Financial Accounting – Merchandising Transactions | Robert Steele | Skillshare

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Financial Accounting – Merchandising Transactions

teacher avatar Robert Steele

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

22 Lessons (3h 51m)
    • 1. Financial Accounting – Merchandising Transactions Overview

      6:15
    • 2. 1 Accounting Cycle Merchandising Company

      3:17
    • 3. 5 Perpetual Inventory System

      18:36
    • 4. 10 Periodic Inventory System

      22:30
    • 5. 15 Perpetual vs

      16:50
    • 6. 20 500 Merchandising Transaction Explained Purchaser and Se

      5:53
    • 7. 30 500 Merchandising Transaction Journal Entry Purchaser

      5:16
    • 8. 40 500 Merchandising Transaction Sales Journal Entry COGS Jou

      7:12
    • 9. 50 500 Sales Discount VS

      5:39
    • 10. 60 500 Purchase Discount Journal Entry Explained

      6:35
    • 11. 70 500 Sales Discount Explained Journal Entry Record Discou

      7:18
    • 12. 90 Inventory Shrinkage

      9:06
    • 13. 100 Sales Return & Allowance Transaction

      16:00
    • 14. 101 Income Statement Introduction

      6:56
    • 15. 110 500

      25:36
    • 16. 20 Discussion Questions Merchandising Company

      4:52
    • 17. 30 Discussion Questions Merchandising Company

      1:42
    • 18. 40 Discussion Questions Merchandising Company

      3:05
    • 19. 10 Multiple Choice Questions Merchandising Company

      10:36
    • 20. 20 Multiple Choice Questions Merchandising Company

      18:35
    • 21. 500

      11:04
    • 22. 500

      18:23
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About This Class

Merchandising transaction, those transaction that deal with inventory, including the purchase of inventory and the sale of inventory. We will discuss related topics including sales discounts, purchase discounts, sales return and allowances, shrinkage and the cost of goods sold calculation. We will also compare and contrast a perpetual inventory system and periodic inventory system, listing and describing the pros and cons of each, explaining when each may be most appropriate in practice.  

In addition to instructional video, this course will include downloadable

•    Downloadable PDF Files

•    Excel Practice Files

•    Multiple Choice Practice Questions

•    Short Calculation Practice Questions

•    Discussion Questions

The PDF files allow us to download reference information we can use offline and as a guide to help us work through the material.

Excel practice files will be preformatted so that we can focus on the adjusting process and learning some of the basics of Excel, like addition, subtraction, and cell relationships.

Multiple choice example question helps us improve our test-taking skills by reducing the information into the size and format of multiple choice questions and discussing how to approach these questions.

Short calculation questions help us reduce problems that have some calculation down to a short format that could be used in multiple choice questions.

Discussion Question will provide an opportunity to discuss these topics with the instructor and other students, a process many students find very helpful because it allows us to see the topic from different viewpoints.

Who will we be learning from?

You will be learning from somebody who has technical experience in accounting concepts and in accounting software like QuickBooks, as well as experience teaching and putting together curriculum.

You will be learning from somebody who is a:

•    CPA – Certified Public Accountant

•    CGMA – Chartered Global Management Accountant

•    Master of Science in Taxation

•    CPS – Certifies Post-Secondary Instructor

•    Curriculum Development Export

As a practicing CPA the instructor has worked with many technical accounting issues and helped work through them and discuss them with clients of all levels.

As a CPS and professor, the instructor has taught many accounting classes and worked with many students in the fields of accounting, business, and business applications.

The instructor also has a lot of experience designing courses and learning how students learn best and how to help students achieve their objectives. Experience designing technical courses has also benefit in being able to design a course in a logical fashion and deal with problems related to technical topics and the use of software like QuickBooks Pro.

