Ultimate Guide to Accounting for Merchandising Businesses
Ultimate Guide to Accounting for Merchandising Business is your go-to resource for mastering the essential steps in recording transactions. This guide simplifies the process of making journal entries, offering a solid foundation for effective financial management in merchandising.
Merchandising Business
A merchandising business refers to a type of entity that buys finished products (goods) from manufacturers or wholesalers and sells these products to customers for a profit. Unlike manufacturing businesses, which produce goods, or service businesses, which provide intangible services, a merchandising business primarily deals with the buying and selling of tangible goods. Moreover, this distinction highlights the unique nature of the merchandising sector in the business landscape.
In the merchandising industry, companies actively plan, get, buy, promote, and sell goods to meet what consumers want and make more money. Thus, this means looking at trends, figuring out what consumers like, and working with suppliers for different products.
In merchandising, it's important to predict and adapt to market changes. Merchandisers negotiate with suppliers, carefully considering market trends and economic factors to make smart decisions.
Visual Merchandising
After getting merchandise, the focus turns to visual merchandising—an art of arranging products to create attractive displays that grab customer attention and increase sales. This includes decisions on where to put products, signage, lighting, and store layout. The goal is to create an engaging shopping experience that matches the target audience and strengthens brand identity. Merchandisers collaborate with marketing teams to plan and run promotional campaigns, using a mix of traditional advertising, social media, and other channels to generate excitement about new products or promotions. Thus, these actions help boost brand visibility and potentially increase revenue.
Inventory Management
It is a critical element of the merchandising business, involving a careful equilibrium between sustaining adequate stock levels to meet customer demand and preventing excess inventory, which can result in financial losses. Advanced technologies and data analytics play an ever-growing role in fine-tuning inventory levels, streamlining supply chain operations, and improving overall efficiency. Merchandisers rely on forecasting models, demand planning tools, and real-time analytics to make well-informed decisions regarding inventory replenishment. This ensures that the correct products are on hand in optimal quantities and at the right times, contributing to effective financial management and customer satisfaction.
E-Commerce
The growth of e-commerce has greatly influenced the merchandising industry, with online platforms becoming crucial to overall business strategies. Merchandisers now deal with the challenge of handling online marketing, improving product listings, and making online shopping easy. Technology, including Customer Relationship Management (CRM) systems, allows businesses to analyze customer behavior and preferences. This data is used to tailor merchandising strategies, leading to enhanced customer satisfaction and overall business success.
Challenges
The merchandising business encounters challenges; notwithstanding, these include the necessity to adjust to rapidly shifting market conditions, navigate the complexities of global supply chains, and meet evolving consumer expectations. Achieving success in merchandising requires a blend of creativity, analytics, and also strategic insight. In this dynamic industry, staying ahead means being innovative and adaptable to outpace competitors. It requires a keen eye on market dynamics and a commitment to continuous improvement.
In the financial records of a merchandising business, key accounts include:
Inventory
Represents the goods that the business has purchased and intends to sell. Inventory is a current asset on the balance sheet.
Cost of Goods Sold (COGS)
Represents the direct costs associated with producing or acquiring the goods that a company sells during a particular period. COGS is an expense on the income statement.
Sales Revenue
Represents the total amount of revenue generated from selling goods to customers because sales revenue is a key component of the income statement.
Gross Profit
Calculated by subtracting the COGS from the total sales revenue. It reflects the profitability of the core business operations.
Operating Expenses
Include costs such as rent, utilities, salaries, and advertising. These are deducted from the gross profit in order to calculate the net income.
In a merchandising business, the accounting cycle involves recording transactions related to the purchase, sale, and inventory management of goods. The periodic inventory system is commonly used, where the cost of goods sold and ending inventory are calculated at the end of each accounting period.
The proper accounting treatment of transactions ensures accurate financial reporting, enabling stakeholders to assess the business's performance, profitability, and financial health. Overall, accounting in a merchandising business is essential for tracking the flow of goods and money, facilitating decision-making, and complying with financial reporting standards.
Accounting for Purchases
In business operations, the process of documenting the items acquired and received for sale is typically done through a document known as a "Purchase Invoice."
Purchase Invoice
It commonly referred to as a supplier invoice or vendor invoice, is a document issued by the supplier or vendor to the buyer or customer to request payment for goods or services purchased. It serves as a record of the transaction and outlines the details of the purchase, including item descriptions, quantities, prices, applicable taxes, payment terms, and any other relevant information.
The purchase invoice is typically created by the supplier or vendor and sent to the buyer after the goods or services have been delivered or rendered. The buyer uses the information on the purchase invoice to verify the transaction and process payment to the supplier.
