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Accounting procedure in merchandizing businessIn Berbera district Somaliland

MOHAMED NUUR JAMACMOHAMED ABDI SIYAD

GOLLIS UNIVERSITYTHESIS

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Chapter One:1.0 Introduction1.1 Background of the StudyMerchandising business is such a type of business whose activity is based on

purchasing inventory and selling it. Usually merchandising business serves as

intermediary between customer and producer, or customer and distributer or

distributer and other distributer. In short merchandising business is the language

of buying and selling.

Merchandising business earns its revenue by selling goods, merchandising

businesses range in size from side walk vendors to corporate giants. Every

successful merchandising business makes extensive use of accounting information

and answers such questions how much inventory is in hand, how much to order,

when to order, and from which supplier? It also keeps track of the amounts owed

to each supplier and due from each credit customer.

Therefore accounting is a part of information system needed by the merchandising

business to measure its success or failure, accounting facilitate making decisions

for corrections and also accepting or refusing long term planned projects. For each

business type there is special accounting procedure to determine the result of

operations that ultimately leads to the computation of comprehensive income and

other financial reporting aspects of business operations

1.2 Problem of the statementAvailability of applicable accurate and reliable accounting information is highly

considered factor that leads business organization to success. It gives the

opportunity of making right decisions and implementing profitable projects which

all contribute business target. However missing this information causes making

wrong decisions and implementing improper projects which all decline business

development. Moreover, timely collecting, processing, managing and controlling

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accounting data results, and presenting reliable financial statements that truly

interpret business activity is crucial to the success of the business.

There should be systematic accounting procedure which matches business type,

since business development strongly depends on effective accounting information.

1.3 Purpose of the StudyThe purpose of this study is to present and interpret accounting procedure in

merchandising units and how its practiced by Somaliland business organizations

include

1. To test the hypothesis of no significant relationship between the levels

accounting procedure and merchandizing business.

2. To bridge the gaps identified in the related studies.

3. To validate existing information about accounting procedure and

merchandizing business on the theoretical/conceptual framework to which

this study is based.

4. To generate new accounting based on the findings of this study.

1.4 Objectives of the StudyGeneral objectivesThis study analysis how merchandising accounting procedure contributes decision

making and selecting profitable projects

Specific objectives To evaluate how merchandising businesses in Somaliland use computerized

accounting and manual accounting system.

To focus the role of inventory in merchandizing businesses and how it is

calculated and treated in preparing financial statements.

To present how merchandizing statements are different from other

businesses financial statements.

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1.5 Research QuestionsThis study will seek to answer the following questions:

1. What are the demographic characteristics of the respondents as to:

1.1 Age?

1.2 Gender?

1.3 Martial status?

1.4 Educational background?

1.5 Work experiences?

2. What is the level of accounting procedure in merchandising business?

3. What is the level of merchandizing in different business organizations?

4. Is there a significant relationship between the level accounting procedure

and merchandizing business?

1.6 Hypothesis of the research

1.7 Significance of the StudyThe beneficiaries of this study are to include the following: Decision Markers and

Policy formulators to make policies towards the development of procedure and

merchandizing business. The Academicians and traders for getting the empirical

evidence about procedure and merchandizing business, the future researchers will

utilize the findings of this study to embark on a related study. The governments

will benefit this study, to reduce the level of projects failure.

1.8 Scope of the StudyThis study concerns accounting procedure in merchandizing businesses in Berbera

district Somaliland. The sample data was collected from merchandising businesses

in Somaliland irrespective of their size and type. The study focuses on businesses

that use accounting system and employ accounting skilled personnel or owned byaccounting skilled people.

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Chapter Two: Literature Review2.1 literatures Review2.1 Operating Cycle of Merchandizing BusinessMerchandising Businesses do set of series activities that start circulation from one

point then returns to the same point. Generally operation cycle covers three

business activities as follows.

Purchase of Merchandise; usually merchandizing business purchases inventory for

resale from suppliers, this inventory is kept in save area and recorded in

systematic manner.

Sale of Merchandize; in merchandizing businesses inventory is purchased only for

resale. So as soon as it is received, the purchaser prices by adding profitable

percentage amount to the cost price so that it shall be ready for sale.

