Merchandising Operations

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27 Oct 2010
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Merchandising Operations
¾ The primary source of revenues is the sale of merchandise. These revenues are
referred to as sales revenue, or simply sales
¾ Expenses for a merchandising company are divided into two categories: cost of
goods sold, and operating expenses
¾ The cost of goods sold is the total cost of merchandise sold during the period. This
expense is directly related to the revenue earned from the sale of goods. Net sales ±
Costs of goods sold = gross profit
¾ Sales revenue less cost of goods sold is called gross profit.
¾ Operating expenses are expenses that are incurred in the process of earning sales
¾ Gross profit ± operating expenses = net income (or net loss)
¾ Records of inventory are necessary
Operating cycles
¾ The operating cycle of a merchandising company is the average time from the
purchase of merchandise inventory and its eventual sale
Inventory systems
¾ There are two main inventory systems: perpetual inventory system or a periodic
inventory system
Perpetual Inventory system
¾ In a perpetual inventory system, detailed records of each inventory purchase and sale
are maintained
¾ When an item is sold, the original purchase price is obtained from the inventory
records and transferred from merchandise inventory (asset) to cost of goods sold
¾ The cost of goods sold and reduction in inventory is recorded each time a sale occurs
Periodic inventory system
¾ The cost of goods sold is determined only at the end of an accounting period
¾ A physical inventory count is taken to determine the goods on hand at the end of the
¾ Cost of goods sold is calculated as follows: Beginning cost of goods + cost of goods
purchased ± Ending cost of goods on hand = Cost of goods sold
Recording Purchases of Merchandise ± Perpetual Inventory system
¾ Each purchasing order should be documented with a purchase order. A purchase
order is a document used to place an order for goods (or services) with a supplier
¾ Both cash purchases and credit purchases are also supported by a purchase invoice.
This document indicates the total purchase price and other relevant information
¾ When purchase of merchandise for resell occurs, there is usually a debit to
merchandise inventory and a credit to cash/accounts payable
¾ At times, companies create subsidiary accounts for each product it sells in order to
better track each individual balance
Subsidiary Inventory Records
¾ In a perpetual inventory system, the Merchandise inventory account in the general
ledger acts as a control account for all the subsidiary or individual inventory
¾ At all times, the control account balance equals the total of all the individual
inventory account balances
Freight Costs
¾ Freight may be expressed in terms as either FOB shipping point or FOB destination
¾ FOB shipping point means that the buyer is responsible while FOB destination is the
seller who is responsible
¾ When the buyer pays for freight, it should be part of the cost of merchandise and
debited to merchandise inventory
¾ When the seller pays for freight, it is part of their expense, under freight out expense
or delivery expense
Purchase Returns and Allowances
¾ Purchase return ± returned goods for cash or credit depending on the original
transaction (recorded as a reduction of merchandise inventory)
¾ Purchase allowance ± buyer keeps the goods but receives a reduction in price to
compensate for damage to goods (recorded as reduction of merchandise inventory)
¾ Quantity discount ± a reduction in price due to a large quantity being ordered
(recorded as a reduction of merchandise inventory)
¾ Purchase discount ± a reduction in price for early payment. Purchase discounts are
noted on the invoice by the use of credit terms specifying the amount and time period
for the purchase discount
Recording Sales of Merchandise ± Perpetual Inventory system
¾ Every sales transaction should be supported by a business document that provides
written evidence of the sale. Cash register tapes provide evidence of cash sales. A
sales invoice can provide support for a credit or cash sale
¾ Two entries are usually made for each sale. The first entry records the sales revenue:
Cash/A.R is debited and Sales is Credited. The second entry records the cost of the
merchandise sold: Costs of goods sold is debited and Merchandise inventory is
Sales taxes
¾ Sales taxes are collected on the services that are provided and the goods that are sold
¾ Sales taxes take the form of GST, PST, and HST
¾ Sales taxes are not revenue to the company. These are temporarily collected and
remitted periodically to the government
Sales Returns and Allowance
¾ Returned goods for cash or credit depending on original transaction and/or a
reduction in price to compensate for damaged goods (recorded as sales returns and
allowance ± contra revenue account)
¾ There are two entries and situations to be considered: The first entry would be a debit
to sales returns and allowances and a credit to Cash/A.R. The second entry would be
a debit to Merchandise inventory and a credit to Cost of goods sold. This would only
occur if the merchandise returned was able to be resold. If not, the entry would be a
debit to Loss on damaged goods (expense) and a credit to cost of goods sold
¾ Quantity discounts ± recorded as a reduction in sales
¾ Sales discounts ± a reduction in price for early payment
Freight Costs
¾ Freight costs incurred by the seller on outgoing merchandise are an operating
expense to the seller. These costs are debited to a freight out or delivery expense