Business and Personal Finance: Retail Is More Than Buying and Selling

Unique Issues for Specific Businesses – Retail Is More Than Buying and Selling

Retail businesses have a specific focus: they buy products from suppliers and resell them to customers. In addition to the standard journal entries used by service companies, retailers also deal with inventory and cost of goods sold.

Like most product-based businesses, retailers must often account for sales returns and discounts. Retailers have a few unique transactions on top of the usual entries. One common example is layaway sales, as detailed in Chapter 6, in which customers make small payments toward buying a particular product. Another example is consignment shops, unique among retailers; rather than recording merchandise sales and cost of goods sold, the journal entry for a sale is more like a sales commission.

Another issue retailers may face involves exactly when to count merchandise in their inventory, meaning at which point ownership of the goods transfers from the supplier to the retailer. To figure that out, you have to know a bit about goods in transit, meaning items that are actually some- where in between the seller and the buyer. Whichever company has the legal responsibility for those goods is the company that owns them, and that depends on the shipping terms. Shipping terms come in two basic flavors: FOB shipping point and FOB destination (the FOB just means free on board). FOB shipping point means that ownership changes hands from the supplier to the retailer the minute the goods leave the warehouse. FOB destination means that ownership changes hands only when the goods actually reach their final destination, with the retailer.

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FACT

Sales returns and sales discounts are recorded in special contra accounts rather than in the general sales account. The reason for these extra accounts is to give you better information. If everything got lumped into one account, you wouldn’t know how much came back as returns, or whether discounts were causing an increase in overall sales.