Collection of the receivables, during the end of credit period, the merchandizing

business collects cash from debtors. Most of the collected cash will be spent for

purchasing inventory for resale again.

Selling all goods in cash is not mostly possible, so that the business sells goods on

account. Also credit sales will extend customers.

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Fig 1 Operating Cycle of Merchandizing Business

2.2 InventoryInventory is the term used to describe the assets of a company that are intended

for sale in the ordinary course of business, are in the process of being produced

for sale, or are to be used currently in producing goods to be sold.Inventory in abusiness is a list of goods or products that are held in stock. It takes a lot of time

to keep inventory, but failure to do so could result

in major financial disasters. Depending on the size of your business, there are

people whose sole job is to keep track of inventory, but in a small business this is

not possible because of its size

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2.2 Chart of Accounts for Merchandising BusinessAssets

Cash

Accounts receivable

Merchandise inventory

Office Supplies

Prepaid Insurance

Store Equipment

Acc. Depreciation

Office Equipment

Acc. Depreciation

Liabilities

Accounts payable

Salaries payable

Unearned rent

Notes payable

Stockholders

Equity

Capital stock

Retained earnings

Revenues

Dividends

Income Summary

Sales

Sales returns and allowances

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Costs and

Expenses

Sales discounts

Sales salaries expense

Advertising expense

Depreciation expense

Misc. selling expense

Office salaries expense

Rent expense

Insurance expense

Office supplies expense

Other income

Rent revenue

Other expense

2.2 1 accounting for merchandising inventoryAt the end of accounting period inventory in hand is valued, so the profit or loss of

the business can be obtained.

The term inventory is used in this manner to designate merchandise hold for sale

in the normal course of the business the merchandise purchased for sales.

There are two approaches used in accounting for merchandising inventory either

of these two approaches may be used in accounting for merchandising

inventory.

Periodic (physical) inventory

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Perpetual inventory

In the last decades both systems were in widespread use, but today however,

most large businesses and many smaller ones use perpetual system. Periodic

systems are used primarily in small business with manual accounting systems.

2.2.2 Periodic inventory systemIn this system the revenue from sales are recorded when sales are made, but

inventory on hand (ending inventory) cannot be recognized until physical count is

taken place at the end of the accounting period. This following information is

required:-

The cost of merchandise sold during the accounting period

The cost of inventory on hand at the end of accounting period

For merchandising enterprises that use the periodic system, the merchandising

sold during the accounting period is reported in separate sections in the income

statements. The periodic inventory system is often used by retail enterprise that

sells many kinds of lower cost merchandise. Mostly, using periodic inventorysystem is very limited because of excessive advertisements of technological

devices to access perpetual inventory system that are easy and simple.

2.2.3 Perpetual Inventory SystemIn this system both cost of goods sold and inventory on hand are available when

ever required. Currently most of the large merchandise businesses use it, since it

is simple and accessible.

2.2.4 Classification of InventoriesInventories can be classified according to type of business:

Merchandise InventoryMerchandise available on hand and available for sale to customers for e.g.:

canned foods, meats, dairy products etc. Items in the merchandise inventory have

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two common characteristics such as they are owned by the company and they are

in the form ready for sale to customers in the ordinary course of business

Manufacturing InventoryMerchandize that needs to be produced in order to sell is called manufacturing

inventory. Although products may differ, manufacturers normally have three

inventory accounts, each of which is associated with a stage of the production

process: raw materials inventory, work-in-process inventory, finished goodsinventory.

2.2.5 Inventory Valuation Methods2.2.5.1 First-in-first out (FIFO)The FIFO method assumes that a company uses the goods in the order in which it

purchases them. In other words, the FIFO method assumes that the first

purchased goods are the first used (manufacturing concern), or the first sold (in a

merchandising concern). The inventory remaining must therefore represent the

most recent purchases.

FIFO often parallels the actual physical flow of merchandise because generally it is

good for business to sell the oldest units first. That is, under FIFO, companies

obtain the cost of ending inventory by taking the unit cost of the most recent

purchase and working backwards until all units of inventory have been costed.

This is true whether a company computes cost of goods sold as it sells goods

throughout the accounting period (perpetual system) or as a residual at the end ofthe accounting period (periodic system).

