Tips and tricks of merchandising operations
Before going in detail about merchandising business accounting one must be aware of Merchandising Business, what it is? Merchandising Business is a business where a commercial firm is solely dedicated to purchase of finished products and sell them at a higher price to make profit. A merchandising business company usually buys finished products either from manufacturer or from distributors. Merchandising business sells the products to local or international markets depending upon the product’s quality and demand. Merchandising business runs on a very simple theory. In this business – an inventory is purchased at a price and sold to a customer at a higher price. The accounting process of a merchandising company is quite different from other companies. Other companies usually sell a service in return of money. Merchandising businesses are commonly familiar with accounting processes that are rarely used by other businesses. We will discuss on the accounting process of Merchandising Companies here. Accountants Sydney CBD will be able to provide you with professional advise on this regard.
Cost of Goods sold – A company whose motto is to purchase products to resell must keep an acquisition of the products. Cost of Goods sold is the term used in merchandising operations to denote the costs related to purchase of these products. The cost of goods sold includes various elements; like – employee payroll, freight charges and merchandise inventory purchases. The net profit is calculated after subtracting the cost of goods sold from total sales figure. The net profit is also termed as the bottom line profit. Now we will look into details of how to calculate Cost of Goods sold. At first, start by determining the beginning inventory value. This process takes place at the end of previous reporting period’s inventory value. As a seller, the number will be the total amount of all merchandise in your stock. Consider only the stock you have planned to sell to your customers. In other words, it will reflect the total amount of money invested in inventory at the beginning of a reporting period. Now comes the second step, accumulate all the inventory purchases into one account. You can do this by adding all the invoices of products purchased. Simply add all the values and you will have the amount at your hand. As a seller, you will be adding up all products – including received, yet to be received. Now, you should calculate the labor cost. Though this step is important for manufacturer, but merchandising companies also may include the labor charges faced during the storage and warehousing process of the products. Now comes the accounting part of adding up the costs for supplies, materials and other costs. Merchandising Companies should include the costs of freight, carrying containers, warehouse rent, electricity bill and other miscellaneous costs here. Determining the end inventory value is another important step. Determining the ending inventory value depends upon the inventory tracking method used by a particular company. Now, you are almost done to see the Cost of Goods Sold value – just add all the values you got from previous steps together. Now you can subtract the ending inventory from the determined value to determine the cost of goods sold.
Merchandise Inventory – Merchandising inventory means the items, which are sold by a merchandising company. Merchandising companies buy these products from suppliers or manufacturers. If these purchases are made on a trade account, will appear on the sub ledger of accounts payable. These are kept in that sub ledger of accounts payable until they are paid.
Purchase Returns and Allowances – At times, merchandising companies may receive merchandising inventory that are defective from their suppliers. These items are also placed for sale. When a customer buy these defective merchandise from a merchandising company and return the product to the company for refund of the price it was purchased for, the merchandising company receives the product back. But the merchandising company does not put the item back into inventory rather the company returns it to the supplier it was purchased from. The supplier takes this product back and issues a debit memo on future invoices to that company. The debit memo reduces the value of future invoice due to that defective product.
Free on Board – Free on Board is the factor to determine the party responsible for shipping charges and also contains the location where the merchandise inventory gets its ownership transferred from the seller to the buyer. Four types of Free on Board are there: Free on Board Destination, Free on Board Origin, Freight Prepaid and Free on Board Shipping Point. Free on Board Destination is used when the seller of a particular item pays the shipping cost of the product. Free on Board Shipping Point and Free on Board Origin is used when the buyer or the merchandise company pay for the shipping cost of a particular product. In Free on Board Shipping Point and Freight Prepaid the seller who is selling the product to the merchandise company pays for the shipping charges but the shipping charges are billed to the buyer along with the cost of the original product.
Free on Board is also the factor that determines the ownership of a product – from seller to buyer. Free on Board Destination is used when the ownership of a particular product is transferred when the particular product is delivered to the buyer’s location. The term Free on Board Destination is used to denote that the ownership of the product will be changed at the destination or when it reaches the buyers premises. In Free on Board Origin and Free on Board Shipping Point the ownership of that particular product is transferred at the point where the product is loaded on to the carrier from the seller. The terms Free on Board Origin and Free on Board Shipping Point is used to denote the point of transfer of ownership at the origin point or the shipping of that particular business transaction. Free on Board is very important in merchandising business accounting as it is the main factor to determine the location of transferring the ownership along with the cost of shipping.