Merchandise Accounting

Posted: August 26th, 2021

Merchandise Accounting

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Institutional Affiliation

Question 1. Difference between Accounting For Merchandising andService Company

Merchandise Company buys goods, resells at a higher margin to generate profit, and can operate as either retail or wholesale businesses. They do not manufacture products. They are categorized according to their business operations, such as department stores, booksellers, grocery stores, jewelry stores, clothing stores, retail shops, among others (Warren et al., 2020). On the contrary, a service company generates profits through the provision of services rather than selling physical products such as law firms and accounting firms(Aduamoah et al., 2017). Therefore, the two entities have notable differences in their accounting.

The operating cycle between the two companies is different. In a merchandising company, there is a holding cost of inventory before it is sold. The firm takes time to produce revenue as merchandise business must buy the stock before selling it for a profit(Aduamoah et al., 2017). Conversely, in service companies, there are no holding costs as a client walks in an office and pays for the service rendered. The income generated from merchandise business is based on sales revenue while in service firms are other revenue for service offered. Merchandise inventory is used to adjust the cost of goods sold, unlike in service firms (Warren et al., 2020). Physical stocktaking is done periodically in merchandise companies to determine opening stock, purchases, goods sold, and closing stock to determine purchases and sales. Still, in the service business, this is not done. Equally, a perpetual or periodic inventory system is maintained in the merchandise business to manage the stock and reorder levels.

Additionally, the balance sheet for a merchandising business includes merchandise and estimated returns inventory categorized as current assets. It also provides customer refunds payable as a current liability. The multiple-step income statement is prepared in a merchandising company to separatethe cost of goods the firm sells from the costs of operating the business (Warren et al., 2020). The process of preparing the multiple-step income statement involves determining the gross, operating, and net income. Hence, it identifies the profit made directly on the sale of merchandise, operating expenses, and non-operating expenses.

Question 2: Benefits of Using Computerized Accounting Package in Inventory Management

        Inventory management is essential in merchandising companies as it minimizes stock costs maximizing sales and revenue, achieve efficiency and productivity, and reduce wastage. A computerized accounting package will integrate the company’s functions in inventory management into a centralized system. At the same time, it automatically generates stock documents such as invoices and purchase orders(Wijaya & Wingdes, 2017). Merchandise firms will have faster and accurate stock taking and scanning of bar codes, which will minimize errors by adopting an electronic system. Besides, a  computerized inventory systemhelps accurate maintenance of stock reorder level and reorder period,thus eliminating stock holding costs and maintain a just-in-time reorder stock system (Aduamoah et al., 2017). In this way, the entity has the potential to eliminate stock disappearance through shoplifting or employee theft, decreasing administrative costs, and vendor frauds.

Consequently, the adoption of a centralized system will improve the transportation of goods and shipment. Such a system is capable of quicklyscanning of stocks on a computer to observe when it will be received or sent to a customer(Aduamoah et al., 2017). Also, transit errors are eliminated, and it is possible to maintain a fast-moving product in the stores,thus improving sales performance. Finally, the management can get timely information on the company’s operations, such as inventory turn around period, product margins, and sales patterns. Hence, these metrics are vital in assisting the firm’s management decision making.

Question 3: Difference between “Remit To” And “Ship To”

A “Remit to” in accounting is when a company sends an invoice for the goods purchased. The products are itemized with the amount that the customer shall pay for the goods sold. Invoices bearing the date, customer shipping information, billing, amount due, itemized transactions, payment totals, andbilling company information as well as payment transactions are sent to the customer(Aduamoah et al., 2017). The invoice or remittance advice provides clarity to both the seller and the buyer. The supplier flags the outstanding receivables using remittance advice in the accounting system and attached to a payment (Dorsey et al., 2018). Conversely, “ship to” refers to the transiting of goods to the buyer through shipping. In accounting, the title of the products passes to the buyer from the seller at the shipping point. It implies that the goods-in-transit are recorded as purchases to the buyer, disclosed as inventory. Thus, the seller reports as a sale increasing account receivable.

Question 4: Inventory Methods In Peachtree

Peachtree uses a perpetual inventory system where merchandising companies update their stock for purchases and sales of each item in real-time. Inventory management is recorded in real-time by the use of technology on the point of sale system and enterprise assets management software(Aduamoah et al., 2017).  Unlike the periodic inventory system that records the transactions of sales and revenue after some time, the perpetual system is efficient and gives real-time inventory information. It also provides a highly detailed analysis of inventory changes with immediate reporting and accurately reflecting the stock balance. When merchandise companies adopt this system, there is no need for maintaining accurate inventory recordsas purchases are debited directly in the database (Wijaya and Wingdes, 2017). The sales are credited instantly in the system, and the cost of goods sold (COGs) includes direct costs such as labor, materials, and factory overhead. Thus, Peachtree has adopted a perpetual inventory method as it updates the stock levels immediately once sales or purchase is made.

Question 5:  Decisions Managers Can Make Based On theInventory Valuation Report

The inventory valuation report is used in inventory management to show the total cost of an inventory and the potential profits from selling the stock. In this way, the value of the available stock for each item is determined. The inventory value is given by multiplying unit costs with the available quantity(Ferdowsi & Parekh, 2018). The report indicates that the inventory valuation methods are first-in-first-out (FIFO), average cost, and last-in-first-out (LIFO). Detailed cost information such as quantity received, date, receipt number, and unit prices are also shown in the report (Ferdowsi and Parekh, 2018). Management can use the report as an audit and decision making tool. As such, decisions on the ideal stock level, reorder period and reorder level to minimize stock holding costs are enhanced. The total inventory value and retail value are other parameters that managers can decide on based on the report. These parameters are critical for improving management knowledge on the value of a stock being held in the company. Finally,the report shows the potential profit margins, which will aid management to determine which stock is generating sustainable profit against the one with low sales and returns(Wijaya & Wingdes, 2017). Thus, it is crucial inventory management that such indicators are assessed to ensure that as only the right stock level with the highest profit margins is maintained.

References

Aduamoah, M., Yinghua, S., Anomah, S., & Ahmed, F. (2017). Riding the Waves of Technology: A Proposed Model for the Selection of Appropriate Computerized Accounting Software for Implementation in SMEs in Developing Countries. Archives of Business Research, 5(12).

Dorsey, J., McCauley, N. P., Cummins, J. P., Monica, D., Quigley, O. S. C., & McKelvey, J. M. (2018). U.S. Patent No. 9,916,581. Washington, DC: U.S. Patent and Trademark Office.

Ferdowsi, Z., & Parekh, R. G. (2018). U.S. Patent No. 10,157,392. Washington, DC: U.S. Patent and Trademark Office.

Warren, C., Jonick, C., & Schneider, J. (2020). Accounting. Cengage Learning.

Wijaya, T., & Wingdes, I. (2017). Penerapan Kontrol Stok dalam Sistem Informasi Dagang Dengan Metode Perpetual Inventory System. Cogito Smart Journal, 3(1), 20-31.