2.2.5.2 Last-in-first out (LIFO)The LIFO method assumes the cost of the total quantity sold or issued during the

month comes from the most recent purchases. That is, the latest goods purchased

are the first to be sold. LIFO coincides with the actual physical flow of inventory.

The method matches the cost of the last goods purchased against revenue. Under

the LIFO method, the costs of the latest goods purchased are the first to be

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recognized in determining the cost of goods sold. The ending inventory is based

on the prices of the oldest units purchased.

Companies obtain the cost of the ending inventory by taking the unit cost of the

earliest goods available for sale and working forward until all units of inventory

have been coasted.

2.2.5.3 Average Cost Method (Avco)Under the average cost method, the costs of goods are equally divided, or

averaged, among the units of inventory. It is also called the weighted average

method. When this method is used, costs are matched against revenue according

to an average of the unit of cost of goods sold. The same weighted average unit

costs are used in determining the cost of the merchandise inventory at the end of

the period. For businesses in which merchandise sales may be made up of various

purchases of identical units, the average method approximates the physical flow of

goods.

This method is determined by dividing the total cost of the units of each item

available for sale during the period by the related number of units of that item

2.3 Income Statement for merchandise businessSales; this is business inventory sold for profit earning with in an accounting

period. In merchandising business, inventory is purchased at cost price for resale.

To earn profit a percentage amount is added to the cost for resale.

Cost of goods sold; this is the cost price for only the inventory sold, it is theresult form goods available for sale, minus remaining inventory.

Gross profit; the excess amount of sales over the cost of goods sold is known

as gross profit.

Operating expenses; these are the expenses incurred for profit making.

Running business means doing activities for making sales, therefore all

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expenses that are directly or indirectly related to the sales operation is known

as operating expenses.

Operating income; this is the excess of gross profit over the operating

expenses.

Other expenses; these are expenses incurred other than operating expenses,

good example is interest expenses.

Other income; this is indirect income earned during the accounting period.

This is a source of income out of inventory resale. Good example is gain on

sales, discounts received etc.

Net income; this is the excess of all incomes over all expenses incurred with in

an accounting period. This is the common target or objective of all

merchandising businesses.

2.4 Other types of sales2.4.1 Consignment salesConsignment is a type of sales in which goods are sent by trader to his agents to

be sold on his behalf for commission. The seller or trader who sells the goods is

known as consignor, and the person to whom the goods are sent is knows as

consignee, the consignor is known also principal.

The consignee is also known as agent. The goods sent by the consignor to the

consignee are known as consignment goods or goods sent on consignment. the

statement which is prepared and sent by the consignor to the consignee along

with goods is known as invoice .it shows the details of goods sent such as the

quantity price, colors, brands and size, the statement shows the descriptions of

the goods. The statement which is prepared and sent by the consignee to the

consignor is knows as account sale. It gives details regarding the sales value,

expense incurred, the value of unsold goods and commission payable to him. The

goods are sold by the consignee for commission, the commission is payable by the

consignor to the consignee on total sales

2.4.2 Installment salesThis type of sales in which the buyer of fixed assets is allowed to pay the price of

the assets in specified number of installments stated in the agreement of the

parties. Each installment includes a part of the assets and interest is calculated for

the period on outstanding balance of the price for that particular period, it is

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calculated at a specified rate of interest. The buyer of the asset become owner

immediately on the date of purchase itself and ownership is transferred from seller

to the buyer

Chapter three: Research Methodology3:1 Methods of data collectionConsidering availability of reliable data which is useful for merchandising

businesses, by collected both primary and secondary data so that the

recommendations are based on meaningful facts. The primary data is collectedthrough questionnaires that have been distributed to owners and employees

around 200 people throughout Berbera district, implementing stratified random

sampling data took 20 as a sample out of the population.

3.2 Method of Data Presentation and AnalysisIn this paper researchers presented data in tables, in each table includes related

and combined questions. The data have been analyzed after each table in a

percentage form with bio-chart.

3.3 Limitations One of the major difficulties was that there was no researcher done study

on the same topic. Also there was no written sources available from the

selected businesses

The owners and the employees of the businesses are not familiar in

providing financial information, since researches are not usually exercised in

Somaliland.

