Manufacturing vs. Merchandising Explained
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stephanie roswellManufacturing vs. Merchandising Explained
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stephanie roswellCommon questions
Powered by AIA cash discount, synonymous with a sales discount, provides a reduction in the amount a buyer owes by a specific percentage if payment is made within a discount period. A purchase discount refers to a similar reduction for early payment within the credit period. Both types of discounts impact accounting records by decreasing the purchaser's liability and adjusting inventory values or accounts payable and cash paid, based on the timing of payment and adherence to discount terms .
A purchase discount is an incentive from the supplier for early payment typically within a certain credit period. If the payment is made within this period, the buyer benefits from a reduced payment amount. For example, a typical notation like n/30 represents full payment due in 30 days, but a 1% discount may apply if paid within 10 days. The accounting entry for utilizing the discount involves debiting accounts payable and crediting both inventory and cash to reflect the reduced payment .
A perpetual inventory system provides continuous tracking of inventory records, updating quantities of merchandise inventory and cost of goods sold with each purchase and sale transaction. This system enhances accuracy by providing real-time inventory levels, allowing more immediate identification of discrepancies and enabling better decision-making regarding stock management .
A manufacturing business is involved in converting raw materials into finished products, while a merchandising business focuses on buying and selling finished goods produced by others. The revenue for a merchandising company is termed as sales and it's reported through merchandise inventory. Manufacturing requires transforming raw inputs into tangible products, whereas merchandising involves purchasing products for resale without altering them .
A purchase return occurs when the buyer physically returns unsatisfactory products to the seller, often due to defects or incorrect items, and is recorded by adjusting accounts payable and inventory. A purchase allowance happens when the buyer retains defective goods but receives a cost reduction or credit, incentivizing them to keep rather than return the items. This distinction reflects a different accounting treatment and negotiation on how to resolve the buyer's satisfaction issue without a return .
Credit terms like n/30, where a purchaser is given 30 days to pay for a purchase, influence transaction management by affecting cash flow and financial planning. They encourage prompt payment within the specified period and provide opportunities to utilize capital for other needs. These terms also impact the timing and amount of accounts payable, influencing the financial statements and overall liquidity management of the business .
Under FOB shipping point terms, the buyer assumes responsibility for shipping costs and bears the risk of loss or damage during transit as soon as the goods are shipped. This means the ownership transfers to the buyer as the goods leave the seller's premises. Conversely, under FOB destination terms, the seller is responsible for costs and risks until the goods arrive at the buyer's location, transferring ownership upon delivery .
In a periodic inventory system, purchase returns and allowances reduce the total purchases account. When a buyer returns products to the seller, it's recorded by debiting accounts payable and crediting inventory. For allowances, where the buyer keeps goods but receives a reduced cost, no physical goods are removed, but a credit adjustment reduces the amount payable .
For FOB shipping point, where the buyer incurs transportation costs, the entry is: Debit Inventory and Credit Cash, reflecting the buyer's responsibility for these costs. With FOB destination, the seller handles transportation costs, resulting in an entry of Debit Freight Out and Credit Cash, indicating the seller's expenditure on shipping until delivery is completed .
From an accounting perspective, differentiating between freight in and freight out is crucial because it determines whether transportation costs are part of the cost of acquiring inventory (freight in) or an expense associated with delivering goods to customers (freight out). Freight in is capitalized as part of inventory cost, affecting merchandise inventory valuation. In contrast, freight out is an operating expense recorded as part of selling and distribution costs, impacting the income statement directly .