Summary of what will be covered: 

Accounting Fundamentals

  • We will review the fundamentals the core concepts we always need to fall back on and practice, fundamentals including the double entry accounting process and the relationship of the financial statements. These are topics we can almost always still learn something new on even when we believe we have them fully understood. 
  • Merchandising Transaction
    • Purchase of merchandise or inventory
    • Sale of merchandise or inventory
  • Perpetual and Periodic Inventory System
    • We will compare and contrast the perpetual and periodic inventory systems. 
  • Sales Discount & Purchase Discount
    • It is easy to get the sales discount and purchase discount confused and mixed up. We will discuss both transactions and how to record them. 
  • Inventory Shrinkage & Sales Returns. 
    • Inventory Shrinkage has do do will  loss of inventory, the problem being how to know it is lost and how to record the loss. Sales return are when inventory is returned after a sale. We will record transactions related to sales returns. 
  • Financial Statements - Merchandising Company
    • Financial statements, especially the income statement, are typically more complex for merchandising companies then service companies. 
  • Comprehensive Problems
    • We will have to comprehensive problems, on focused on financial transactions, more of a mid sized problem. The second comprehensive problem will cover the full accounting cycle for a merchandising company, the recording of financial transaction, adjusting entries, financial statements, and closing process. 

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Transcripts

1. Financial Accounting – Merchandising Transactions Overview: if we are a business owner who would like Teoh, run our business better by understanding merchandising transactions and the flow of inventory or a business professional who would like to advance our career by knowing the system for recording inventory and processing inventory through and accounting system or an accounting student who would like to better understand accounting concepts and work problems much faster, this course is a course for us. What will we learn? We will be covering merchandising transactions covering what they are. We will be dealing with transactions covering merchandise that's being different than a surface company focusing in on those transactions that will differ from a service company. Those transactions dealing with inventory. We're going to talk about how to record these transactions that can be a little bit more complex and involve a couple of different components to recording inventory. We'll take a look at financial statements for a merchandising company. Typical financial statement being more complex as well as the income statement in particular, typically will have more components to it, having a multiple step income statement rather than a single step income statement as might be used in a service company. We're gonna look at the accounting cycle, our focus won't be on the accounting cycle. Specifically, our focus here will be on the merchandising transactions with India counting cycle. However, we will be doing this within the accounting cycle and focused on the accounting cycle. When we do a comprehensive problem tying everything together both transactions that would be on a service company and merchandising company in that comprehensive problem as well as the transactions that are going to be new, are gonna be added are gonna be components that would be used on Lee in a merchandising company. Those that so inventory. We're also gonna have excel. We're gonna have pre formatted worksheet. So this isn't an Excel course, but we will have excel problems toe work through these problems and apply the skills that we have learned and learn the components, the basic components, the fundamental components of excel, those that we need to practice all the time. Addition, subtraction sell relationships within that program. Why choose this course? Although this course will have a lot of instructional video, we will have more than just instructional video, including pdf files, pdf files. With much of the presentations that can be downloaded can be read off line and can be used as a reference and guide for future reference. We're gonna have excel practice problems. This will give a practical example, and many of the problems will have both an example sheet to show how these concepts are put together to show it worked out in an example problem. So you can go through there and see how all the cells tie together. We'll also have an Excel sheet that will have a practice file that you can go in there and actually reworked the information. Looking both at the video, Teoh work through the problem with, as well as the example file to work through those problems with learning. Both excel as well as the accounting concepts. As we go, we're gonna have practiced test questions in a couple different formats. They will be in video format, so we're just gonna go through test type questions. One multiple choice questions that may not have calculations in them, and we'll take a look at these concepts that really are easier and actually to understand within the context of the accounting cycle and a comprehensive problem, and then take a look at how were typically tested on these things in a multiple choice short question type format and look at how to approach those multiple toys. Type questions in a video format will also look