Assignment topic:

accounting for merchandising business

Subject:
financial accounting
Submitted by:
Unsa Arshad

Submitted to:
sir Bilal kamran

Date:
17oct 2016

Class:
M.Com 1st semester
 Content

Topic: accounting for merchandising business

 Introduction
Inventory classification
Personnel
Inventory Manager
Inventory inspector
Cash manager
Payroll Manager
Cashier
Accountant
Management of assets system
Purchasing system
Selling system
Aim of the proposed accounting information system
Advantages & disadvantages
Analysis
Conclusion

Accounting for Merchandising Business

I. INTRODUCTION

Most people buy their needs in a retail merchandising. In buying, the buyer wants a
product with a reasonable price. Therefore they choose different variety of products
available for sale in such a way to have many choices and them to entice to make a
purchase.

Entrepreneur in merchandising business is establishing working relationships with

manufacturers who will provide the goods or services that are ultimately sold by the
retailer. This type of buying involves determining what products will be carried in the
establishment, negotiating and arranging for the delivery of those goods. Business
activities done by the merchant are: interacts with the seller, puts efforts into proper
relation between selling offices, selling agents agency and seller exporter in terms of
executing an order.

In order to be successful with retail merchandising, it is necessary to provide consumers

with a couple of key benefits. First, the products must be of high quality; this helps to
ensure the customer will return for more purchases in the future. Along with the quality,
the retailer must also sell the products at prices the consumer finds reasonable. By
providing quality products at affordable prices, the retailer has a much better chance of
standing out from the competition and remaining in business for many years to come.
This paper purports the developed and designed accounting information system
suitable or compatible for small/medium-sized merchandising business, with the system
focusing on expenditures, disbursement and revenue-generating activities.

II. INVENTORY CLASSIFICATIONS

Inventories to be sold consist from household items to office supplies and other
commodities. They may be classified into fast-moving and slow-moving products. Fast-
moving products are: well-known brands or considered as a necessity with a high
demand in the market, high-quality, and affordable; and these are divided into two
groups: (1) seasonal demand and (2) continuous Demand. While slow-moving products,
are those products that have low-market share/demand or new brands that have low
popularity, or products that have poor consumer rating as to its purpose.

For fast-moving products, particularly—in the seasonal demand, it includes products

which are easily sold associated to or during a particular period, event or occasion.
Examples are: pasta which have high demand during/few months before December and
condensed or evaporated milk for making halo-halo during summer season. On the
other hand, continuous demand includes those products that are demanded all
throughout the year. Examples are milk, soap, condiments and other items. In short,
products with continuous demand are those commodities that are considered as daily
needs.

Another classification of product is the slow-moving products, with this type of

classification, products have low market share, low demand, may be new products, and
those with high price tag which consumers find it unreasonable to buy. Also, slow-
moving products may indicate that those products have low quality or not much needed
by consumers and that they but that product rarely seldom or those products with no
definite pattern of demand. Also, a merchandising business with slow-moving products
would just set the business on the rocks since only small revenue would be generated
arising from sales.

Personnel

INVENTORY MANAGER:
 Responsible for all inputs related to inventory (sale, purchase, and returns).
 Responsible for monitoring inventory levels and making sure that the re-order
point is met before ordering
 Responsible for issuing purchase order
 Responsible for managing “Inventory Database” and “Suppliers Database”

GENERAL MANAGER:
 May refer to the owner of the business establishment
 Approves transactions that require his/her approval
 Responsible for decision-making in case of serious matters
 Administrator of the information system

INVENTORY INSPECTOR:
 Responsible for inspecting the delivered inventory if the quality, quantity, and
good physical appearance is met
  Responsible for inspecting returned items (sold) that is found to be spoiled or
damaged by the buyer.
 Supports the function of inventory manager

CASH MANAGER:
 Monitors cash levels (inflows and outflows)
 Monitors expenditures
 Manages the “Accounts Receivable Database” and “Accounts Payable
Database”
 Also monitors “Payroll Database” and “Expenses Database”

PAYROLL MANAGER:
 Manages the “Payroll Database”
CASHIER:
 Responsible for the holding of cash arising from the sale of inventory

ACCOUNTANT:
 Responsible for the preparation of financial statements that may be needed by
regulatory agencies
 Has the authority to access all databases that are relevant in the preparation of
financial statements.
 Has the authority to check source and operational documents needed in the
preparation of financial statements

To further understand the flowcharts shown on the subsequent pages, use this legend
to identify the persons responsible for the different tasks within the system.

