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Chapter 6: Merchandising Transactions

Chapter Introduction​

Marie's restaurant, Le Petit Bistro, has been growing. She's now selling not just meals, but also retail items like wine bottles, specialty coffee beans, and branded merchandise. "This is getting complicated," she tells Monsieur Schneider. "When I buy wine to sell, is that different from buying ingredients to cook with? And how do I account for the wine I sell versus the meals I serve?"

Monsieur Schneider explains that Marie's business is now operating as both a service business (restaurant) and a merchandising business (retail sales). "Merchandising businesses buy goods and resell them," he says. "The accounting is different because you need to track inventory—the goods you have for sale—and cost of goods sold—what it cost you to buy those goods."

In Luxembourg, many SMEs are merchandising businesses: retail stores, restaurants selling retail items, e-commerce businesses, and wholesale operations. Understanding merchandising transactions is essential because:

  • Inventory management affects profitability
  • VAT treatment differs for goods vs. services
  • Cost of goods sold must be properly calculated
  • Inventory valuation affects financial statements
  • PCN has specific accounts for inventory (Class 3)

This chapter teaches you how to account for merchandising operations. You'll learn about perpetual and periodic inventory systems, how to record purchases and sales of merchandise, how to handle freight costs, and how to prepare income statements for merchandising businesses. Most importantly, you'll understand how to apply these concepts in Luxembourg, including proper VAT handling and PCN account classifications.

By the end of this chapter, you'll be able to properly account for any merchandising business in Luxembourg—from a small retail shop to a restaurant selling retail items—ensuring accurate financial reporting and compliance with Luxembourg regulations.

Why It Matters​

Merchandising transactions are fundamental for any business that buys and sells goods. In Luxembourg, many SMEs are merchandising businesses, and proper accounting for these transactions is essential for:

  • Accurate Profitability Measurement: Cost of goods sold must be properly calculated to determine gross profit
  • Inventory Management: Proper inventory accounting helps manage stock levels and prevent losses
  • VAT Compliance: Different VAT rates apply to different types of merchandise, requiring careful tracking
  • Financial Statement Accuracy: Inventory is a significant asset for merchandising businesses and must be properly valued
  • Tax Compliance: Cost of goods sold affects taxable income calculations
  • Business Decision-Making: Understanding merchandising transactions enables better pricing, purchasing, and inventory decisions

In Luxembourg's business environment, where retail, hospitality, and e-commerce are significant sectors, understanding merchandising accounting is crucial. Whether you're running a clothing store, a restaurant with retail sales, or an online shop, proper merchandising accounting ensures accurate financial reporting and regulatory compliance.

Learning Objectives​

By the end of this chapter, you should be able to:

  1. Define and describe merchandising operations
  2. Compare and contrast perpetual versus periodic inventory systems
  3. Analyze and record transactions for merchandise purchases using the perpetual inventory system
  4. Analyze and record transactions for the sale of merchandise using the perpetual inventory system
  5. Discuss and record transactions applying the two commonly used freight-in methods
  6. Describe and prepare multi-step and simple income statements for merchandising companies
  7. Analyze and record transactions for merchandise purchases and sales using the periodic inventory system (appendix)
  8. Understand Luxembourg retail/hospitality inventory accounting (PCN Class 3)
  9. Apply Luxembourg VAT on merchandise (3%, 8%, 14%, 17% rates)