at short calculation type questions, which could also be formatted in terms of multiple choice questions or just short calculations again limiting the information and seeing how a test might put together this information. Try to get to these concepts, but in short problems, test taking skills needing to be applicable in these areas. Discussion questions will have more open ended questions for discussion questions in order to facilitate discussion with myself as well as with other students, to see these components from different perspectives and see people listing out what they think of them from different perspectives. Who will we be learning from? We will be learning from a practicing, certified public accountant at someone who has accounting, experience, teaching experience and curriculum development experience both on a course level, as well as multiple courses that need to be put together in a logical fashion so students could get from them what they want to someone who has a chartered global management accountant designation, someone who has a master's of science in taxation, someone who is a certified postsecondary instructor and curriculum defined expert. Someone who has experienced putting together courses, putting together content in both, of course, as well as multiple courses in a way that students can flow through them. Go forward, go back, pick up from them what they want. How will we be taught through viewing and then doing We will have a presentation files that go through the concepts, and many of those presentation files will include pdf file so you can read those. You can download them off line and go through them and use them as a reference. As we go through the material. We're then going to include Excel practice files. Those practice files will give us an example to go through and apply the skills to a practical problem, given an example of it so you can see how it's put together and a file to work through. The problem, along with instructional videos, will have practiced test questions. Those test questions, typically in that video format, to go through test taking skills and see how this concepts that we really see in real life in a larger, comprehensive question. How it would be used in test taking skills in order to learn those test taking stills for both multiple choice and short calculation type questions. We'll also have those discussion questions, discussion questions, open ended questions in order to facilitate discussion with both the instructor as well as other students. Please join us for financial accounting, merchandising transactions. It will be great. 2. 1 Accounting Cycle Merchandising Company: in this presentation, we're gonna talk about the operating cycle for a merchandising company. When we think about the operating cycle for a merchandising company, we can contrast this to a service company, A service company providing a service in order to generate revenue and a merchandising company providing merchandise. The merchandise now being an added factor adding a bit more complexity to the cycle and is , of course, what we want to concentrate on as the new thing, the different thing, the thing that we need to get practice with. As we move from my service company to a merchandising company, the cycle will look something like this. First, we're gonna be purchasing inventory. So the inventory could be anything that we are going to purchase for the purpose of reselling in order to generate revenue. Once we have the inventory, at some point in the future, we will hope to sell that inventory to a customer. We're going to say here that we're gonna make the sale on account now, we could make the sale four cash and receive payment at the point of sale. But in order to work through the standard cycle, we're gonna work this cycle. We're going to say we sell something on account, meaning we invoice the client. We provide the in the inventory to the clients selling the inventory and expect to received payment at a later point in time. And when we do receive payment, then, of course, we're gonna collect the cash decrease in the accounts receivable and increasing the cash at that time. And this will be the standard process. We're gonna purchase inventory. We're going to sell it to the customer. We're going to receive cash. Now, this is gonna be just an idea of what we want to keep in our mind. Of course, when we are a merchandising company where buying inventory, we're marking it up in order to get a profit margin. We're selling it to the customer. We're getting that cash, and the cycle then will continue. Don't mix this up with the other cycles that we have talked about, which are going to be the standard purchasing cycle where we can think of just the purchasing in and of itself. In other words, we may not be purchasing just for cash. We might be purchasing on account and have a similar cycle in this process as well. Meaning we're gonna purchase inventory on account. And at a later time we're gonna pay what we owe. Pay off the account. And this cycle over here, when we're dealing with the customer, of course, is the receivable cycle where we're typically going Teoh invoice the client having accounts receivable and then collect payment at a later point. And of course, we could at some point received cash directly from the customer. The idea of this cycle is to differentiate from the service company in that we have this added factor this added factor of inventory and this process will be happening in one form or another where we will be purchasing inventory. The goal of the purchase of the inventory is to mark it up. That's how we generate the revenue. Once we mark it up, we sell it to the customer at the market price and if we sell it on account, then we increase the accounts receivable and we increased the sales. Then, of course, eventually we collect the cash and once we have the cash, we have the funds in order to repeat this process to generate more revenue 3. 