Chapter 14

Summary: Merchants Win the Credit Card Wars

http://www.fool.com/how-to-invest/personal-finance/credit/2010/10/07/merchants-win-the-credit-card-wars.aspx

The article that I read was about the credit card war between merchants and credit card companies. At first, credit card companies banned merchants from discriminating among the various credit cards from the same company. Then, on October 4, 2010, Visa and MasterCard agreed to let merchants encourage the use of credit cards with cheaper interchange fees by letting them offer incentives such as discounts to customers.  However, American Express did not agree to the settlement. They justified it by saying that it would restrain free trade because it would mean customers would be discouraged from using American Express cards. Therefore, the U.S. Department of Justice filed a lawsuit against them for not letting consumers have right to choose from lower prices. In the end, the overall effect was unclear because major merchants do not really say that they have any discounts offered for different payment methods. A negative effect that could occur would be that people who pay high interchange fees for credit cards that have rewards would stop using them and make credit card companies lose revenue.

Connections


The connection between this article and chapter 14 is that a credit card is a type of payment that can be used in today’s ever expanding society. There two types of credit cards, merchant credit cards that can only be used for one store and credit cards from companies such as Visa, MasterCard and American Express that can be used in any store that accept credit cards. There are four steps in accounting for a credit card transaction. The first step is to write a voucher by running the credit card through an imprinting machine that will show all the information required for the sale slip and have the customer sign it. The second step is for the merchant to put the sales slip in a safe place. The third step is to prepare the credit card slips by totaling it, recording it in Merchant Deposit Summary, and placing it in an envelope for a bank deposit at the end of each day. The fourth step is to include the credit card slips as transactions in the accounting entries every day. As you can guess, the bank charges a fee for credit card services. For merchants, it is an annual fee which is deducted every month as a “credit card discount expense.”

Reflections

Many people seem to like the idea of using a credit card rather than carrying cash because it is more convenient. However, there is an increasing awareness on how tricky credit card companies can be and how to deal with them in order to avoid getting tangled up in their rules. From the article that I read, I learned that merchants also have problems with credit card companies that have been going on for quite a long while. Now that merchants have won over “the credit card war” with Visa and MasterCard, they will have more freedom to choose to encourage their customers to use the credit cards with the lowest interchange fees.  I think that it would be nice to receive discounts or other types of incentives for using a credit card with cheap fees. So it would look more appealing to use those cheaper cards rather than credit cards with reward points that are have fees that are quite expensive. Those people using credit cards with rewards would lose out from this settlement because merchants will not like to accept those cards. Therefore, credit card companies could potentially end up losing revenue as well. If it becomes too drastic it could really affect the economy because credit cards play an important role in this society.

Chapter 11

Summary

http://www.vancouversun.com/business/Canada+trade+deficit+shrinks+exports+grow/3671025/story.html

This article is about how Canada’s trade deficit shrinks more than expected in August as exports to the U.S. grow. Therefore, this will put more people at ease because the declines several months ago might have indicated a stop to the recovery of the economy. This decreased the deficit from $2.55 billion Canadian dollars in July to $1.35 billion in August. Since the overall trade trend is weak, the
Bank of Canada will not change the benchmark interest rate. However, it has raised the borrowing costs several times and RBC might tighten their credit in March 2011. The Canadian dollar pared with the U.S. dollar before this report to $1.002. This increase in the Canadian dollar and the damaged U.S. economy might have been a reason to Canada’s downturn in exports. All export, such as industrial goods and materials, metals, and other consumer goods sectors, grew in August except the auto sector. The drop in car imports caused the slip of 0.5% in the overall imports of Canada. However, August was not enough to change Canada’s declining rate of trade.

Connections

This article connects to Accounting for Merchandising Business in the text in chapter 11 because the exports and imports to Canada affect the economy in turn affecting businesses. Let’s use the decrease in car imports to Canada as an example to show its effect. If there are fewer imports of cars, then wholesalers can’t purchase as many cars as they could have to sell them to retailers. This will affect the auto sector because their cost of merchandise purchased will be lower. There will also be fewer goods available for sale. Another factor that will affect the accounting process for cost of goods sold is that the economy is not doing that well. So there won’t be many consumers purchasing cars from automotive businesses. Thus leading to lower sales (merchandise sold). Overall, it will affect the gross profit of the business since it is basically subtracting sales from the cost of goods sold.

Reflection

I think that it is important to keep up with current events if you are a business owner or if you plan in opening a certain type of business. Certain things that occur can affect how much your business might make in profit. The U.S. as our neighboring country has big influence on our markets from trading. Some current events might also affect your accounting procedure. For my example before, just some of the values would have changed for the income statement. This will also give you a clue to the behavior of consumers at a given time, such as in a recession or when there is a deficit. It will also help you decide what type of business or merchandises you want to open or sell.  Banks will be on top of things, so you would want to know when it is best to borrow money. Overall, knowing about trades and how it affects the economy will be a useful tool for you to have.