This is Part 3 in our Merchandising Operation series, and we'll be discussing
the selling of inventory. So the first thing we're going to look at is
transportation costs. Transportation costs are costs that are incurred to get
a product from the seller to the buyer.
Now it can happen one of two ways. The buyer could pay shipping or the seller
could pay shipping. Freight- in is transportation costs on purchased goods.
So this is what it's called when the buyer pays the shipping cost or the
transportation costs. This is not an expense it actually increases the value
of the inventory of the buyer. This is also you may also see it called FOB
shipping point. FOB stands for free on board or freight on board shipping point.
Shipping point means at the point of shipment it's no longer the
responsibility of the seller. It becomes the responsibility of the buyer. So again
remember freight-in is not an expense. It's an increase to the value of your
inventory. Freight- out is going to be is going to be paid by the seller, and it is
an expense.
It's often called FOB destination or free on board or freight on board
destination. Meaning is the responsibility of the seller until it's
received by the buyer. When we sell inventory, we have to make two journal
entries. The first one we have to record the sale, the second entry is to reduce
our inventory and record the cost. When we make a sale we generate sales revenue
from the selling of our inventory and of course sales revenue is a revenue
account. Also when we make a sale or sell inventory, we have what's called our cost
of goods sold, or the cost of that inventory that we sell. This is a an
expense account and it's typically the largest expense account a business will
have.
Let's look at Sales, Returns and Allowances. Now unlike purchase, returns
and allowances, sales, returns, and allowances is an actual account. This is
when customers return goods to the seller, or the seller grants a reduction
in price to the customer. Sales discounts again unlike purchase discount, sales
discounts is an actual account. Sales discounts occur when customers pay
within the discount period allowed by the seller . These two accounts are called
contra- revenue accounts. So we know that revenues carry a credit balance. Contra-
revenues therefore will carry a debit balance, and they will effectively reduce
the value of our sales. So we'll take our sales, and subtract our two contra sales
accounts, ( sales returns allowances and sales discounts), to give us net sales. And
now we'll discuss delivery expense. This is the same thing as Freight- out so this
is the expense of the seller. If they pay the shipping costs, it's called a
delivery expense and it is included on the income statement of the seller.