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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.