A Merchandising Business Near Me

Introduction

After learned basic accounting principles that generally apply to all types of firms, we turn our attention to merchant firms. Since merchants are the most common type of business, and also have some special issues in accounting for operations. A merchandising business, in short, is to purchase inventory and resell it at a higher price, like 7-11 and Walmart. Such a business has some accounting issues on inventory, discounts, purchases, and costs. Purchases and resell are the core activities of their operations. Their profits mostly from sales after subtracting the cost of goods sold. But the business does not as simple as only purchases and resale, they also have to manage the inventory and operating expenses, freight charges, taxes, even returns, and allowances. Moreover, if they sell tons of goods, but still not getting fewer and fewer amounts of net profits, they might be in serious trouble. New types of payment methods are also testing merchants' abilities to update their operating strategies.

A Merchandising Business Near Me

There's a bookstore chain called "Eslite Bookstore (https://www.eslitecorp.com/eslite/index.jsp)" who sells books and stationery in where I live. 

What Type of Merchandise Do They Stock

Obviously, the store purchases multiple books for inventory to sell, and the merchandise that the bookstore stocks are books.

How Does The Merchant Determine Its cost of Goods Sold? 

The bookstore is using a perpetual system, connected with the barcode system to manage and doing accounting with the inventory. Therefore, the cost of books sold account is constantly adjusted as transactions occur. As a result, the determination of the cost of goods sold is by reference to the "cost of goods sold" account in the general ledger balance, instead of resort to calculating the purchase accounts. With the real-time data of books stock, the bookstore optimizing its management by rapidly know what kind of books are selling quickly. The bookstore often publishes a week or monthly favorite list of books called "Top 10 Eslite's Choices" on the wall in their stores. 

In processing inventory, the bookstore determined a consistent method of "First In, First Out", which means purchase first, costs first on assigning the cost of goods sold. For instance, suppose a book was purchased on day 1, then an identical book was purchased on day 2. The one which purchased on day 1 will be calculated as the cost of goods sold first. 

There are more and more "FinTech" payment methods these days, such as LINE Pay, Apple Pay, or Amazon Pay, merchants have to accept new technologies without enhancing their costs. The bookstore records these added costs which charged by other companies as operating expenses, not the cost of goods sold. 

Compare to other non-merchant businesses, merchants sell and manage their inventory to make money. In short, they buy goods mostly for resale, not for operation. Consider the opportunity cost, they have to purchase those popular goods and resale them quickly. As a result, inventory management is the most important part of their operations.

The Real Accounts

As we learned in the prior chapter, the real accounts are those entries which balance amounts being carried forward and represented on the balance sheet. In this case, we focus on inventory accounts. It's an asset account that reflects the number of goods does a merchant owns and available to sell for profits in the future. For the bookstore, most of the goods they stock are books. 

The bookstore does not actually take advantage of books or use them to make profits. Instead, they resell them at higher prices. Although their revenues involve the reselling of books, from the inventory, it does not mean inventory is a revenue or expense. The selling is an activity, the level of inventory is a status, and it's an asset. 

It's similar to Your Phone Battery

Suppose the battery of your phone has 20% power left while you plugging in the charger, does your phone zero-out and recharging from 0%? Absolutely not! The 20% remains of energy will be carried forward, and the battery percentage increase from 20%. 

References

Walther, L. M. (2012). Principles of accounting. Logan, UT: Utah State University. Retrieved from https://www.principlesofaccounting.com/chapter-5/

What Working Capital Is and Why It Is Important for A Business

What is working capital? 

According to the principles of accounting (https://www.principlesofaccounting.com/chapter-4/), is represented as " Current assets - Current liabilities ". Notice that the "current" reflects you can transfer it into cash in a short period, and also means the obligations you have to repay in a short period. So the remain after current assets minus current liabilities means how much quick assets or highly liquid assets you have on your hand to run the business in a particular period. 

Why it is important for a business?

