The calculation of merchandise sold for a retailer is important for three general reasons:
- It calculates the actual pre-markup cost of all merchandise the retailer has purchased and sold.
- The final figure for merchandise sold is subtracted from revenue earned from selling the items at a predetermined markup. This is gross profit also referred to as gross margin. If a business has sales revenue from merchandise sold of $1,000 and the actual cost of the merchandise sold by that business is $600, then the gross margin is $400 (1,000 - $600). This may be used as a ratio expressing the fact that for every $1 of merchandise sold, $.60 covers the cost of the merchandise to the seller and $.40 is the gross profit made on the sale of that merchandise.
- Cost of merchandise sold calculations must be made on federal income tax return Schedule C, Form 1040 as a component of the business’ computation of taxable business income.
The Difference Between a Perpetual and Periodic Inventory System
A retailer using the perpetual system of tracking merchandise inventory has an up-to-date balance of both the cost of merchandise sold and the merchandise inventory accounts. This is because the retailer makes entries into the inventory or cost of merchandise sold general ledger accounts each time an item is purchased or an item is sold.
A retailer using the periodic method of calculating the cost of merchandise sold updates specific accounts on a periodic basis rather than on a perpetual basis. This occurs most commonly among retailers who do not use point-of-sale computerized software.
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