Inventory Manager
General Manager
Inventory Inspector
Cash Manager
Payroll Manager
Cashier
Accountant
III. MANAGEMENT OF ASSETS SYSTEM

Under this system, the monitoring of inventory levels, inspection and identification of
spoiled goods and management of fixed asset is undertaken. In managing inventory,
FIFO-Perpetual method is used since it is reasonable for goods that are acquired first to
be sold or disposed first and the acquired inventory is inputted in the inventory
database. For goods that are replaced by the supplier due damage or found to have
defects is inputted to the inventory database to update the inventory count. For spoiled
goods that are found after the sale, meaning the customer had found it to be damaged,
defective, upon receipt of the establishment; it is further inspected by the inventory
inspector to ensure that it is really damaged or defective. After the inspection done by
the establishment, the returned item would be inputted to the spoiled goods database
for record-keeping purposes. Also, after it has been proven to be defective by the entity,
the customer will be given an option to refund or replace the item. If the customer would
opt to replace the item then an update to the inventory database is necessary. However,
if the customer would opt to refund the payment of the returned merchandise then the
transaction must be reflected in the sales and cash database. Then, generation of
return slip will follow and thus notifying the supplier that spoiled goods was detected
then when it is approved for replacement, upon the receipt of the replaced item, it would
be inputted to the inventory database. On the other hand, if the good is not found to be
damaged or defective, then it will be rejected thus returned to the customer. For fixed
assets—in a merchandising business, it composes of the following: building, computers,
etc. The reason why fixed assets is included in the management system is because of
the reason that this information system is related to accounting and it is known that in
accounting we account for non-current assets since it gives benefit and so in relation to
merchandising business, necessary accounting treatments to fixed assets are
entered/inputted to the non-current assets database.

IV. PURCHASING SYSTEM

The purchasing section manages the entire inventory acquisition process, from
requisition, to purchase order, to product receipt, to payment. Purchasing systems are a
key component of effective inventory management in that they monitor existing stock
and help companies determine what to buy, how much to buy and when to buy it.

The process starts with checking the reorder point that is referred to the inventory
database and followed by the issuance of a purchase order that indicates the types,
quantities, and additional supplier information that is extracted from the suppliers’
database. This purchase order must be approved by the firm’s inventory manager and
the supplier. In the event that the supplier didn’t approve the order, a follow-up is
required that can be made through phone call. If it has been approved, a reciprocal
obligation of delivery of the goods and payment of the account will arise. If the goods
have been delivered, it must undergo inspection which is done by the inventory
inspector. If it passes the inspection, the inventory inspector must inform the inventory
manager regarding the result of the inspection. Then, an update must be made in the
inventory database. If it fails during the inspection point, the goods must be returned to
the supplier with the issuance of a return slip approved by the inventory inspector and
inventory manager. If the supplier has fulfilled its obligation to deliver, the purchaser
must also fulfill its obligation to pay. If the cash available in the firm’s account is enough
to pay the purchased goods, it can pay in cash. If not, the account is left on credit or by
issuing a post-dated check which is similar to notes payable. In either ways of payment,
a record of it must be inputted in the system thereby reflecting it in its appropriate
databases and archive the receipt of invoice. An optional task is to make an entry in the
e-journal system of the database of the entity, either to make: Merchandise Inventory
(Dr.) and Cash/Accounts Payable (Cr.).
V. DISBURSEMENT SYSTEM

This system purports the financial outlays related to the expenses incurred. Also, this
system does not include the purchase of inventory for the fact that inventory is not
expensed outright because it is still an asset on the time of the purchase and expensed
(cost of sales) once sold. In a business, there are different sources of expenses—some
come from utilities, payroll, other miscellaneous expenses, acquisition of fixed assets.
The disbursement of these expenses may be outlaid by cash or petty cash fund.
Expenses outlaid by cash are those expenses that have huge amounts. On the other
hand, expenses outlaid using petty cash fund are those expenses that have small
amounts or are immaterial. For disbursement using cash, the entry would just be:
Expense account (Dr.) and Cash (Cr.). For disbursements using petty cash fund, the
imprest system is used for control purposes. On the imprest system, expenses are
recognized at the time of replenishment thus the entry made will be: Expense account
(Dr.) and Cash (Cr.).

In the process of disbursement for expenses, the first step is to identify the amount to
be paid which can be obtained by check the billing statement issued, extracting payroll
data from the payroll database, or any unexpected disbursements. After the amount of
payment is identified, this amount must be approved by the general manager and cash
manager, so if there are suspicious figures included then the general manager should
verify and make sure that the amount reported is correct and justifiable. Then after the
amount due is verified, the general manager will notify manager to authorize him to
disburse payment in order to settle the obligation. The invoice received arising from
payment of utilities expense will be used for future use since there are situations that
require documents as proofs for proper presentation and reporting like: during
replenishment of petty cash fund and payment of income tax wherein it is better to
choose the itemized method of taxation but before it financial statements must be
prepared especially the income statement because tax is based on the operating
income of the firm.For acquisition of fixed assets, the fixed asset to be bought must be
tested to ensure that it functions properly, then after it has been proven that it is working
properly, the general manager would notify the cash manager regarding the amount to
be disbursed thus the cash manager would reflect the transaction in the cash database.
Another approach is that if he is knowledgeable of basic accounting procedures, he can
reflect the transaction in the e-journal system by: Fixed Asset Account (Dr.) and
Cash/AP (Cr.). Any official receipt received after payments had been made is stored for
auditing purposes.
VII. SELLING SYSTEM