5 Perpetual Inventory System: In this presentation, we will talk about a perpetual inventory system. The perpetual inventory system is the default system. We will typically be talking about Win referring to an inventory system. But we want to be able to compare and contrast it to a periodic system one reason being that a periodic system is often used when we don't have a sophisticated system. And two we're gonna use a similar cost of goods sold the same cost of goods sold calculation in both a perpetual system and a periodic system. When considering the perpetual system, we're gonna go through a series of transactions those transactions being the purchase of inventory and the sale of inventory starting with purchase of merchandise on account. No, we have our trial balance over here. We're gonna be recording the journal entry on the left side with both a debit and credit column credits represented with brackets. When we post them over here, however, we're starting with a beginning trial balance that trial bounds representing debits and credits on Lee with debits being positive or un bracket numbers credit being negative or bracketed numbers the debits, then minus the credits giving us a zero balance showing that debits equal the credits. Nothing is currently in net income will then record the transaction here to see a quick view of the activity. What will happen in each account, as well as account group asset liability, equity revenue and expense assets and green liabilities in Orange Capital and light blue revenue and expense in the dark blue. So if we purchased merchandise on account, what's gonna happen? I would think first, is cash affected? No, it's not because we purchased it on account. That terminology typically meaning we purchased it on credit or some other fashion. Therefore, I would think about what we got. What we got then, is inventory inventories up here? It's in the assets section. Assets have a debit balance. We got more of it. Therefore, it's gonna go up. So we're gonna do the same thing to it, which is another debit. So we're gonna debit the merchandise inventory. 13,000 will be the amount. We will then credit something for 13,000. We know it's not cash. We know he bought it on account, which means accounts payable accounts payable, has a credit balance, and therefore and it needs to go up the bad things going up, we owe more money and therefore we're gonna do the same thing to it, which in this case, is another credit. So we'll credit the accounts payable. If we post this out, then we're gonna post this to our worship started with 10,000 increasing 13,002 merchandise inventory to a total of 23,000 accounts payable then started at 6500. Increasing by 13,000 in the credit direction gives us a credit balance of 19,500. Note. This transaction will be the same under a periodic system and a perpetual system Note. This transaction is what it is. There is no estimate involved. Here it, We're going. We are going to pay $13,000 worth of the inventory. Assets have been increased liabilities to have increased, and there's no effect on equity. Here's the full transaction here. With all the other accounts we could see, we are still in balance. We could see that there is no effect in net income. Next transaction. We're gonna make a sale for 3120 have a cost of 2400 when we are on a perpetual system. As we are doing here, we will do something with both the sales portion and the cost portion, as opposed Teoh. If we worked the same problem from a periodic system, we wouldn't This would be this with the information we would not be using as we record the system in this point, we would then do a calculation at the end of the period that month, the year or the week, whatever the period may be in order to calculate the cost of portion in order to do this side, we typically want to think of the transaction as to transactions one dealing with this sales, half the second dealing with the cost half when dealing with the sales half. I would think of a type of company that does not have inventory, remove inventory first, think of a service company and think of the transaction related to it and then add the inventory as we do the second journal entry for the cost. Note that if you see this in software, they won't break out the two journal entries. Oftentimes they're putting together debits on tops credits on the bottom, but conceptually, it makes a lot of sense, a lot easier to break them out. And when we're doing journal entries by hand, that's the way we would recommend doing it if we were a service company and we made a sale on account, meaning we did work and we're going to get were invoicing someone. Then we didn't get cash. We got accounts receivable, so they accounts a stable is a debit balance account. It would then be going up so we would do the same thing to it, which is a debit gonna be for the larger amount, of course. And then we're going to say the credit would be to revenue. There was a service company. It might be fees earned or something like that. Income or revenue. If it's a manufacturing company, same thing. But we