The working capital reflects your abilities to fuel business activities and operating. Suppose you have $1,000 in cash, $5,000,000 worth of real estate, and receive a regular paycheck of $3,000 every month on 28th. Here is the situation, you have an obligation to pay $5,000 on February 25, you only have $1,000 cash on hand, the real estate might take 2-3 years to sell, your paycheck must wait until February 28. What would you do? It's similar to the situations while we are running a business. 

As an example, describe a business that operates where you live and describe how knowing what the working capital of that company would be useful to the business leaders of that company and to outside investors.

My father owns a food company in Taiwan where I live. To run the business, he has to track the pork inventory and purchasing when it's less than the minimization. The pork needs to be stored in a large fridge and costing electricity, and the payroll is also the cost of operating. The working capital is needed to pay the electricity bill, the pork inventory, and the payroll, in order to keep the business running and growing. The electricity bill, the pork inventory, and the payroll are near-term obligations, the current liabilities, all be billed every short period and must be paid in time. On the other hand, the receivables and cash are the two accounts which most likely be used to pay those near-term obligations. Obviously, if he does not have enough cash or other current assets on hand to pay those bills, his financial stress will increase. 

The food company is being organized as a sole proprietorship and run by my father, so it may not has any outside investors. But if we imagine that it is a corporation and has issued common stocks, the working capital could be a cause to lower its value on shares. New investors will analyze the working capital to evaluate the company's ability to deal with financial stresses since it's important to their investment.

References

Walther, L. M. (2012). Principles of accounting. Logan, UT: Utah State University. Retrieved from https://www.principlesofaccounting.com/chapter-4/

Discuss The Difference Between "Nominal" and "Real" Accounts

Now we begin to look at the "accounting cycle", culminates in closing the books and producing financial statements. While expanding the picture to take in the full accounting cycle and culminates in closing the books and producing financial statements, balances of some accounts are carried forward from period to period, some were not. To understand why, we need to know the differences between these two types of accounts, which are "nominal" and "real" accounts. 

The Nominal Accounts

The nominal accounts are revenue, expense, and dividend accounts, these accounts must be reset to begin the next accounting period. 

The Real Accounts

The real accounts are assets, liabilities, and equity accounts, these accounts must be carried forward from period to period. 

What Are The Differences?

1.Reset or not

The balance of the real accounts, assets, liabilities, and equity accounts, be carried forward from period to period. In contrast, the nominal accounts are revenue, expense, and dividend accounts, these accounts must be reset to begin the next accounting period. For instance, It's just like your bank accounts, the balance of the account(Real account) is carried forward while you deposit or withdraw. The nominal accounts, on the other hand, reflect the amounts of your deposit and withdraw.

2.The Results or Happening

The amounts of revenues, expenses, and dividend accounts during a particular period, depending on how much you earned or paid. In short, it's the happening events of the period. In contrast, the amounts of assets, liabilities, and equity depend on the results of the prior, it's the achievements that you have already done before measuring the revenues, expenses, and dividends. Recall the example of your bank account, your balance reflects the result of your deposits and withdraw. Your deposits and withdraw are printed on the record of transactions, they are events and activities of your account, reflect the happening nominal events.

Why are they so-called?

The reason why they are so-called "nominal" and "real" accounts, is actually achieved or not. As we know that the net income equals revenues minus expenses, so we have the actual increase or decrease on the balance sheet after the result of the net income. If you have $1,000,000 in revenue, but you also have $1,000,000 in expense, you will end up with zero increase in the assets. Moreover, if the expense is $2,000,000 , you will end up with $1,000,000 in liabilities. The result will finally accumulate to the real accounts, the balance sheet, assets, liabilities, and equity.

What type of information is contained in nominal accounts?

Since the nominal accounts are the revenues, expenses, and dividend accounts, so they contain the information to record revenues, expenses, and dividend accounts. The information contained in nominal accounts is usually income statement accounts such as revenue data, expense data, and gain or lose data.

What types in real accounts? 

The real accounts are also known as capital accounts, which contain balance sheet accounts, asset data, liability data, and equity data. 

