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.