just name the revenue account now sales. So sales is the common name for revenue in a merchandising company. It will then be credited. Now, remember that sales has a credit balance, that credit balance account. It only goes up, therefore it will go up by doing the same thing to it. Another credit. If we post this out, we got the accounts receivable increasing. We got the 6000 plus the debit of 3120 to get a total of 9000 120. We've got the sales of zero, and then it goes up in the credit direction by 3122 3000 120. Then we have the second component, starting with the cost of goods sold and the other piece being inventory. Now note that the second component is the new component for a merchandising company. It might be easier to start with the inventory to think about it and say, OK, the second piece, there's the cost. But what's happening? We're selling inventory, so you might want to think our inventory is an asset account. It's going down, so I'm gonna credit it, build the credit portion of the second piece. Then we know we're gonna debit something, and we know we can then remember or figure out or see that they were going to debit the new account cost of goods sold. The account knew in that it's on account that's on a merchandising company, not in a service company. So these are the two accounts that are basically there for a merchandiser, which would not be there for a service company. This one is often one that confusing people because it is an expanse and it doesn't have the word expense in it. And when we expense it, we never do anything to cash as we do it. So sometimes that's confusing to people. Cost of goods sold is an expense because we're consuming the merchandise in order to help generate revenue. And that's what the expense will be. So cost of goods sold and merchandise inventory. If we post the merchandise inventory first, we're going to say that the 23,000 it's gonna be credited by that 24th 2400 bringing the balance down to 20,600 cost of goods sold gonna go up from zero to 2,402,400 Accounting equation effect. Assets are going up now with both of these journal entries knows that notice it went up by the accounts receivable and then down by merchandise. Inventory for net increase liabilities stay the same, and equity went up by revenue and down by the increase in expenses. Because the net income is calculated by revenue minus expenses. And the equity includes all of the income statement accounts to see all the accounts Here. We have everything lined up. We could see we're back in balance here. We could see the effect on net income being these two items thes two items being the effect on net income increased by the sales. And then it decreased by the cost of goods sold. Revenue minus expenses. 7 20 Is the net increase in the net income. Same for the assets it increased by 3001. 20 the A r it decreased by the inventory. We gave up a difference of that. Same 7 20 Next transaction, we're gonna say we have another purchase on account for 6000 were purchasing merchandise and so is cash affected. Know what we get then? We got merchandise. Merchandise is an acid has a debit balance. Therefore, we will do the same thing to it, which in this case, is another debit to increase it. Then we're gonna credit something won't be cash. We didn't pay cash. Instead, it will be accounts payable. Accounts payable has a credit balance indicated by the brackets. In this case, we need to make it go up. The bad things going up, we owe more money. Therefore we do the same thing to it. Another credit. If we posted this out, then we're going to say this 6000 in merchandise inventory will be going here to merchandise inventory that 20,600 that 6000 will be increasing merchandise inventory to 26,600. The accounts payable here will be increasing the accounts payable. Credit balance 19,500 increasing by 6002. 25,500. Accounting equation is increasing because the asset account of inventory is going up. The liabilities are increasing because the accounts payable liability is increasing. No effect on equity. If we see all the accounts, then we can see everything lines out. We're back in balance and there is no effect here on net income. We purchased merchandise inventory haven't yet used it. We didn't expense it at the time that we purchased it. Because we haven't consumed it. To help generate revenue, we will win. We sell it in the form of cost of good soul. Next transaction, we're gonna have another sale. It's gonna be a sale for, Ah, 1 3020 it cost of 2400. Remember, this is the journal entry that will be differentiated from the periodic system. The pure attic system will not be recording. The cost will only be recording the sales half. We're gonna break this out once again into the sales portion and then the cost portion focusing first on those accounts that would pretty much be there if it was not an inventory company. We're not a merchandising company. So let's remove the merchandising type transactions. Think of as if it's a service company. Prepare that transaction and then add to it the new ah accounts if it was a merchandising company. So first, if we made a sale and we were a service company, we would say we made it on account. We didn't get cash. We got instead, and I owe you that Being accounts receivable, it has a debit balance. We're gonna make it to go up by doing the same thing to it. Another debit. So when a debit accounts receivable, we're going to credit something that something being revenue would be called revenue income could be called fees and earned