In a merchandising business, the main and only revenue-generating activity is selling

because that’s what it is intended to do. In selling goods, pricing and the presence of
promos are considered. In the first consideration which is pricing, any cost attributable
for the acquisition of goods and incremental mark-ups are inputted in the inventory
database. For the second consideration which is the promo, it may be in two types
namely: promo mandated by the supplier and promo mandated by firm. The promo
being referred here pertains to giveaways or premiums. For the first type, if the
giveaway if provided by the supplier, it needs to be inputted to the giveaway database
and a record book must be made for redemption purposes. For the second type, the
giveaways/premiums acquired/purchased are inputted also in the giveaway database. If
the promo implemented is price-related (discount) it is just treated as a reduction in the
inventory database since the inventory database shows all information related to the
products. Under this type an entry is necessary, for the purchase of
premiums(Premiums (Dr.) and Cash (Cr.)), for the distribution of premiums to customers
(Premium Expense (Dr.) and Premiums (Cr.)), and at the end of the year where
premiums are still outstanding (Premium Expense (Dr.) and Estimated Premium Liability
(Cr.). In the sale of inventory, there can be two types of payment either by cash or credit
card. For sales paid by cash the entry would just be, Cash (Dr.) and Sales (Cr.) while for
credit card sales the entries are, Accounts Receivable (Dr.) and Sales (Cr.), then if
notice has been given by the bank for payment then the entity would now make an entry
for the receipt of cash and paying the corresponding collection fee which is :Cash and
Collection Expense (Dr.) and Accounts Receivable (Cr.).

VIII. AIM OF THE PROPOSED ACCOUNTING INFORMATION SYSTEM

The aim of the accounting information system created is to:

1. Shorten/streamline the process with control thus making it efficient.

2. Improve/enhance the timeliness in the preparation of financial statements and other
necessary information.
3. Improve the relevance of information generated.
4. Improve the reliability of the information that would contribute effectiveness in
decisions made.
5. Create strong relation(s) between management and employees.
6. Show the importance and impact of technology in business.

IX. ADVANTAGES AND DISADVANTAGES OF THE PROPOSED SYSTEM

Advantages:
 Provides efficiency with control
 Rapid generation of reports
 Less reliance to accountant in terms of recording transactions
 Back-up can be made easily
 Lessens paper works

Disadvantages:
 Costly
 Not user-friendly

X. ANALYSIS

Based on the system of the entities we have interviewed, we have found out that their
systems are mostly performed manually and as well as the processing of information
and there is weak relationship between employees and management and this is
because the management is reluctant in giving their trust to their employees since they
thought that maybe this employees are not trustworthy since there are a lot of cases
wherein businesses suffers downfall because of the malpractices committed by the
employees. Since this happens sometime, we want to design a system that would view
the performance of the employees and at the same time create a division of labor so
that efficiency is enhanced and at the same time there’s control of the problems since
there is segregation of tasks that would help determine the cause of the inefficient
function of the overall system.

Based on the system designed and formulated for medium-sized merchandising

business, we have noticed that there are less paper-works maintained which would
result in streamlined processes. Also, since the activities of a merchandising business is
only few, its subsystems are only few thereby the generation of financial and non-
financial information is done in a short-period of time. Furthermore, since this system is
mainly designed for medium-sized merchandising business wherein owners still have
full control of the processes, then the owner don't necessarily have to maintain records
that are partially-relevant since all are being inputted to the database and computations
can be generated immediately when necessity arises. Since the aim of AIS (Accounting
Information System) is to ensure the reliability and timeliness of information, the
designed system can achieve this quality of information because of the presence of
databases that stores, updates, and correlates data in order to generate documents that
would aid the management in decision-making, that would eventually result to the
achievement of its goals.

XI. CONCLUSION

As a conclusion, the influence of information technology really improved the

competitiveness and enhanced sound decision-making of different businesses and as
well as increased its efficiency. Since one of the vital ingredient for a successful
business operation is information since this contains processed data that serve as a
feedback of past operations which in turn aids the management n how to enhance their
performance. Also, since information must be needed when making decision, timeliness
is another relevant factor in decision-making since this refers to the availability of
information at the time it is needed. So, to achieve timeliness of information, computer
systems, databases, and servers are used in order to streamline the flow of data and
information. Furthermore, with the aid of technology—transmission of information would
be fast, easy, reliable, and timely that would contribute to a sound decision making.

ACKNOWLEDGEMENT:
First of all I would like thank ALLAHA ALMIGHTY for giving me ability to complete this
project .
I also acknowledge with a deep sense of revenue our gratitude to wards my parents and
my teacher who have always supported me morally.