This was the first time for researchers to conduct such findings.

No extensive time for doing research

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Chapter four: Date presentations and Analysis4.1 Presentation of Date and AnalysisTable1: Respondents by Age Group

Alternatives Respondents Percentage

Below 25 yrs 2 10%

Between 2540 yrs 12 60%

Above 45 yrs 6 30%

Below 25yrs10%

Between

2540 y rs60%

Above 45yrs30%

R e s p o n d e n t s b y a g e g r o u p

Table2: Respondents Business StatusAlternatives Respondents Percentage

Employee 18 90%

Employer 2 10%

90%

10%

Respondents status

Employee Employer

In table1, it gives that 60% of the

respondents are in between 2540 years

old, while 30% of them are above 45

years old, and the rest 10% are in

between 2540 years old

In table 2, 90% of the respondents are

employee for the business, while 10% of the

respondents are employers for the

businesses.

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Table3: Form of businessesAlternatives Respondents Percentage

Proprietorship 14 70%

Partnership 6 30%

Corporation Nil Nil

70%

30%0%

business form

Proprietorship Partnership

Corporation

Table4: Sorts of goods with merchandise businessesAlternatives Respondents Percentage

Food items 8 40%

Building materials 4 20%

Electrical materials 3 15%

Electronics 2 10%

Drugs 1 5%

Others 2 10%

40%

20%

15%

10%5%10%

Sorts of goods

Food items Building materials

Electrical materials Electronics

Drugs Others

Table 3, shows that 70% of the visited

businesses were proprietorships while 30%

were partnerships, which means no

corporation was met by the observers.

Table 4, presents all kinds of goodspurchased and sold by the selected

businesses, 40% of the goods are food items

while 20% is building materials, another 15%

are electrical materials, and 10% are

electronics, likewise 10% are undefined items

sold, the rest 5% are drugs merchandises.

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Table5: Reasons for selecting types of merchandisesAlternatives Respondents Percentage

Because of high demand 18 90%

Because of maximum profit 1 5%

Because of less competitors 1 5%

Others Nil Nil

90%

5% 5% 0%

Reasons for merchadise sel

Because of high dem Because of maximum

Because of less compet Other

Table6: Sources of merchandise businessesAlternatives Respondents Percentage

Inside vendors 12 60%

Outside vendors 8 40%

Table 5, shows that 90% of the respondents

selected the type of merchandises for its

higher demand, while 5% of the respondents

selected the type of merchandises because of

maximum profit and also similarly another 5%

selected because of less competitors, and no

selection for another reason.

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60%

40%

Supply sources

Inside vendors Outside vendors

Table7: Type of merchandise businesses salesAlternatives Respondents Percentage

Retail basis 10 50%

Wholesale basis 4 20%

Both retail and wholesale 6 30%

Consignment Nil Nil

50%

20%

30%0%

Type of sale

Retail basi

Wholesale basi

Both retail and

wholesale

Table8: Number of employees in the businessesAlternatives Respondents Percentage

Less than 10 14 70%

Between 1050 4 20

More than 50 2 10%

In this table, 60% of the respondents stated

that they receive goods from inside vendors,

while 40% of the supply is received fromoutside vendors

Table 7, points that 50% of the businesses selltheir goods on retail basis, while 20% are for

wholesale basis, and 30% sell for both retail and

wholesale, and no business uses consignment

sales.

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70%

20%

10%

Number of employees

Less than 10 Between 10 --50

More than 50

Table9: Kind of accounting system usage in businessesAlternatives Respondents Percentage

Computerized accounting system 2 10%

Manual accounting system 18 90%

10%

90%

Accounting system

Computerised accounting syste

Manual accounting syste

Table10: Reasons for implementing accounting procedureAlternatives Respondents Percentage

For decision making 8 40%

For profit or loss disclosure 6 30%

For error and fraud prevention 6 30%

Table 8, 70% of the businesses respondedthat the number of their employees are

lesser than 10, while 20% responded

between 1050 and the rest 10% stated

more than 50.

This table shows that 90% of the selected

businesses use manual accounting system,while only 10% uses computerized

accounting system.