Which financial statement contains the information from nominal accounts?

Obviously, the income statement contains the information from nominal accounts, since it has the amounts of revenues and expenses.

Which contains the information from real accounts?

Clearly, the balance sheet involved assets, liabilities, and equity, which contains the information for real accounts.

References

Walther, L. M. (2012). Principles of accounting. Logan, UT: Utah State University. Retrieved from https://www.principlesofaccounting.com/chapter-4/

Accrual Basis Accounting

What Is Accrual Basis Accounting?
As the meaning of the word "accrual", natural growth or increase, accrual basis accounting has four crucial parts, which are time, recognition, liabilities, and allocation. Accrual basis accounting is the better choice of accounting methods, it reflects the truthful and complete business activities. 

Time
Not every transactions and event are both inflows and outflows at the same time, just like the time you use your credit card, you don't have outflows of cash at that moment, but have liability to pay the bill a few days later. By the time you made the payment, you are already in the next consumption period. The insurance company does not complete its obligation unit the contract expires. 

Recognition
Since accrual accounting is reflective of measuring revenues as earned and expenses as incurred, both of the two conditions, which are exchange transaction and earning process is completed, must be met, even though, you have got the cash in advance or provided services ahead of inflow of cash.

Liabilities
Similar to the notion of debit and credit rules, after you get the cash, you have the obligation to offer your products or services, that's one of the core concepts of accrual basis accounting. You don't just simply earn the money after you sold an insurance contract, instead, you have the obligation to take the risk for the client.

Allocate
Instead of just picking up the dates of inflows and events, to reflect the activities, some expenses and revenues are allocated to different periods. Because the inflows of cash do not actually mean the process is done and you don't have any obligation to provide outflows of anything. 

What Is Cash Basis Accounting? 
Just like the term "cash basis", the records are focus on the inflows and outflows of cash, transactions, and events. Revenues are confirmed while cash is flow in, whatever it does match the rule of sold, delivered or earning process being complete or not, and it does not allocate to different periods or reports. 

What's The Difference?
1.Allocate or not
To reflect the more detailed activities, some expenses and revenues need to be separated to different periods and shown on multiple reports.

2. Recognition rules
Accrual basis accounting has its own rules to recognize expenses and revenues in different periods. This is the preview rules for deciding how allocates are being set on procedures, considering not every event should be allocated.

3. Reflect obligations or not
Every business income does not just grow on trees, It involved the obligations to provide or offer something, besides, you deserve some benefits after you provide goods or services. When you sold a car with a 3-month contract, you have the obligation to provide what you needed to offer, not only confirm the inflows of revenues, but also the liabilities of the contract, although it may occur at different time points.

4. Collecting periods.
After recognizing revenues and expenses, you must collect the data of different periods to allocate it. Prepaid insurance has the right for 3 months, so it allocated to 3 months. 

Why Not Just Use Cash Basis?
This is a question that being frequently asked. Why not just use our chequebook records? If we take a closer look at the financial reports, we shall find out that the cash basis accounting is not a well-balanced choice. Assets = Liabilities + Equity. It's a "balance" of both two sides, not just look at how much inflows you made in any particular periods. The income must come from somewhere, and the outflows must have its reasons to go anywhere. 

To compare the difference, just look at your credit card bills and record your payments. You will soon find that you may have a $1,000 outflow to the bank, but rarely outflows of the others. When you purchasing something, you don't have any outflows of cash, if you forget to record your liabilities to pay it later.

Where you live and describe how the financial statements of that company would be useful to the business leaders of that company and to outside investors

Introduction

My father runs a food company in Taiwan since 2005. He frequently faces some tough choices and some of it was living or dead, thus he needs financial statements to support his decisions. Although those decisions not always end up with good results, but still reduce the chance to fall like gambling. The statement of cash flows reflects his company's daily operations and shows how the cash flows in and out. The balance sheet shows how healthy his company is in finance, how much resources he can use in the future and how many liabilities he has. The income statement shows the efficiency of his company in making profits and he can know which part is the most important one, the largest part of the total revenues. Despite, he owns the company with no shareholders, no report on the owner's equity, pay attention to the information of it is a preparation for the future.

