Question

Explain the importance of merchandise transaction accounting and
The adjustment process for a merchandising business.

Answer 1

Definition: Merchandise, often called inventory, is a good or product that a retailer purchases and intends to sell for a profit. ... Anything that is on the sales floor for sale is considered merchandise because it's a product that they are hoping to sell to customers for a profit.

The operating cycle of a merchandising business involves three steps: purchasing merchandise from a supplier, selling the merchandise to a consumer, and collecting payment. Periodic inventory systems require a physical inventory count in order to update inventory records and to calculate the cost of merchandise sold

Merchandising Business Example

Take a closer look at a merchandising business example. Consider a pet supply store that sells dog beds and kennels. The store might have two distributors, one for the beds and one for the kennels. There may be a differentiation between the credit terms and FOB for each of the seller's.

The dog bed seller might require FOB shipping point with EOM credit terms of 1%. The cost of 100 beds is $10,000 plus $180 for shipping. The buyer accounts for the COGS as $10,180 plus 1% or $10 in interest. This is subtracted from cash and credited to the inventory and tax accounts. The seller can sell each bed for $50 each for a total of $50,000 potential revenues. However, 50 of his 100 beds are lost in shipping that had no insurance obtained to protect it. This drops his potential revenues to $25,000 due to shrinkage since he was the responsible party based on FOB shipping point.

The remaining dog beds sell at the $25,000 is added to cash while inventory is debited per transaction. The gross margin is $25,000 - $10,180 = $14,820 or 59 percent. Had all 50 beds been sold, the gross margin would increase to $39,820 or 79.6 percent.

The kennel wholesaler allows FOB destination but takes payment upon delivery. The merchandiser doesn't have space for many kennels and it isn't a big seller so he only orders 10. Ten kennels are shipped, but one is broken in transit. The COGS is $50 per kennel or $500 total. The seller pays the shipping and replaces the broken kennel. The buyer then resells the kennels for $100 each, for a total of $1,000 in gross revenues. His gross profit margin is 50 percent = $1,000 - $500 / $1,000. Even though he has fewer items with lower margins, he reduces his risk exposure, based on the terms.