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For other purpose Nil Nil

40%

30%

30%0%

Reasons for accountinguse

For decision making

For profit or loss disclosure

For error and fraud prevention

For ot er purpose

Table11: Differentiation of business merchandise accounting procedurefrom other businesses accounting procedures.

Alternatives Respondents Percentage

All transactions are based on purchases and sales 10 50%

There is no overhead cost 4 20%

Preparation of gross profit 6 30%

All of the above Nil Nil

50%20%

30% 0%

Merchandise Vs otherbusinesses

All transactions arebased on purchasesand sales

Table12: Types of transactions recorded in the businessesAlternatives Respondents Percentage

Double entry system 6 30%

Table 10, shows that 40% of the

respondents implement accounting for

decision making, while 30% implement

for profit or loss disclosure and other

30% use accounting for error and fraud

prevention, and there is no business

uses it for another purpose.

Table 11, shows that 50% of the respondents

say all transactions are based on purchases

and sales, while 30% say that variance is the

preparation of gross profits, and 20% saythat there is no overhead cost.

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Single entry system 14 70%

30%

70%

Transaction recording

Double entry system Single entry system

Table13: Businesses accounting periods for financial statementsAlternatives Respondents Percentage

Annually 6 30%

Semi annually 6 30%

Quarterly 4 20%

Monthly Nil Nil

Daily Nil Nil

Not fixed 2 10%

Not at all 2 10%

3 0

3 0

2 0

0 %

0 %1 0

1 0

A c c o u n t i n g

A n n u l lSe m i a n l lQ u a r t lM o n t lD ai l N o t f i N o t a t l l

Table14: Inventory Reorder levels

According to table 12, it presents that 70%

of the financial transactions are based on

single entry system, while the rest 30%

transactions are based on double entry

system.

30% of the respondents say that their

financial reporting based on annually,

likewise 30% prepare their financial

statements semi annually, and 20%

prepare as quarterly, 10% of them do not

use fixed term also another 10% of the

respondents do not use financial reporting

period, and no business uses monthly or

daily financial reporting.

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Alternatives Respondents Percentage

At minimum level 12 60%

At reorder level 4 20%

At maximum level Nil Nil

At deadline 4 20%

Others Nil Nil

60%20%

0% 20%

0%

Inventory reoder level

At minimumlevel At reorder level

At maximumlevel At deadline

Others

Table15: Types of inventory valuation approaches in businessesAlternatives Respondents Percentage

Periodic approach 14 70%

Perpetual approach 2 10%

Not of them 4 20%

70%

10%

20%

Inventory valuationapproach

Periodic approach

Perpetual approach

Not of them

Table 14, gives that 60% of the respondents

order goods at minimum level, while 20%

order with in reorder level and also another20% order at deadline time, there is no

business which orders goods at maximum

level, similarly no respondent orders goods

by the use of other methodology.

Table 15, shows that 70% of the

respondents say that they use periodic

approach for inventory valuation, while

10% use perpetual approach for

inventory valuation, and 20% of them

do not use any approach for inventory

valuation.

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Table16: Businesses inventory stocktaking methodsAlternatives Respondents Percentage

Fifo method 12 60%

Lifo method Nil Nil

Avco method Nil Nil

Weighted Average Nil Nil

Not at all 8 40%

60%

0%0%

0%

40%

Stocktaking methodsFifo method Lifo method

Avco method Weighted Average

Not at all

Table17: Business implementations for natural disasters preventionAlternatives Respondents Percentage

Purchase of insurance Nil Nil

Save money for contingencies 10 50%

Purchase of protection devices Nil Nil

Others Nil Nil

Not at all 10 50%

In this table, 60% of the respondents say

that they use FIFO method for

stocktaking, while 40% of them do not

use any stocktaking method for inventory,

and no business use LIFO, Avco or

Weighted average methods for business

inventory valuation.

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Purchase of

insurance

0%

Savemoney

forcontingencies50%

Purchase of

protection

devices0%

Others0%

Not atall

50%

Natural disasters

Table18: Business implementation of segregation of dutiesAlternatives Respondents Percentage

Yes 18 90%

No 2 10%

90%

10%

Segregationof duties

Yes No

Table19: Techniques by businesses for asset internal controlAlternatives Respondents Percentage

By supervision 6 30%

By job rotation Nil Nil

By segregation of duties 2 10%

By auditing 6 30%

All of the above 4 20%

By recruiting high personal integrity employee 2 10%

Table 17, shows that 50% of the selected

businesses save money for contingencies,

while 50% of the businesses do not use any

plan for natural disasters prevention, this

means no one purchases insurance, no one

purchases protection devices and no one uses

other technique.

