Question

discussion, let us continue with our observation of our local merchants from Unit 5. How do they account for, protect, and manage their cash?

(local merchant case below)

One of the popular merchant here is Big Bazaar. It is having several outlets of different sizes spread across the city and countrywide also. It stocks several ranges of products from kitchen & home appliances, garments, dry foods, beverages, fruits, consumables etc.

Inventory is classifies by its use. Retailers often have only one category→Merchandise-which includes retail goods that were purchased ready for sale.

Cost of goods sold is basically comprises of the wholesale prices of the goods and its stocking charges like, the cost of storing or warehousing, delivery, packaging etc. For retailers like this, they don’t have much of production activity therefore, cost of production here is little to none. They possess a huge volume of inventory because the inventory are purchased from the wholesalers at the wholesale prices and they sell it to the customers by giving a required mark up on each product.

Costs mostly are of administrative nature. They used to maintain a perpetual inventory system which keeps continuous track of the changes in the inventory accounts. All transactions are recorded as they occur. Retail systems are more accurate as they update records or record inventory changes at the point of sale, updating both the inventory and cost of goods sold. Purchases, Returns, Allowances, Discounts, Freight-in etc. are also updated. The basic system of cost of goods sold is to determine in this way: (Beginning Inventory + Purchase) – Ending Inventory

Let’s taken an example of this. Beginning inventory, January 1 $350000

Ending inventory, December 31 $400000

Purchase $670000

Cost of Goods Sold:

Opening Inventory $350000

Add: Purchase $670000

Cost of Goods available for sale $1020000

Less: Closing inventory $400000

Cost of Goods Sold $620000

Answer 1

Solution:

Accounting of Cost of Goods Sold:

The retailers usually compute the COGS with the following formula:

Opening Inventory + Purchases - Closing Inventory

As they do not maintain any specific inventory system mostly follow the perpetual inventory system, as the customers pick the items as they see.

Accounting process starts with receiving the merchandise from wholesalers through different stages like issuing purchase order, negotiations etc.

Once the matetrial/merchandise received purchasing entry will be made by debiting to the purchases a/c with sub ledgers like product types. At the same time, crediting to the suppliers A/c. Often suppliers credit will be there to repay the dues in certain number of days, till then no need to pay until there is no demand from supplier.

The accounting entry would be:

Purchases Dr.

To Creditors A/c

After the merchandise is received they will be labeled with the cost:

Inventory (product wise) A/c Dr.

To purchases Control A/c (This shall be equal to the purchases A/c at the end of the year)

After labeling, the price of the product includes the profit and maintainence cost.

Once the merchandise stacked for sale,customers pick what they want and pay the bill in cash. With this activity the sale is completed. Generally, the retailers lilke Bigbazaar will sell their merchandise on cash basis but not on credit basis. As soon as the sale is completed that particular item is reduced from the inventory, and the cost of Goods Sold is updated. Cost of Goods Sold includes all the cost directly related to the goods produced and excludes any indirect costs.

Cost of Goods Sold A/c Dr.

To Inventory (product wise) A/c (Consumption of inventory)

To Overheads A/c

Entry to record the Sales is

Cash/Bank A/c Dr.

To Sales A/c

Managing the cash: The question comes here is how to manage the receipts? Since the sales are 100% cash basis, the amount collected through sales either in cash or card is deposited in the Bank 's a/c.

From then, the creditors will be paid and the following entry for repayment shall be passed:

Creditors A/c Dr.

To Bank A/c