and a service company here. It's gonna be called sales because we're manufacturers. Just the name that will change depending on the type of company we are in. But it is a revenue account. Revenue accounts have credit balances. They only go up, we're gonna increase it, doing the same thing to it. Another credit. So that's gonna be the first half If we post it accounts receivable has a debit balance 9120 then we're posting this 4 2040 here, increasing the amount to 11,460. The sales starts out with 3120. We're gonna increase it by this credit there by 2342 5460. Next component we're gonna have here to our journal entry will be that we're gonna be recording the merchandise inventory going down. Cost of goods sold. Now, I usually think of the merchandise inventory first because I think it's easier that it's an asset in the asset as a debit balance and we need to make it to go down. So we credit merchandise, inventory, and then the other side of it. The debit then would be the cost of goods sold. So caused a good soul debit merchandise inventory credit Again, it might be easier to think about the credit first because most people conceptually just had a little bit harder time knowing exactly what cost of goods sold is merchandise. We can visualize merchandise, whatever that maybe we know it's going down. We know merchandise is an asset like cash. We probably have a lot of practice with cash and therefore we can say merchandise is going down. We need to credit it. So we credit that debits something else, and then we just have to know it's gonna be the new account that we're adding to the income statement portion cost of goods sold. Then you want to think about that. You want to remember, okay, cause to get sold is an expense. It's an expense related to a merchandise inventory being consumed. All expenses have debit balances. We need to make it to go up because expenses typically only go up. Therefore, we will do the same thing to it in this case, another debit. If we post this out, then we're gonna say the merchandise inventory here. Here's the merchandise inventory here. It's got 26,600 in its were posting this credit their eighth out, 1800 bringing the balance down Teoh 24,800. Then we're gonna post this cost of goods sold debit here and we started with 2400. We're increasing it by 1800 to 8. Balance of 4200. The assets are going up because the accounts receivable went up, merchandise went down, but the net is an increase and then the liabilities stay the same and the equity is going up because revenue is going up. Although the expenses are going up as well, bringing down net income. It's a net increase The net income and therefore also an increase to total equity. If we see everything plan out here, this is all the accounts we can see. We are back in balance. We can see the effect on net income is an increase in revenue on increase in expense, resulting in the difference between those being the net increase in net income of 5540. That being also the increase in equity the increase in assets being the increase in the receivable minus the decrease in merchandise inventory. Also tying out to that same 540 now, it's important to note that even though we did a perpetual system and we basically have the merchandise inventory and the cost of goods sold numbers here, that should be correct because we've been recording them as we make the sale, meaning we've been every time we make a sale, we don't just record the sale. We record the decrease in the inventory and the related cost of goods sold At that point in time. In a per periodic system, we might wait until the end and then count how many are left in order to do that calculation Now in the perpetual system. It's important to note that although we are tracking these items perpetually, we still need to do the same calculation. We still need to count ending inventory and double check what it is. And it's still important to know the cost of goods sold calculation. So we're gonna take a look at that. If we said that we counted the invent ending inventory, it came out to be 24,800. Then we know that we didn't lose anything. Basically, we had the perfect ending inventory. We'll talk about a scenario, a scenario that's very common, which we do lose something which there's some type of shrinkage in inventory, which would be theft or spoilage or breaking or lost or something like that happening. But we're gonna tie this out perfectly right now and just be able to see this formula so that we can see how it works. And we and we'll explain later, of course, why or in what situation We would definitely need it in order to see what that shrinkage is , what the loss is. And we also need it in this case to prove that there wasn't one so caused a good soul is gonna be the beginning inventory in our problem. It started with 10,000. If we went back to the first journal entry, we would see that 10,000 in our first, uh, account here. If you have the General ledger account, of course, the beginning balance would be the beginning balance in the G l. The General Ledger for the inventory account. Then we would look at the purchases. We had two purchases throughout this problem, which would add up to 19,000 again if you looked at the Gene General Ledger account. That's where we could pull this in practice, what the purchases were. And this again. There's no guessing in this number. This number is not an estimate. That's what we're actually gonna pay for the inventory. Then, if we add those two up the 10 and the 19 we get to 29,000. That's what