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MERCHANDISING ACTIVITIES
What is a Merchandising Company?
A Merchandising company, whether a wholesaler or a retailer, earns revenue by buying and selling goods called merchandise. In such a company, net income results from revenue exceeding cost of goods sold and operating expenses, according to the following equation:
NET INCOME = Revenues - Cost of Goods Sold - Operating Expenses
Components of the Net Income Equation
Revenues of a Merchandising Company
The revenues created through the sale of goods consist of the gross sales from merchandise sales less returns, allowances, and discounts. This gives you the net sales of the business.
Gross Sales
Gross sales are the total cash and credit sales made by a company in a given accounting period.
Sales Returns and Allowances
Most stores allow customers to return any unsatisfactory merchandise that they bought. Sometimes, customers are even allowed to keep the unsatisfactory goods and are given an allowance, an amount off the sales price.
Sales Discounts
When goods are sold on credit, the terms of payment must be clearly stated. These "credit terms" specify both the amounts of payment and the period of time allowed to pay. When the payment period is long, creditors often grant cash discounts for early payment. For example;
A buyer agrees to pay for materials within 60 days. The seller issues him a discount rate of 2 % off the price of purchase if the payment is made within 10 days (discount period). The terms are written as follows:
Calculation of Net Sales The calculation of net sales is accomplished through the following technique:2/10, n/60
| Gross Sales | $ 350,000 | ||
| Less: | |||
| Sales Returns & Allowances | $ 5,000 | ||
| Sales Discounts | $ 2,500 | ($ 7,500) | |
| Net Sales | $ 342,500 |
Cost of Goods Sold of a Merchandising Company
Cost of Goods Sold refers to the price paid by a company for the products it sells. This cost refers only to the price paid for the materials used in production and not the labour and other expenses that generally accompany production of goods. The cost of goods sold is subtracted from the gross sales to calculate the gross profit.
Calculation of Cost of Goods Sold
The following technique is used in the calculation of cost of goods sold:
| Beginning Inventory | $ 25,000 |
| Cost of Goods Purchased | $ 150,000 |
| Cost of Goods Available for Sale ($25,000 + $150,000) | $ 175,000 |
| Less Ending Inventory | ($ 20,000) |
| Cost of Goods Sold ($175,000 - $20,000) | $ 155,000 |
Operating Expenses of a Merchandising Company
Operating expenses for a merchandising company generally include all expenses associated with the production of the goods sold. There are generally two types of operating expenses:
1. Selling Expenses
à Expenses of storing and preparing goods for sale, promoting sales, actually making sales, and delivering goods to customers.
2. General and Administrative Expenses
à Support the overall management and operations of a business.
Calculation of Operating Expenses
Upon completion of the Accounting Period, the expenses incurred by the business must be calculated. Since there are two types of operating expenses, we must have two sections to our expense sheet:
Operating Expenses:
|
||
| Selling Expenses: | ||
| Amortization Expense, store equipment | $ 5, 000 | |
| Rent Expense, selling space | $ 10, 000 | |
| Sales Salaries Expense | $ 25, 000 | |
| Store Supplies Expense | $ 1, 000 | |
| Advertising Expense | $ 7, 500 | |
| Total Selling Expenses | $ 48, 500 | |
| General and Administrative Expenses: | ||
| Amortization Expense, office equipment | $ 1,000 | |
| Office Salaries Expense | $ 25,000 | |
| Insurance Expense | $ 1,500 | |
| Rent Expense, office space | $ 1,500 | |
| Office Supplies Expense | $ 1,500 | |
| Total General and Administrative Expenses | $ 30, 500 | |
| Total Operating Expenses | $ 79, 000 |
Summary
A merchandising company operates under the following equation:
Net Income = Revenues - Cost of Goods Sold - Operating Expenses
Throughout this section we have dealt with each of these areas in detail. Use these examples as a guide to understanding merchandising accounting.