Hi, Else, here.
And we're going to start analyzing
the transactions of Greene Inc., a merchandiser who
buys and sells widgets to retail stores.
We'll focus on individual business transactions
in order to analyze and record those transactions.
Let's start with June 2.
Greene Inc. purchases 280 widgets
from DJB Inc. for $2 each paying cash.
Let's start the analysis using our question,
what did the business get?
Widgets, which are owned, can be sold in the future for a higher
price, and are due to a past transaction-- which
means that they're an asset.
Since you plan to sell the widgets to customers,
they are considered inventory-- products
that are ready for sale.
The inventory count is increased when you buy inventory.
What did the business give away?
Cash-- so the cash account will decrease
because it's gone and, therefore, has
no future benefit for the business.
Let's record this activity into the expanded accounting
equation on June 2 using account names.
The cash account would decrease by $280 times
$2, which is $560.
The inventory account would increase
by the same amount, $560.
Notice that the other elements, liabilities, equity, revenues,
and expenses are not impacted by the purchase of inventory.
We are, basically converting cash
into inventory changing one asset into an other asset.
Next transaction-- on June 7 you sell 190 widgets
to Bleaue Inc. for $5.
In addition, on June 7 you must also
record the cost of the inventory you just sold.
The key to remember here is that a sale of inventory
involves two distinct transactions.
The first entry is a sales entry.
This entry records the sale of inventory
at the selling price of the inventory to the sales revenue
account.
The three S's entry.
If we then use the critical enhancing questions,
we can analyze it further.
What did the business get?
Cash-- which is owned, will benefit
the business in the future, and is due to a past sale.
The cash account will increase.
What did the business give away?
They gave away a good, delivered it in order
to generate revenue.
Since they finished their job, completed
what they had to do as a business,
they can record an increase to the sales revenue account.
Let's record it in the expanded accounting equation
on June 7 using account names.
Cash increases by $950, which is 190 widgets times their selling
price of $5.
The sales revenue account increases by the same amount.
What does that sale do to equity?
It increases equity because revenues increase profit
which increase retained earnings,
which then increase equity.
We did the sales entry.
We now have to do the cost entry.
This entry records the cost of the sale
at the cost of the inventory to the cost
of goods sold account--
the three C's entry.
If we then use the critical and enhancing questions,
we can analyze it further.
What did the business get?
Actually, I'm not sure they got anything, so it's unclear.
Move on to the next question.
What did the business give away?
They gave away inventory, which now
has no future benefit because it's gone due to a past sale.
The inventory account, therefore, decreases.
Move on to the enhancing questions.
What did the business earn?
Nothing, because we are, right now, doing the cost entry
and you don't earn anything with the cost entry.
What did the business use, consume, or incur?
They used up their inventory in order to generate revenue
and that means that there is an expense recorded as an increase
to the cost of goods sold account.
Let's record it in the expanded accounting equation
with account names on June 7.
The cost of the inventory was $2 each.
So the cost of selling 190 units is 190 times
two, which is $380.
Inventory decreased by $380.
The cost of goods sold goes up by $380
because you have an expense which is used
in order to generate revenue.
Wait a minute.
We have a negative under assets but a positive under expenses.
It appears that the equation does not balance.
Recall that expenses on the expanded account equation
are always entered as positive because expenses
are increasing.
However, once we flow the expense numbers up
into the equation, they become negative
and their impact on profit is negative.
The impact on retained earnings is negative
and therefore their impact on equity is negative.
Since the impact on equity and assets are both negative,
the two sides actually match.
Let's recap the basic purchase and sale of inventory.
When we buy inventory, we increase inventory
because we have an asset that will benefit us
when we sell it.
We record it at the price we paid for it.
When we sell inventory, we have to record two entries.
The first is the sale of inventory for the selling price
to the sales revenue account--
the SSS entry.
Keep in mind that this might also impact the cash
or accounts receivable account.
Then the second entry is the cost
of inventory to the cost of goods sold account
at the price it cost us to buy the inventory
in the first place, the CCC entry.
This last entry also decreases the inventory account.
It's important to remember that the sale of inventory
always includes two entries--
the SSS to record the sale of inventory and the CCC
to record the cost of inventory.
In the next video, we'll continue on with this example.