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3.1: Introduction

  • Page ID
    43069
  • So far our discussion has been limited to service businesses where companies sell expertise, knowledge, experiences, or the use of something to customers. In a service business, customers do not purchase or take ownership of a physical product.

    Merchandising businesses sell products. A merchandising business buys finished and packaged manufactured products, marks them up, and sells them to customers. A merchandiser, therefore, may be either the buyer or the seller in a given transaction, depending upon whether product is being purchased (and added to the stock of inventory), or sold (and removed from the stock of inventory.)

    A vendor is a company or individual that a merchandiser purchases goods from. A customer is a company or individual that a merchandiser sells goods to.

    Inventory consists of items that are purchased for resale. Note that inventory is different from supplies. Supplies are items that are purchased to be used in the operation of the business, not to be sold to customers. For example, a merchandiser may have Windex glass cleaner on hand. It is considered inventory if it will be resold to customers and is considered a supply if it is used in running the business to keep the check-out counters clean. Similarly, inventory is also different from fixed assets such as equipment. For example, a merchandiser may have desktop computers on hand. They are considered inventory if they are to be resold to customers, such as in the case of Best Buy, Dell, or Apple. They would be classified as equipment if the merchandiser is using the computers to run its own business operations.

    Sales is the new revenue account used to record income from selling products. This account replaces Fees Earned, the revenue account used for a service business.

    The following are common sequences of events for merchandising businesses. When you are the buyer, you will (1) purchase product on account; (2) return product; and (3) pay for the product. When you are the seller, you will (1) sell product on account and reduce the inventory balance; (2) accept returns and increase the inventory balance; and (3) receive payment for sales.

    Most merchandising businesses use a perpetual inventory system. It is the process of keeping a current running total of inventory, both in number of

    units on hand and its dollar value, at all times. When product is purchased for resale, inventory immediately increases. When product is sold, the total value of the inventory on hand is immediately reduced.

    This accounts summary table lists the new accounts used by merchandising businesses that use the perpetual inventory system for timing the recording of its changes in inventory value.

    ACCOUNTS SUMMARY TABLE

    ACCOUNT TYPE

    ACCOUNTS

    TO INCREASE

    TO DECREASE

    NORMAL BALANCE

    FINANCIAL STATEMENT

    CLOSE OUT?

    Asset

    Merchandise Inventory

    Account that keeps track of Items in stock for resale to customers

    debit

    credit

    debit

    Balance
    Sheet

    NO

    Contra Asset

    Estimated Inventory Returns

    Account that keeps track of the cost of the amount inventory that customers are expected to return

    credit

    debit

    credit

    Balance Sheet

    NO

    Revenue

    Sales

    Account that keeps track of the dollar amount of purchases made by customers

    credit

    debit

    credit

    Income Statement

    YES

    Contra Revenue

    Sales Returns

    Account that keeps track of the dollar amount of merchandise actually returned by customers

    Allowance for Sales Returns

    Account that keeps track of the dollar amount of merchandise esti- mated to be returned by customers

    Sales Discounts

    Account that keeps track of the dollar amount of discounts taken by customers under the gross method of recording sales

    Sales Discounts Not Taken

    Account that keeps track of the dollar amount of discounts not taken by customers under the net method of recording sales

    debit

    credit

    debit

    Income Statement

    YES

    Expense

    Cost of Merchandise Sold

    Account that keeps track of what a company paid for the inventory it has sold to customers

    Delivery Expense

    Account that keeps track of the transportation charges that a seller has absorbed as an expense

    debit

    credit

    debit

    Income Statement

    YES

    Note

    When BUYING, the only new account above you may use is Merchandise Inventory. When SELLING, you may use any of the seven new accounts.

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