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A little inside information helps

It’s important for both parties to know two things when goods are sold. The price of the item and the timing of the payment. It’s also good to know what the stipulations are, if there are any which may apply to the return of merchandise, for example. Companies utilize different methods to quote their prices. A lot of merchants will generally quote the price that they will like to sell for.

On the other hand, some merchants such as manufacturers or wholesalers will usually quote their prices as a percentage of those in their catalog; generally a reduction of around 30 percent or more, which is known as a trade discount. For example, if something is listed at $1,500 with a trade discount of 30 percent or $450 then the seller writes the price as $1050, and the buyer records it as $1050. From there the seller can raise or lower it depending on the quantity that is being sold.

The terms of sales are usually on the sales invoice and show the type of terms to the agreement. In many industries the payment is expected within a short time after the purchase. If it’s 15 days then the invoice will have “n/15” (net 15) or “n/20” (net 20) which means that the amount is due 15 or 20 days later. In most industries a discount is usually offered for an early payment. This type of discount is called a sale discount which serves the purpose of increasing seller liquidity by reducing the amount of money logged in the accounts receivable column.

An invoice with a discount may look like "3/10, n/20," which that the purchaser can pay within 20 days and receive a 30 percent discount, or they can pay within twenty days and pay the full price for it. If you have noticed, the amount of discounts have been decreasing for a couple of reasons. First it is quite expensive for the seller, and second, to the customer it appears that they are not receiving a bargain even though it's there.

In some industries it is expected for the seller to pay some of the charges, and others it may not. One example is in the freight industry. FOB shipping point basically means that the buyer is paying for all of the shipping expenses. So if you purchase something heavy and the sales agreement says "FOB" then that means that you are responsible for the shipping charges. However, FOB destination is the opposite and means that the seller pays the shipping or transportation expenses once it is delivered.

A lot of retailers will give buyers the opportunity to charge the shipping expenses to some type of third party service. The five most used credit cards are:

American Express
Visa
Discover Card
Diners Club
MasterCard

The customer is given credit by the lender or credit card issuer, and receives a shiny plastic card to charge their purchases to. Once the seller accepts the card, the invoice is automatically prepared and the seller receives money into their account. If the seller is offering a discount, the discount is recorded as an expense to the seller.

Let’s not forget that the seller’s merchant also deducts money for each transaction, and that's money that is deducted and recorded as an expense. Let’s not forget that you also have something that is known as freight in, also called transportation in. This is the shipping costs that are associated with receiving particular merchandise, and is generally included with the cost of goods sold.

A lot of companies like to include the cost of freight with the cost of the merchandise, because it is a relatively small amount of money. Sometimes the buyer is expected to pay the freight in and it is reported as an increase in the accounts payable. Also, if the seller experiences a return because of the wrong item shipped, or for a damaged/low quality product, then the buyer may be granted a refund for cash or for credit back to their account. The returned purchase is deleted from the merchandise inventory account under the perpetual system.

Sometimes sellers will pay the delivery or the freight out costs hoping that it will increase their sales. These expenses are gathered in the freight out expense, or commonly known as delivery expense. This is viewed as a selling expense on the income statement. When a customer is dissatisfied with a product, they will usually return it and these costs are gathered in the sales returns and allowances account which gives the management a more flexible estimate of what products to keep and which ones to discard. This account deducts sales from the income statement.

A merchandising company can have inaccurate records as well as experience a huge loss in profits if they don’t have reliable accounting records. The management is generally charged with setting up the system for internal control. Internal control is the policies that a management puts into action to make sure that the financial information is reliable. This is the process that the management adopts in order to protect their assets. It also confirms that the employees have conformed to legal requirements so that they will do the best job possible for the company.

Since the managers are the ones in charge of the structure of a business they must report their goals and progress on the “Report Management” of a company’s annual report to stockholders. To be successful with internal control, management uses five parts of internal control. They are: Control environment, risk assessment, information and communication, control activities, and monitoring.

Control environment deals with the overall attitude, and actions of a management system. It also includes management ethics, integrity, and philosophy. The employees must also be properly trained and very knowledgeable in the field their participating in. The risk assessment is the analysis of risk in an environment and how to monitor them. These include screening out thieves in a retail store, or employees that are likely to steal from a company.

Next, information and communication correlates to the accounting system by establishing management, and reporting a company’s transactions. Control activities are the restraints that management puts in place to make sure that instructions are properly carried out. Last, monitoring involves the periodic assessment to make sure that all policies are enforced.

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