Merchandising is defined as buying products for resale to customers, rather than selling services. So, what exactly do merchandisers do? Well, they purchase inventory, which refers to the products that a company owns for resale to customers; it is selling inventory. Merchandisers, then, purchase inventory and sell that inventory to customers.
EXAMPLEAn example of merchandisers who sell goods would be department stores or grocery stores. This means that they are purchasing goods to resell them to the consumers. On the other hand, service providers would be tax preparers or repairmen, for instance. This involves paying someone to provide a service, rather than providing goods.
Now, let's look at some of the unique accounts that are involved when performing accounting for a merchandising company. There are several additional accounts that merchandisers use:
|Inventory||The products that a company owns for resale to consumers. It is the financial value of product held for resale.|
|Cost of Goods Sold||
The cost of inventory that a company has sold during a given period. Specifically, it is the dollar value of what it cost the merchandiser for the units sold during the period.
It is important to note that cost of good sold is the cost of what was actually sold, not how much it was sold it for.
|Freight on Board (FOB)||
The freight terms that designate whether the buyer or seller pays the freight, and when ownership is transferred to the buyer. There are two types of freight on board:
1. FOB destination, which is when the ownership of merchandise does not transfer until it arrives at the store. This means that once it is in the possession of the merchandiser, that is when the ownership is transferred.
2. FOB shipping point, which is when ownership transfers as soon as it leaves the shipper.
As a merchandiser, when you buy something, if it is FOB shipping point, you own it as soon as it leaves the shipper, whereas if it is FOB destination, you don't have ownership of those goods until they arrive at your store.
Let's look a bit closer at the cost of goods sold account, as well as a calculation of cost of goods sold. As mentioned, cost of goods sold is the cost of inventory that a company has sold during a given period.
What information do we need to calculate cost of goods sold? Well, we need to know:
EXAMPLESuppose we're a merchandiser and we purchased 1,000 couches for resale to the customer, and it cost us $100 per couch, so that is $100,000 and relate to what is available.
|Cost of Goods Sold Example|
|Available||Purchase 1,000 couches for $100 each||1,000 X $100 = $100,000|
|Sold||Sold 500 couches for $200 each||500 X $200 = $100,000|
|Cost of Goods Sold||Sold 500 couches that originally cost $100 each||500 X $100 = $50,000|
Source: Adapted from Sophia instructor Evan McLaughlin.