LESSON 3 - THE MERCHANDING BUSINESS

Lesson Overview

• Topic: Merchandising Business

• Subject: Fundamentals of Accountancy, Business & Management

• Presenter: JV Legaspi

Nature of a Merchandising Business

• Definition: A business that engages in buying and selling merchandise is called a Trading or Merchandising Firm.

• Income Generation:

  • Merchandising businesses generate income by buying and selling goods at a profit.

  • Differs from a Service Type of Business, which earns income by providing services to clients.

• Comparison with Manufacturing Businesses:

  • Manufacturing Businesses buy raw materials and process them into finished goods for sale.

  • Merchandising Businesses only buy and sell finished goods.

• Goods are purchased from manufacturers or other merchandisers.

Types of Merchandisers

• Wholesalers:

  • Buy goods in bulk directly from manufacturers.

  • Sell goods to retailers.

• Retailers:

  • Sell products directly to end users.

Merchandising Operations

• Main Activities: Two key activities are involved:

  • Buying

  • Selling

• Recording Transactions: There are two perspectives in recording transactions:

  • Point of View of the Buyer

  • Point of View of the Seller

Inventory Systems in a Merchandising Business

• Importance of Merchandise Inventory: Goods acquired for sale are part of merchandise inventory, crucial for determining sales cost.

• Inventory Recording Systems: Two main systems:

  • Periodic System

  • Perpetual System

The Periodic System

• Appropriateness: Suitable for businesses dealing with low-priced items where sales transactions are numerous, making individual item tracking impractical.

• Example: Supermarkets, where tracking each low-priced item’s cost during sales is not feasible.

• Cost of Goods Sold: Typically determined at the end of the accounting period.

Transaction Recording under the Periodic System

• Inventory Acquisition:

  • Recorded as purchases, purchase discounts, and purchase returns/allowances.

• Freight Costs:

  • Freight-in: Transportation costs borne by the buyer.

  • Freight-out: Transportation costs borne by the seller (recorded as delivery expense).

• Sales Transactions:

  • Recorded as sales, sales discounts, and sales returns/allowances.

The Perpetual System

• Appropriateness: More suitable for businesses selling high-priced items (e.g., car dealers, expensive watch stores) with fewer daily transactions.

• Cost Recording: Cost of each item sold can be tracked per sales transaction, maintaining running balances of inventory.

• Physical Inventory Count: At the end of the accounting period, the ending inventory balance should match actual counts unless discrepancies arise from theft, obsolescence, or spoilage of goods.