work backward from there to your beginning inventory number. 

3. Track inventory changes during the reporting period

Once you have your beginning inventory number, account for the following inventory changes during your reporting period:

• Purchased inventory. This refers to the cost to your business of all merchandise purchased during the accounting period as well as any associated packaging or shipping expenses. You can find this information in your accounting system under accounts payable.
• Cost of goods sold (COGS). This refers to the cost to your business of merchandise inventory sold during the accounting period in question. You can find COGS on your company’s income statement or in your accounting records. 

4. Calculate ending inventory 

The ending merchandise inventory equation is straightforward: You simply take the cost of what you started with (beginning inventory), add what you gained (purchased inventory), and subtract what you sold (COGS). 

The resulting figure represents your merchandise inventory at the end of the accounting period in question. Here’s the full merchandise inventory calculation:

Beginning merchandise inventory + purchased merchandise inventory – COGS = ending merchandise inventory value