Statement of Cash Flows

This report shows the operating of his company and reveals how cash is generated and expended during a specific period of time, a month or a year. The cash inflows and outflows may attributable to operating activities, investing activities, and financing activities. For instance, his factory needs to purchase pork as an ingredient in making several products, this activity cause outflows of cash. He can understand how much pork he has purchased in operating by reviewing the report. How does this helpful? Well, if he trying to make a decision such as limit his cost on production or budgeting his cost on production, although it is a record of the history. Another crucial part of the statement of cash flows is that it provides a standard, accurate and impartial of these operating activities. 

The Income Statement

As we have learned about the income statement, every business owners desire to know how much revenues they earn from their customers, either does my father. The income statement shows how much inflows from customers, the cost of production and the net income, my dad can make his decision accordingly, such as how attractive his products are. For instance, if he increases the prices of his products, opening a sale project, or putting on an advertisement, he wants to know how much of these costs affect his revenues. Suppose my father wants to gain more capital to expand his business, this is the information that outside investors would like to see. 

The Balance Sheet

Just like every time we decided to go outdoor with umbrella or not. Did you make the decisions without watching the weather forecast? Or you just bet you are lucky and everything is under your control? That's why we need financial statements to support our decisions. On the balance sheet, we shall know how much resources we have, how much liabilities, and what's the equity. It is crucial to know how much abilities you have if you are making a life-or-death decision. Overestimate yourself can end up with the cost of your lifetime earning. Business owners can use the retained earnings to purchase more equipment or just keep it for the expected upcoming winter. 

The accounting equation and its key component.

The accounting equation and its key component.

According to the principle of accounting, the fundamental accounting equation is : 

Assets = Liabilities + Owners’ Equity

Assets are basically the economic resources owned by the entity, such as cash, accounts receivable, inventories, land, buildings, equipment, and even intangible assets like patents and other legal rights. 

Liabilities, in short, are obligations and duty, which are amounts owed to others. Loans, extensions of credit. It's basically the existing obligation to pay or perform some duty.

Owners’ equity also called net assets since it is equivalent to assets minus liabilities, and depends on the legal form of the entity, the owner is different. For instance, a business can run by sole proprietorships, partnerships, and corporations. A sole proprietorship is a business owned by one person and typically consists of a single owner’s capital account. A partnership is a business owned by more than one person, with a separate capital account for each partner. A corporation is ownership interest being represented by divisible shares of stock, generally corresponding to the owner investments in the capital stock and additional amounts generated through earnings that have not been paid out to shareholders as dividends. 

Generally accepted accounting principles

According to the principle of accounting, financial reports prepared under the generally accepted accounting principles (GAAP), intended to be general-purpose, not prepared especially for owners, or creditors, or any other particular user group. Instead, they are intended to be equally useful for all user groups. As such, attempts are made to keep them free from bias (neutral). Standard-setting bodies are guided by concepts that are aimed at production of relevant and representationally faithful reports

Key principles

1. Not prepared especially for owners, or creditors, or any other particular user group.
2. Equally useful for all user groups
3. Keep free from bias and neutral
4. Relevant and representationally faithful

The basic financial statements and their purpose

As we have learned from the textbook, the income statement, statement of retained earnings, statement of cash flows and balance sheet are the four core financial statements. 

The income statement, a summary of an entity’s results of operation for a specified period, in short, is operations, revenues, and expenses, partly similar to our daily life(We get paychecks and we spend it). 

Statement of retained earnings provide dividends, net income or loss information. 

The balance sheet is an overall summary of total assets, liabilities, and equity. The balance sheet portrays financial position while other statements reflect the results of operations.

Statement Of Cash Flows provide the details of an entity's cash flows, in other words, why we spend, received and how much the amounts of these flows.