Wednesday, August 25, 2010

Accounting for Merchandising Operations

Merchandising Issues and Accounting

Merchandisers will derive most of their income from the sale of goods.  Usually the largest expense for a merchandiser is cost of goods sold.  This is also known as the cost of sales.

The difference between the net sales of a company and cost of goods sold is gross profit, which is also called the gross margin. This will be recorded on the income statement.

To keep track of what they own, a merchandiser will use the Merchandise Inventory account on the balance sheet.  It represents the stock of goods on hand and in the inventory that can be sold to customers.

There are two types of inventory systems; the perpetual inventory system which keeps a record of all of the ins and outs in the inventory account and the periodic inventory system which only updates the inventory account at the end of the period.  Most companies use a perpetual inventory system because technology has made it cheap to do so.

This means that the merchandise inventory account is updated for every purchase and decreased for every sale.  Returns of goods also affect the account.

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