BUSA 100 Chapters 10 and 11 Notes on Merchandising Companies

BUSA 100 Chapters 10 and 11 Notes on Merchandising Companies

Merchandising Companies

Merchandising companies sell products, not services. Their accounting practices are different than service companies. These notes summarize most of these differences, and explain the general ledger accounts unique to merchandising companies.

The distribution channel is the means that manufacturers of products use to sell their products to consumers. A common example of a distribution channel is:

Manufacturer sells to wholesaler who sells to retailer who sells to consumer.

In our class, we will take the point of view of either the wholesaler or the retailer.

Differences between Merchandisers and Service Companies

• Freight costs: Who pays the freight? It depends on the shipping terms:
• FOB Shipping Point-buyer pays freight and owns the merchandise when shipped.
• FOB Destination-seller pays freight and owns the merchandise until delivered.

• Sales tax: Retailers must collect sales tax from consumers and remit to the government.

• Credit cards: The use of credit cards by consumers is more prevalent in merchandising companies as compared to service companies.

Banks charge the sellers when customers use credit cards to pay for purchases.

• Returns: Sellers usually allow the return of merchandise. The seller uses the Sales Returns and Allowances account for returns (debit balance account). The buyer uses Purchases Returns and Allowances (credit balance account).

• Discounts: Some sellers may allow a discount for the early payment of merchandise purchased. The seller uses Sales Discounts (debit balance account) and the buyer uses Purchases Discounts (credit balance account).

New Accounts - (Seller of Merchandise)

Normal

Name of AccountType of AccountBalanceUsed to:

SalesRevenueCRRecord sales of

mdse. inventory

Sales Tax Payable LiabilityCRRecord sales tax

collected

Sales DiscountsContra-RevenueDRRecord early

payment discounts given to buyer by seller

Sales Returns &

AllowancesContra-RevenueDRRecord products

returned by buyer on the seller’s books

New Accounts - (Buyer of Merchandise)

Normal

Name of AccountType of AccountBalanceUsed to:

PurchasesExpenseDRRecord purchases of

merchandise for resale

Purchases Returns &

AllowancesContra-ExpenseCRRecord returns of

merchandise to vendors

Purchases DiscountsContra-ExpenseCRRecord discounts

taken for early payment to vendors

Freight-inExpenseDRRecord payment of

transportation costs on merchandise purchased