OCW041: Special Considerations for Merchandising Companies

Overview of Merchandising Operations

Merchandising is any practice which contributes to the sale of products to a retail consumer.

Learning Objectives

Recognize what items make the financial statements for a merchandiser different from a manufacterer

Key Takeaways

Key Points

  • In Retail commerce, visual display merchandising means maximizing merchandise sales using product design, selection, packaging, pricing, and display that stimulates consumers to spend more.
  • In the supply chain, merchandising is the practice of making products in retail outlets available to consumers, primarily by stocking shelves and displays.
  • Merchandising has its own specific income statement other than general income statements in other industries.

Key Terms

  • supply chain: A system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer.

In the broadest sense, merchandising is any practice which contributes to the sale of products to a retail consumer. At a retail in-store level, merchandising refers to the variety of products available for sale and how the products are displayed to stimulate interest and entice customers to make a purchase.


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Retail store: Merchandising is any practice which contributes to the sale of products to a retail consumer.

Promotional merchandising

In Retail commerce, visual display merchandising refers to the process of maximizing merchandise sales using product design, selection, packaging, pricing, and display that stimulates consumers to spend more. This includes disciplines and discounting, physical presentation of products and displays, and decisions about which products should be presented to which customers at what time.This annual cycle of merchandising differs between countries and some times within them. The cycles may relate to cultural customs like holidays, and seasonal issues like climate and local sporting and recreation. In the United States for example, the basic retail cycle begins in early January – with merchandise for Valentine’s Day – and ends around mid-February. Presidents’ Day sales are held shortly thereafter.

Retail supply chain

In the supply chain, merchandising is the practice of making products in retail outlets available to consumers, primarily by stocking shelves and displays. While this used to be done exclusively by the stores’ employees, many retailers have made substantial savings by requiring it to be done by the manufacturer, vendor, or wholesaler that provides the products to the retail store. In the United Kingdom, for example, there are a number of organizations that supply merchandising services to support retail outlets with general stock replenishment and merchandising support for new stores. Through this approach, retail stores have been able to substantially reduce the number of employees needed to run the store.

Specific income statement of merchandising operations:

Sales

– Sales Return & Allowances

– Sales Distcount

= Net sales

– Cost of goods sold

= Gross margin

– Operating expenses

= Income before taxes

– tax

= Net income

Recording Purchases

In merchandising accounting, purchases are the amount of goods a company buys in the course of a year, including the kind, quality, quantity, and cost.

Learning Objectives

Define a purchase and describe how to record it

Key Takeaways

Key Points

  • Purchases are offset by Purchase Discounts, and also by Purchase Returns and Allowances.
  • Purchase discounts are an offer, from the supplier to the purchaser, to reduce the selling price if the payment is made within a certain period of time.
  • FOB specifies which party (buyer or seller) pays for which shipment and loading costs, and where responsibility for the goods is transferred, with the last distinction important for determining liability for goods lost or damaged in transit.

Key Terms

  • purchase discount: a reduced payment from the customer based on invoice payment terms
  • FOB shipping point: the buyer pays shipping cost and takes responsibility for the goods when the goods leave the seller’s premises
  • FOB destination: the seller will pay shipping costs and remain responsible for the goods until the buyer takes possession
  • deposits in transit: money sent from a company to its bank that does not yet appear in the bank account
  • Incoterm: Any of a series of international sales terms that divide transaction costs and responsibilities between buyer and seller.

Purchases

In accounting, purchases are the amount of goods a company buys over the course of the year. It also refers to information that should be recorded about the kind, quality, quantity, and cost of goods that are purchased and added to inventory. Purchases are offset by Purchase Discounts, and also Purchase Returns and Allowances. When purchases should be added to inventory depends on the Free On Board (FOB) policy of the trade. For the purchaser, this new inventory is added on shipment (and the seller removes the item from inventory when it is shipped by the seller) if the policy was FOB shipping point. On the other hand, the purchaser adds the inventory on receipt (and the seller removes the item from inventory when it arrives with the purchaser) if the policy was FOB destination.

