Merchandising businesses, also known as retailers, purchase goods and then sell the goods to customers. So, unlike businesses that manufacture goods or sell services, retailers simply buy and resell goods. This means they have slight accounting differences in their financial statements and have a keen focus on their key business asset: their inventory. Merchandising businesses use a multiple-step income statement, which is an income statement with sections, subsections, and subtotals. Merchandising businesses also use balance sheets, just as any business would. They have a particular interest, however, in the inventory found on the balance sheet, as it is a crucial asset. Two systems are commonly used to track inventory—the periodic system and the perpetual system.
At A Glance
- The operating cycle of a merchandising business involves three steps: purchasing merchandise from a supplier, selling the merchandise to a consumer, and collecting payment.
Periodic inventory systems require a physical inventory count in order to update inventory records and to calculate the cost of merchandise sold.
Perpetual inventory systems are updated each time a transaction occurs, providing real-time information on inventory levels and cost of merchandise sold.
- There are a number of differences between periodic inventory systems and perpetual inventory systems, including the accuracy of real-time inventory data, the entries used to record transactions, and the required physical counts of merchandise.
- Merchandising businesses record their transactions much like any other type of business. They do, however, have a few accounts and transactions that are unique to their business type in order to record the purchase of merchandise and freight charges, make entries to track inventory, and record the cost of the merchandise when it is sold.
- Inventory lost to theft or damage and inventory returned by the customer require the use of adjusting entries, which involve updating the accounting records to document inventory shrinkage and customer returns and allowances.
- The balance sheet of a merchandising business has only slight variations as compared to the balance sheets of other types of businesses.
- The financial statements of a merchandising business involve a multiple-step income statement which separates the cost of the goods the business sells from the cost of running the business.