Certain merchandise that a firm may acquire may be inventory or supplies. Accounting treats them differently as to the matching criteria used. Required:
a. Describe the situation where merchandise would be considered inventory. How would the firm account for the costs of the merchandise?
b. Describe the situation where merchandise would be considered supplies. How would the firm account for the costs of the merchandise?
a. A firm that is an office supply store may purchase merchandise for resale to its customers. When the merchandise is purchased, it may be accounted for by debiting Inventory and crediting Cash (or Accounts Payable). When the merchandise is sold, the cost of the merchandise may be accounted for (or matched) to the sales by debiting Cost of Goods Sold and crediting Inventory.
b. A firm that is an office supply store (per a. above) may also purchase merchandise to use in its own offices to run its business. When the merchandise is purchased, it may be accounted for by debiting Supplies and crediting Cash (or Accounts Payable). At the end of the year when an inventory is taken of the supplies and some were used up during the course of business, the supplies used may be accounted for by debiting Supplies Expense and crediting Supplies.
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