All right. How do we differentiate
between
manufacture excuse me merchandising
business and service
businesses that's where this chapter or
this video comes into play we're going
to talk about how do we actually
recognize these things what do they look
like in a journal entry.
Now pretty much from here on out I'm
going to make the assumption that you
know how to convert journal entries into
T
tables because it's pretty
straightforward if you haven't go back
to chapter I believe two
and re-watch those videos, for right now
I'm just gonna when I move forward it's
really going to be on these examples
just the journal entry
because that's really where the you need
to know that hopefully you know how to
turn them into T tables. So how do we
recognize the events that happen
typically in a merchandising business?
Well let's talk about the first
the obvious one and that is how do we
recognize us
buying the inventory or purchasing the
inventory, so
we the company purchase inventory we
bring in the inventory into our business
in order to sell so we're just looking
at that point first
bringing it in okay so what would that
look like on
a journal entry well whatever the date
is I'm just gonna put one one
and I'm gonna put merchandise inventory
or inventory of whatever amount that's
what I'm debiting because remember that
is an asset account
I own that inventory until I sell it so
my inventory is going up by that amount
and then I'm going to credit however I
pay for that inventory maybe it's cash
maybe it's accounts
payable it should be payable I'm not
sure why it says accounts receivable but
accounts payable because it's a
liability to us if I go that route
so that is what just the simple purchase
of inventory journal entry would look
like very straightforward
my inventory goes up my cash from my ap
goes or my cash goes down or my ap goes
up my liability goes up
it's a lot of moving pieces to this
but that's the purchase. Now let's look
at the sale the cell is where the
difference
happens the cell is where you're going
to see a major difference here
okay so when we sell inventory there are
a couple things that's happening
so each cell involves two things two
parts
and therefore require two entries, okay,
and each entry will have its own debit
and its own credit
at minimum so we're really talking
about a minimum of four accounts being
affected here.
Okay. The first thing we need to
recognize
is the recognition of the revenue we
sold inventory
we gave the product or service therefore
we got inventory or we got revenue
okay that's the first part so let's go
ahead and do the journal entry for that.
My debit is going to be however I was
paid so it's either going to be cash or
it's going to be accounts receivable
that one's right
uh of however much. Okay. So how much
however much I sold it for that's what I
got in cash my cash went up or my ar
went up whichever one they paid with
okay that's also the amount that I
earned so my credit is going to be uh
sales revenue
or sometimes you'll just see it called
sales that's part one that's step one of
the
sales of inventory. The second step is
now we have to recognize the expense
side of it
or what we call the cost of goods sold.
Okay. Remember we purchased this
inventory with the intent to sell which
means we're not going to use it remember
we don't expense things until we use it
we're not going to use it until we
actually do sell it and at that point we
have used the invent for
inventory for what his purpose was so
therefore not only do we have to
recognize revenue
we have to expense it as well, so the
second step to this is going to be the
expense side and we use what's called
cost of goods sold.
You can kind of think of it as inventory
expense but we use the term cost of
goods sold as
a account name, so the second part this
would be I'm going to debit my expense
account which is cost of goods sold
so cost of goods sold for whatever that
amount was to me
not what I sold it for but what it cost
me and then not only did I
gain something I gained cash I also lost
the inventory because I gave it to my
customer,
so my credit for this one would be
merchandise inventory or inventory
for the same amount. It is important that
you recognize the different
numbers because the cash and the sales
revenue are what we sold at four
and the cogs or cost of goods sold and
the inventory is what it cost
us, you don't want to have the same
numbers on there because that means
you're not making a profit and that's a
very bad business strategy you will go
out of business very quickly,
okay, that's it in concept if you wanted
more practical sense I would just
like we've been doing from the beginning
when we talk about journal entries
we do all the debits first and all the
credits last this is what a more
practical one would look like I do my
two debits together
and then I do my two credits together,
still the same thing most of the time
it's not that big a deal but that is how
you recognize
the purchases and the sales of
inventory.
Appreciate it.