90% of the respondents in selected

businesses said no when asked about

segregating duties, while only 10% of the

respondents insisted that they use

segregation of duties

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Bysupervisi

on30%

By jobrotatio

0%

Bysegregati

on ofduties10%By

auditing30%

All of theabove20%

others10%

Business cont

Table20: Employees who access records of cash or credit transactionsAlternatives Respondents Percentage

Accountant 12 60%

Cashier 4 20%

Clerk Nil Nil

Owner 4 20%

Others Nil Nil

Accoun

tant

60%

Cashier

20%

Clerk0%

Owner

20%

Others

0%

Access cash or credit

transactions

Table 19, presents that 30% of the businesses

control their assets by supervision, whileanother 30% control by auditing, and 20% use

all stated control techniques, and 10% control

their assets by supervision, the rest 10% use

by recruiting high personal integrity employee,

and no business uses job rotation.

In table 20, 60% of the respondents say that

accountant access cash or credit

transactions, while 20% of them say that

cashier access cash or credit transactions,

and another 20% say that owner of thebusiness access cash or credit transactions,

and no business says that clerk or other

access cash & credit transactions

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Table21: Employees who receive or collect cash from customersAlternatives Respondents Percentage

Cashier 14 70%

Salesperson 4 20%

Accountant Nil Nil

Clerk Nil Nil

Owner 2 10%

Others Nil Nil

Cashier

70%

Sales

person

20%

Accoun

tant

0%

Clerk

0%

Owner

10% Others

0%

Cash receipt70% of the respondents say that cashier

receives and collection cash from

customers, while 20% of them say that

salesperson receives and collection cash,

the rest 10% say that owner of the

business receives and collects cash from

customers, and no accountant, clerk or

other receive & collect cash from

customers.

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Chapter five Conclusion and Recommendation5.1 Conclusion

Accounting procedures in merchandising units is an accounting system that maintains

the records of financial transitions between buyers and seller, because of that the

business nature is one acquires merchandise for resale to the customers. The

merchandise is purchased by the firm either cash or credit basis, if the transaction is

cash purchase, cash is paid and inventory is received but if the transaction is on credit

basis, the credit ledger is identified and purchase journal is created for the purchase of

inventory on credit, the credit term may allow cash discount for early payment, thediscounts are recorded by the buyers as purchase discount and deducted from amount

initially recorded as payable.

Transportation cost is also very important element in producers of merchandises, its

the term between seller and the buyer which indicates the conditions concerning when

the ownership of the merchandise is passes from seller to buyer, which party will be

the bearer, and those are explained in the (fob shipping and fob destination).

At the end of accounting period, inventory in hand is valued by using these approaches;

periodic inventory approach and perpetual inventory approach, under these approaches

there are valuation methods that are used for calculating end inventory, these methods

are FIFO,LIFO and AVCO

The output of every accounting procedure is financial statements therefore; the

accounting procedures of merchandising units will end these financial statements for

every accounting period or fiscal year which may be yearly, half yearly, quarterly or

monthly.

Last but not least, the accounting procedures in merchandising units in Somaliland are

not implemented properly.

Accounting procedure in merchandising business in Berbera district Somaliland2012

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5.2 Recommendation Merchandising Businesses that customize computerized accounting are very rare

while compared to those who customize manual system; therefore I recommend

by computerized accounting system, so that they will be effective, efficient and

avoid to facing market competition.

To follow general accepted accounting procedure (GAAP), financial transaction

recording should be based on double entries system. This will minimize error.

Many of the businesses use FIFO method for valuation of inventory, but there

are some others that do not use any method, so we recommend the businesses

to use one of inventory valuation methods to find ending inventory, and also

weighted average can be applied for survival of inflations or deflations.

Use of consignment sales will facilitate the principal or owner to sale his/her

goods to the international markets or local markets which is located at the same

countries or different by employing an agent on behalf of the principal.