we could soul cell throughout the period. It's not necessarily what we did, so we'll figure that out by counting what we have at the end. But that, or we are we already actually, in a perpetual system, have it here. We've been calculating it as well, but that's what we could have sold. And it's not what we had at any given point throughout the month or the year or the period that we're calculating for. But if we accumulated all the all the inventory that we had in possession at any given time throughout that time period, it would add up to 29,000 meaning we could have sold up to $29,000 worth of inventory, but we could not have sold anymore because we didn't have any more than that at any given time. And then if we subtract out Indian inventory which were getting from the physical count here. So we're counting the inventory to be at 24,800. Quick note here that the 24,800 represents the dollar amount in this case. And obviously if we counted the inventory, it would be in units and we have to do some type of conversion. We'll talk about the conversion problem later. Eso just note that we would count it and then we'd have to do a conversion just like some kind of currency conversion or any kind of a measurement conversion from units $2 to get Teoh the dollar amount. And then if we subtract this out, we're saying this is what we could have sold throughout the time period. This is what we have left. Then we get that 4200 and again if everything works perfectly, If everything is correct, then of course, this cost of goods sold will tie out to our cost of goods sold here and the physical count that we count at the end of the time period will match the physical. I mean, what is on the books for our perpetual system. And but there will be times when that is not the case in this formula will be important. Whether we use the perpetual or periodic system will match this up to a periodic system. 4. 10 Periodic Inventory System: In this presentation, we will discuss a periodic inventory system as we discussed the periodic inventory system, we want to keep in mind and contrast the perpetual inventory system. That's the inventory system. We will most likely be seen and using wind discussing inventory. But the periodic system is actually used more often when we have a less sophisticated system. So if we're working in a situation where we don't have a sophisticated system, we would more likely be using a periodic system in order to simplify that system. If we have a more complex system or a system that has, AH, better ability to pick up the information as we record it sex, jazz and electronic system a scanner that knows the cost of items as we go, then we would want to use a perpetual inventory system, which would be preferred. And it's just a trade off between the added cost of a system like that in the time that it would take for a perpetual system versus the ease, but less information we have during the process on a periodic type of system. As we go through this, we're gonna look through some transactions, some purchases and some sales on a periodic method we're gonna have our gentleman tree is gonna be recorded on the left side. This will be our chart of accounts On the right side, the journal entry will have both debit and credit columns as well as credits in brackets. The chart of the accounts will only have on the trial balance the debits and credits being represented by debits, not having brackets or positive numbers, credits having brackets or negative numbers. And then the zero will show that the debits minus two credits equals zero meaning debits equal the credits. Then we'll post this information and see what we end up with so that we can see this activity and a nice little worksheet. See which accounts are affected. Which type of account assets, liabilities, equity income expense accounts are affected and the effect on net income starting with purchase merchandise on account. This is gonna be a transaction that will not differ under either method. If we have a perpetual or periodic system, we're gonna purchase the merchandise. Same transaction, we're gonna say. Is cash affected? No, because we purchased it in this case on account. That means we purchased it with accounts payable. But I would first think about what we got. We got merchandise, inventory, inventory, and asset has a debit balance and we need to make it go up. We're going to do therefore the same thing to it. Another debit. There's the debit to merchandise inventory. We're gonna credit something now and now we can say, OK, it's accounts payable, and we already know that we're gonna credit it. Having done the merchandise inventory first, then eso we're gonna say we're gonna credit the accounts payable. That makes sense because accounts payable has a credit balance indicated by the brackets. Here. The bad thing is going up. We owe more money because we purchased something on account. Therefore, we do the same thing to it. Another credit. If we post this out, then we have the merchandise inventory here, which we will post here. We have the $10,000 debit balance. It's gonna increase by another deputy of 13,000 to a total of 23,000. Then we have the accounts payable 6500 credit. We're gonna do the same thing to it. This credit is gonna be posted 13,000 plus the 6500 gives us the amount owed in accounts payable 19,500. The effect on the accounting equation assets. They're going up. Inventory is going up, The liabilities air going up because the accounts payable is going up and Theo equity remains the