FAA 101: MERCHANDISING

Merchandising Business → “Buy and sell”

Business buys products at wholesale price and sells at retail price (higher price than purchase costs)

“Service”

Absence of inventory of tangible goods

Professional skills, expertise, advice

“Merchandising”

Presence of inventory of tangible goods for sale

Inventory

International Accounting Standard 2 (IAS 2), inventories as assets

Held for sale in ordinary course of business = Finished Goods Inventory

In the process of production for such sale = Work-in-progress Inventory

Form of materials/supplies to be consumed in production process/rendering of services = Raw materials

IAS 2.10 : Cost of inventories shall comprise..

Costs of purchases → all costs of buying inventories

Costs of conversion → costs directly related to units of production (direct labor), systematic allocation of fixed and variable production overheads incurred in converting materials into finished goods

Other costs incurred in bringing inventories to their location and condition → only to the extent that they are incurred in bringing the inventories in location and condition

Phases

(Merchandising Business)

“Inbound”

Purchase (buyer)

Cost of inventories

“Outbound”

Sales (seller)

Cost of goods sold

[Purchase- Inbound]

Accounts

Nature

Classification

Normal balance

Phase

Purchases

Cost of goods/

merchandise purchased (debited, under periodic inventory)

Expense

Debit

Purchase

Purchase returns & allowances

Returns of merchandise to seller, “debit memo”

Contra-account

Credit

Purchase

Purchase discount

Buyer avails cash discount; credited

Contra-account

Credit

Purchase

Freight-in/ Transportation-in

Freight costs incurred by buyer in acquiring merch

Adjunct account

Debit

Purchase

[Sales- Outbound]

Accounts

Nature

Classification

Normal balance

Phase

Sales

Sales of merchandise (cash/on account)

Revenue

Credit

Sales

Sales returns & allowances

Returns of merchandise from customers, “credit memo”

Contra-account

Debit

Sales

Sales discount

Buyer avails cash discount;

debited

Contra-account

Debit

Sales

Freight-out (delivery expense)

Shipping costs shouldered by seller in selling merchandise

Expense

debit

Sales

Discounts

“Trade”

Percentage reduction to the list price/catalog to arrive at the invoice price/sales