The purchase invoice includes important details such as the invoice number, invoice date, payment due date, billing and shipping addresses of both the buyer and supplier, as well as any reference numbers or purchase order numbers associated with the transaction.
Businesses need purchase invoices for keeping records, tracking expenses, and managing what they owe. These invoices are crucial for audits, following tax rules, and making sure accounts match up.
Upon receiving a purchase invoice, the buyer actively reviews and compares it to the corresponding purchase order. If discrepancies arise, the buyer promptly contacts the supplier to resolve issues before processing payment.
After making the payment, the buyer marks the invoice as paid and keeps a copy for their records. Simultaneously, the supplier retains a copy as part of their accounts receivable process.
Journal Entries
Record the credit purchase in the general journal of Angeles Trading as follows:
November 24, 2023-
Purchases 20,100
Accounts Payable- Mabiyaya Merchandising 20,100
To record purchases of bags and tumblers on credit.
When Angeles Trading pays for the purchase in cash instead of credit, they record the entry in their general journal as:
Purchases 20,100
Cash 20,100
To record purchases of bags and tumblers in cash.
Accounting for Purchase Returns and Allowances
Buyers may return purchased goods at times due to defects, damage, or other reasons. When this happens, the company will reduce its Purchases by the amount returned. The buyer notifies the seller in writing. Typically, a buyer communicates this using their printed business form known as a Debit Memo. Similarly, if the supplier gives an allowance for minor defects (meaning the buyer keeps the goods but at a reduced price), this also reduces the Purchases. Below is an example illustration of a Debit Memo.
If the seller approves the return or grants an allowance, they typically send the buyer an acknowledgment or issue a written document known as a Credit Memo. A Credit Memo may have a similar format to the Debit Memo, with the only difference being the substitution of the word "debit" with "credit." Upon receiving this communication, the buyer records the returns or allowances in their books.
Illustration
Let's continue with the transactions between Angeles Trading and Mabiyaya Merchandising.
From the 150 items that Angeles Trading acquired, they identified defects in 12 school bags and 5 tumblers. The defective items had a total value of 1,890. Consequently, Angeles Trading issued a Debit Memo to Mabiyaya Merchandising. In acknowledgment, Mabiyaya Merchandising confirmed the defects and provided a Credit Memo in return.
Given this scenario, the journal entry for Angeles Trading would be:
Entry upon purchase:
November 24-
Purchases 20,100
Accounts Payable- Mabiyaya Merchandising 20,100
To record purchases of bags and tumblers on credit.
Entry upon return:
December 8-
Accounts Payable- Mabiyaya Merchandising 1,890
Purchase Returns and Allowances 1,890
To record merchandise purchases returned
to Mabiyaya Merchandising.
If the transaction operates on a cash basis, the seller may issue a cash refund upon returning goods. In cases where no cash refund is provided, the buyer will have a receivable from the seller.
Create a journal entry when purchasing goods with cash.
Original Entry:
November 24-
Purchases 20,100
Cash 20,100
To record purchases of bags and tumblers in cash.
Entry upon return:
Cash 1,890
Purchase Returns and Allowances 1,890
To record cash refund for returned goods.
However, if the return does not involve a cash refund, perform the necessary journal entry as follows:
Accounts Receivable- Mabiyaya Merchandising 1,890
Purchase Returns and Allowances 1,890
To record the Accounts Receivable to Mabiyaya
Merchandising due to the cash not refunded for
the returned goods purchased.
Accounting for Discounts on Purchases
There are two types of Discounts in purchasing goods on credit as follows:
Trade Discounts
When purchasing goods or services on credit, apply trade discounts as reductions to the list or catalog price. These discounts are automatically subtracted from the list price to determine the actual invoice price charged to the buyer, without explicit recording. Trade discounts serve multiple purposes, including promoting trade, incentivizing larger purchases, and maintaining good business relations. They also provide buyers with an idea of the resale price for the goods. Negotiate the percentage of the trade discount between the buyer and seller based on factors such as purchase volume, frequency, and the nature of their business relationship. Unlike cash discounts, trade discounts are not subject to specific terms or conditions.
Cash Discounts
Sellers offer cash discounts to buyers as deductions, aiming to encourage debtors to make early payments for their accounts. The purpose of cash discounts is to motivate the buyer to pay within a specified timeframe.
Apply these discounts to the price of the purchased goods and record them as either purchase discounts or sales discounts, depending on whether you are the buyer or the seller. Buyers calculate the net purchase amount by deducting the purchase discount from their total purchases. On the other hand, sellers subtract sales discounts from their sales to determine the net sales revenue. Apply cash discounts only to credit sales, while give trade discounts for both cash and credit purchases. Base trade discounts on the listed price of the goods, while calculate cash discounts based on the invoice price.
