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Describe Merchandising Operations and Inventory Systems

Merchandising operations involve purchasing, selling, collecting, and paying for inventory. There are two main types of inventory systems - perpetual and periodic. Perpetual systems continuously track inventory levels while periodic only does an inventory count at the end of each period. Adjusting entries are necessary to ensure financial statements accurately reflect revenues and expenses for the period even if payment was not received or made during that time.

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Sadia Rahman
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242 views4 pages

Describe Merchandising Operations and Inventory Systems

Merchandising operations involve purchasing, selling, collecting, and paying for inventory. There are two main types of inventory systems - perpetual and periodic. Perpetual systems continuously track inventory levels while periodic only does an inventory count at the end of each period. Adjusting entries are necessary to ensure financial statements accurately reflect revenues and expenses for the period even if payment was not received or made during that time.

Uploaded by

Sadia Rahman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Describe Merchandising Operations and Inventory Systems

Merchandising operations are your purchasing, selling, collecting and


payment activities.

SALES REVENUE : In a Merchandising Company, the primary source of


revenues is sales of merchandise, referred to as sales revenue or sales.

INCOME MEASUREMENT PROCESS FOR A MERCHANDISING COMPANY:


Unlike expenses for a service company, expenses for a merchandising
company are divided into 2 categories:

Cost of Goods Sold and Operating Expenses.

Cost of Goods Sold is the total cost of merchandise sold during the
period. This expense is directly related to the revenue recognized from
the sale of goods.

OPERATING CYCLES

The operating cycle of a merchandising company ordinarily is longer


than that of a service company. The operating cycle of a merchandising business
involves three steps: purchasing merchandise from a supplier, selling the merchandise to
a consumer, and collecting payment.

Purchase merchandise from vendors for inventory on account or for cash  Sell inventory to customers
on account  Collect cash from customers  Pay cash to vendors  Repeat again and again  Note that
these steps overlap so that the cash collections from customers may occur before and/or after the cash
payments to vendors.

INVENTORY SYSTEMS
Merchandise Inventory (Inventory or MI) refers to the goods the company has purchased and intends to
sell to others.  Inventory is a current asset since the company intends to sell it within one year.

Companies use one of two systems to account for inventory: Perpetual


Inventory or Periodic Inventory.
Perpetual Inventory System: Companies maintain detailed records of the
cost of each inventory purchase and sale. These records continuously (or
perpetually) show the inventory that should be on hand for every item.
Records cost of goods sold each time a sale occurs.

Periodic Inventory System: Companies do not keep detailed inventory


records of the goods on hand, throughout the period. They determine
the cost of goods sold only at the end of the accounting period, that is
“periodically.”Does not keep detailed records of goods on hand
throughout the period.Determines the cost of goods on hand and cost
of goods sold only at the end of the accounting period.

Purchase returns:  Inventory account is decreased for the cost of the merchandise returned to the
seller less any allowances or discounts already recorded in the ledger. Sales Transactions:  Inventory
account is decreased and cost of goods sold is increased for the cost of the merchandise sold.  The
freight cost necessary to transport the inventory to the buyer’s place of business is an expense in the
period of sale (FOB Destination). Transportation Out or Freight Out are typical accounts used to record
the expense.  The selling price of the merchandise sold represents revenue to the seller and is recorded
in a separate transaction.  Trade discounts are deducted as part of the initial sale transaction; they are
not a sales discount nor a contra-revenue. Sales Returns:  Inventory account is increased and cost of
goods sold is decreased for the cost of the merchandise returned by the buyer.  Sales returns and
allowances is increased and cash or A/R is decreased for the selling price of the merchandise returned
by the buyer.

What is 2/10 Net 30?


2/10 net 30 means that buyers are eligible to get a 2% discount on trade credit if the
amount due is paid within 10 days. After those 10 days pass, the full invoice amount is
due within 30 days without the 2% discount according to the terms for 2/0 net 30.
what are adjusting entries and why are they necessary

Adjusting entries are the entries made by the business before the preparation of financial statements
in order to make changes that have already recorded in the books of accounts. The adjusting entries
are mainly used to record the unrecognized income and expenses take place in the period of time.
The adjusting entries helps the business to correct the mistakes made by the company in the
accounting year. The accurate and reliable income statement and balance sheet is the main aim of
adjusting entry.The purpose of adjusting entries is to ensure that your financial statements
will reflect accurate data. If adjusting entries are not made, those statements, such as your
balance sheet, profit and loss statement, (income statement) and cash flow statement will not
be accurate. The main two types are accruals and deferrals. Accruals refer to payments or
expenses on credit that are still owed, while deferrals refer to prepayments where the products have
not yet been delivered.

What Is the Accounting Cycle?


The accounting cycle is a collective process of identifying, analyzing, and
recording the accounting events of a company. It is a standard 8-step process
that begins when a transaction occurs and ends with its inclusion in the financial
statements.

The key steps in the eight-step accounting cycle include recording journal
entries, posting to the general ledger, calculating trial balances, making adjusting
entries, and creating financial statements.

Steps of the Accounting Cycle


There are eight steps to the accounting cycle.

1. Identify Transactions: An organization begins its accounting cycle with


the identification of those transactions that comprise a bookkeeping event.
This could be a sale, refund, payment to a vendor, and so on.
2. Record Transactions in a Journal: Next come recording of transactions
using journal entries. The entries are based on the receipt of an invoice,
recognition of a sale, or completion of other economic events.
3. Posting: Once a transaction is recorded as a journal entry, it should post
to an account in the general ledger. The general ledger provides a
breakdown of all accounting activities by account.
4. Unadjusted Trial Balance: After the company posts journal entries to
individual general ledger accounts, an unadjusted trial balance is prepared.
The trial balance ensures that total debits equal the total credits in the
financial records.
5. Worksheet: Analyzing a worksheet and identifying adjusting entries make
up the fifth step in the cycle. A worksheet is created and used to ensure
that debits and credits are equal. If there are discrepancies then
adjustments will need to be made.
6. Adjusting Journal Entries: At the end of the period, adjusting entries are
made. These are the result of corrections made on the worksheet and the
results from the passage of time. For example, an adjusting entry may
accrue interest revenue that has been earned based on the passage of
time.
7. Financial Statements: Upon the posting of adjusting entries, a company
prepares an adjusted trial balance followed by the actual formalized
financial statements.
8. Closing the Books: An entity finalizes temporary accounts, revenues, and
expenses, at the end of the period using closing entries. These closing
entries include transfering net income into retained earnings. Finally, a
company prepares the post-closing trial balance to ensure debits and
credits match and the cycle can begin anew.

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