A Chart of Accounts for a Merchandising Business

With the evolution of time, business ideas have also evolved. A lot of new businesses are starting every day. 

Most of those businesses are merchandising businesses. Someone simply can’t think of an idea and start it immediately. 

Before starting a business, one has to consider many things and need to set up a plan. One of the most important things of business is the chart of accounts. 

Many of us may not know what it is actually, but it’s a prerequisite to starting any business. 

A chart of accounts for a merchandising business would be a little different from other businesses. In this section, we would look deeply into what a chart of accounts is and the details of it for a merchandising business.

What is a chart of accounts?

A Chart of Accounts for a Merchandising Business
What is a chart of accounts

An index of all the financial accounts in the general ledger of a company is called a charter of accounts. It is called COA, in short. 

We can say it is an organizational tool that provides a breakdown of all the financial transactions that the company makes during a specific accounting period. 

Accounting periods are always fixed. If you need any details of a past transaction, then you can easily get that from the chart of accounts. It makes it easier for readers to locate specific accounts or transactions.

What is a merchandising business, and what are the types of it?

There are different types of businesses going on in the modern world. Merchandising business is also a type of business that deals with readymade or finished products. 

In a merchandising business, the finished products are bought, and then they are resold to the consumers. Merchandising business is quite broad now considering to the last decade. 

The best example of merchandising business is a local grocery store or a retail clothing store you see in your day-to-day life.

Merchandising business is mainly of two types. The types are described below:

Retail business: The retail business is where the company sells the product directly to the customers. No intermediary is involved in it.

Wholesale business: The business where the father company’s manufacturers bulk from the company’s manufacturers and then sold to the retailers or other wholesalers.

Study carefully about these business types and select which one you would like to do after proper planning.

Why is a chart of accounts important?

A Chart of Accounts for a Merchandising Business
Why is a chart of accounts important

There are several reasons for which a chart of accounts is important. We know without a chart of accounts, a business can’t be successful. 

The most important thing that the COA provides gives a clear picture of the company’s financial health. This proves very useful because you don’t benefit from it.

 Rather, the investors and shareholders use it. Observing it, they get an idea of your company and decide whether they’ll invest in your company or not. 

To abide by the financial reporting standards, it is important too. You don’t face any legal issues if you maintain the accounts properly and within the rules.

What is included in a chart of accounts for merchandising business?

For different businesses, the chart of accounts is usually different because different factors are included. 

Similarly, the chart of accounts for merchandising business is also different. The things that are included in the chart of accounts for merchandising business are:

  • Assets.
  • Liabilities.
  • Operating Revenue.
  • Stockholders Equity.
  • Operating Expenses.

These factors occur when you run a business, so you need to manage these things properly. 

Thus the accounts for merchandising business are created, including all of these factors.

For a merchandising business, accounts are added to make space for inventory that is purchased and of those which are sold. Subsidiary ledgers are included with the above things also.

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What is the working procedure of a chart of accounts?

What is the working procedure of a chart of accounts
What is the working procedure of a chart of accounts

You may have a question that how does the chart of accounts work, and how can it help? Accounts in a chart of accounts are shown in an order where at first the assets, liabilities, and stockholders equity are shown. 

Then the operating revenue and expenses are shown. These categories are furthermore divided into subcategories. It makes the accounts more flexible and convenient to use.

The sub-categories which may be included are:

  • Cash
  • Prepaid expenses
  • Inventory
  • Petty cash
  • Accumulated depreciation
  • Accounts payable
  • Wages and taxes payable
  • Accrued liabilities
  • Preferred stock
  • Retained earnings
  • Common stock

There are a lot of sub-categories that may be included.

This makes it easier to locate the specific accounts you’re looking for, as a chart of accounts can become very big and complex since you would run the business for some more years in the future.

Conclusion

Keeping track of all your business transactions is a challenge, and you also need to have a bird’ eye view of your accounts all the time to make your business successful. 

You get a view of the overall financial health of your company too by observing the chart of accounts. You may think that somehow creating a short chart of accounts won’t harm you. 

Rather, it would save time, but you’re wrong. Rather you should spend a lot of time while creating the chart of accounts because it will save a lot of time while you run your business. 

Trying to make an account that won’t change for several years will prove to be beneficial.

If you keep adding new accounts, it will be more difficult to manage them and compare your financial information over a multi-year period.

Hope you’ve found out all the details you needed about a chart of accounts for merchandising business.

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