Illustration
To illustrate, let's consider an example. Marian Rivera purchases merchandise from Dingdong Trading on April 4, 2023. The merchandise has a listed price of ₱200,000, with trade discounts of 25% and 15%. Additionally, the credit terms for this transaction are 5/10, n/30.
This means offering a 5% cash discount for payments made within 10 days. If the payment extends beyond 10 days but remains within the credit period of 30 days, the customer must pay the full amount of the invoice.
Computation:
The entry to record the purchase is:
Purchases 127,500
Accounts Payable- Dingdong Trading 127,500
To record purchase on account.
Please note that we are not recording the Trade Discounts.
The entry for recording the payment made within the discount period is as follows:
Accounts Payable- Dingdong Trading 127,500
Purchase Discounts 6,375
Cash 121,125
To record payment of obligation within the discount period.
If Ms. Rivera exceeds the specified number of days during the discount period, she must pay the full amount. The discount in this instance is no longer applicable.
The entry in Ms. Rivera's book will be:
Accounts Payable- Dingdong Trading 127,500
Cash 127,500
To record payment of obligation beyond the discount period.
If the customer fails to pay their account within the term period provided by the seller, the seller can take several actions. The seller may send payment reminders or contact the customer directly to inquire about the payment. If the payment remains outstanding, the seller may impose late fees or penalties. In more severe cases, the seller may involve a collections agency or pursue legal action to recover the unpaid amount. It is important for customers to honor the agreed-upon terms of payment to maintain a good business relationship with the seller.
Complete Illustration of Trade and Cash Discount
Transactions March, 2023
Date | Transaction | Term |
March 1 | Antonnete Store bought merchandise from Aurea Enterprise with a list price of ₱120,000. | 20%, 15%, 2/10, n/30, |
March 5 | Returned defective merchandise amounting to ₱15,000. | |
March 7 | Paid in full the accounts due to Aurea Enterprise. | |
March 14 | Bought equipment to Matibay Trading ₱45,000 | 10%, 5%, 2%, 5/15, n/30. |
March 31 | Settled the accounts due to Matibay Trading |
Journal Entries:
Mar 1 Purchases 81,600
Accounts Payable- Aurea Enterprise 81,600
To record purchase on account.
Mar 5 Accounts Payable- Aurea Enterprise 15,000
Purchase Returns and Allowances 15,000
To record merchandise returned to
Aurea Enterprise.
Mar 7 Accounts Payable- Aurea Enterprise 81,600
Purchase Discounts 3,330
Cash 78,270
To record payment of merchandise within
the discount period.
Mar 14 Purchases 37,705.50
Accounts Payable- Matibay Trading 37,705.50
To record purchase on account.
Mar 31 Accounts Payable- Matibay Trading 37,705.50
Cash 37,705.50
To record payment of liabilities.
Computation:
March 1 transaction-
March 14 transaction-
Methods of Recording Purchases
Record purchases using two methods, namely:
1. Gross Method
Both Purchases and Accounts Payable are recorded at their full gross amounts.
Illustration:
a. Purchase of merchandise from Aurea Enterprise on account, ₱ 200,000, 5/10, n/30.
Purchases 200,000
Accounts Payable- Aurea Enterprise 200,000
To record the purchase of merchandise on account.
b. Assume the payment occurs within the discount period.
Accounts Payable- Aurea Enterprise 200,000
Purchase Discounts 10,000
Cash 190,000
To record payment of account.
c. Assume payment occurs after the discount period.
Accounts Payable- Aurea Enterprise 200,000
Cash 200,000
To record payment of account.
2. Net Method
Both Purchases and Accounts Payable are recorded at their net amounts.
Illustration:
a. Purchase of merchandise from Aurea Enterprise on account, ₱ 200,000, 5/10, n/30.
Purchases 190,000
Accounts Payable- Aurea Enterprise 190,000
To record the purchase of merchandise on account.
b. Assumes payment occurs within the discount period.
Accounts Payable- Aurea Enterprise 190,000
Cash 190,000
To record payment of account.
c. Assume payment occurs after the discount period.
Accounts Payable- Aurea Enterprise 190,000
Purchase Discounts Lost 10,000
Cash 200,000
To record payment of account.
To sum up, we've looked at how a merchandising business works by going through the daily transactions. This quick overview gives you a clear picture of the simple yet crucial record-keeping needed for success in merchandising.