Purchase Discount

A purchase discount is an offer, from the supplier to the purchaser, to reduce the selling price if payment is made within a certain period of time. For example, a purchaser buying a 100 dollar item with a purchase discount term of 3/10, net 30, will only need to pay 97 dollars if they pay within ten days. Under the gross method, the total cost of purchases are credited to accounts payable first, and discounts realized later if the payments were made in time. Under the net method, purchase discounts are realized right away. And if the payments are not made in time, an anti-revenue account named Purchase Discounts Lost is debited to record the loss.

FOB


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Shipping: The initials FOB represent ownership and responsibilities involving the shipping and receiving of goods.

FOB is an abbreviation which pertains to the shipping of goods. Depending on the specific usage, it may stand for Free On Board or Freight On Board. FOB specifies which party (buyer or seller) pays for which shipment and loading costs and where responsibility for the goods is transferred. The last distinction is important for determining liability for goods lost or damaged in transit from the seller to the buyer. Precise meaning and usage of “FOB” can vary significantly. International shipments typically use “FOB” as defined by the Incoterm standards, where it always stands for “Free On Board. ” Domestic shipments within the U. S. or Canada often use a different meaning, specific to North America, which is inconsistent with the Incoterm standards.

Recording Sales

Net sales are gross sales minus sales returns, sales allowances, and sales discounts.

Learning Objectives

Differentiate between gross sales and net sales

Key Takeaways

Key Points

  • Sales returns, allowances and discounts are contra-revenue accounts.
  • In bookkeeping, accounting, and finance, net sales are operating revenues earned by a company for selling its products or rendering its services. Also referred to as revenue, they are reported directly on the income statement as sales or net sales.
  • In financial ratios that use income statement sales values, “sales” refers to net sales, not gross sales.

Key Terms

  • gross sales: The total invoice value of sales, before deducting customers’ discounts, returns, or allowances.
  • net sales: The value of sales generated by a company after deduction of returns, discounts, and the value of damaged or lost goods
  • sales returns and allowance: a refund to customers for returned merchandise / credit notes or reductions in sales price for merchandise with minor defects agreed upon after the purchase
  • sales discount: reduced payment from the customer based on invoice payment terms
  • sales invoice: the seller’s name for a commercial document issued by a seller to a buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided the buyer
  • double-entry bookkeeping: A double-entry bookkeeping system is a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different nominal ledger accounts.

In bookkeeping, accounting, and finance, net sales are operating revenues earned by a company for selling its products or rendering its services. Also referred to as revenue, they are reported directly on the income statement as sales or net sales.

In financial ratios that use income statement sales values, “sales” refers to net sales, not gross sales. Sales are the unique transactions that occur in professional selling or during marketing initiatives. The sales portion of an income statement for merchandising companies is figured as noted below:

Sales – Sales Return & Allowances – Sales Discount = Net sales


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Sales: Net sales are operating revenues earned by a company for selling its products or rendering its services.

Revenue is earned when goods are delivered or services are rendered. In a marketing, advertising, or a general business context, the term “sales” often refers to a contract in which a buyer has agreed to purchase products at a set time in the future. From an accounting standpoint, sales do not occur until the product is delivered. “Outstanding orders” refers to sales orders that have not been filled.

A sale is a transfer of property for money or credit. In double-entry bookkeeping, a sale of merchandise is recorded in the general journal as a debit to cash or accounts receivable and a credit to the sales account. The amount recorded is the actual monetary value of the transaction, not the list price of the merchandise. A discount from list price might be noted if it applies to the sale.

Fees for services are recorded separately from sales of merchandise, but the bookkeeping transactions for recording sales of services are similar to those for recording sales of tangible goods.

Gross sales and net sales

Gross sales are the sum of all sales during a time period. Net sales are gross sales minus sales returns, sales allowances, and sales discounts. Gross sales do not normally appear on an income statement. The sales figures reported on an income statement are net sales.


Source: Accounting