same. If we see all the accounts here, we can see the transaction here. We can see that there is. We're still in balance and no effect on net income. We purchased inventory. We didn't expense the inventory because we have not yet used it. We will expensive at the point. It is used at the point of sale in the form of cost of goods sold. So note one more time. This journal entry is the same under either method, perpetual or periodic. Next transaction sale for 3120 cost 2400. This will be a transaction that will differ under the periodic and perpetual system, the perpetual system. What we're not doing here would record both the sales portion and the cost portion under a periodic system. What we are doing here, we will record just the sales portion recording the cost at the end at the late at the end of the time period, month, week, year whatever we're doing here on and we're gonna do that by doing a physical account. So if a problem gives you the cost at the point in time that we are working a periodic system, it doesn't matter. We don't need the cost in practice. The fact that we may not know the cost is part of the problem. Meaning if we are trying to have someone run our store basically and we just want a clerk up there to be recording transactions, collecting cash, given back change and we don't have a sophisticated Elektronik system, then they know the sticker price. Of course, when someone pays them, they know how much money they got, what they do not know, because not on the sticker price is the cost. So we don't want our clerk to have to figure out the cost in order to record the cost. Every single time someone comes up that would take a more experienced clerk, someone that was able to do that, what we want them to do. And if we were doing it to, we want to be a ZZ as possible. We want to focus on sales. Therefore, we're just gonna record the sales portion. That's easy. We're focused on giving back the change we laid into the to the customer. And then we'll figure out the cost at the end. Now, if we had a various 50 if we had a nice system that was a scanner system that knew the cost at that point and I wouldn't even need to know it or think about it, then we can use that system and it would be just on automatic type of system. So if we don't have that were often using this periodic system and the journal entry would be the same as if we're service company would say we're gonna assume we got the not cash, and we made it on account. So on account, we've got the accounts receivable, eyes going up. It has a debit balance. We're gonna make it to go up by doing the same thing to it. Another debit, and then the other side would be some kind of revenue account. So we're talking sales. In this case. Here's the sales account. It could be revenue. It could be income. If there's a service company. Be fees earned its just another name for the same thing. A revenue account. Revenue accounts have credit balances. It will be going up. So we're gonna do the same thing to it. Another credit. So then, if we post this, then we're posting this accounts receivable here. So there's a debit and a debit. 6000 plus the debit of 1 3020 brings us up to 9120. Then we're gonna post this sales credit to the sales item here, So we have zero going up by 3120 in the credit direction to 3120. Effect on the accounting equation is the assets are increasing by the accounts receivable. The liabilities are not affected and the equity is going up because sales is going up, sales is increasing. The net income calculation of revenue minus expenses and net income is part of equity. When net income increases total equity increases. We look at all of the transactions, all the balances here. We could see that we are in balance. We can see this effect on net income here. That's from this account here. So this part down, that's the income statement. So it went up in the credit direction. This isn't a loss. This is income representing a credit of 3120. And, of course, the assets of accounts receivable to went up Next transaction, we're gonna have another purchase purchase merchandise on account for 6000. Oh, just to mention here, obviously, if if this was a perpetual system, we would have the other side of this to being cost of goods sold and merchandise inventory . That's what we're leaving out in a periodic system. That's what we do at the end of the time period. That's what will get done through a physical count. Now we're gonna go back to another purchase. We purchased merchandise on account. Remember that the purchases will be the same under the two method. It is what it is. We're gonna pay what we pay. We got what we got under the purchase items. So we're gonna purchase on account, meaning we're not gonna pay cash. We are instead going to be paying with accounts payable. But first to think about the debits and credits, which might be more easy to think about what we got, what we got. Merchandise inventory, which is an acid. Got more of it, therefore goes up. How do we make something go up? We do the same thing to it. Another debit in this case. So we're gonna debit merchandise, inventory. Then we know we're gonna credit something for 6000 because we have a debit there and we know that that then it's gonna be accounts payable. So by thinking about merchandise inventory first it might help us to know that the credit is gonna be going to accounts payable. And the reason I think that the benefit is because we deal with cash a lot. So we probably have more experience increasing and decreasing asset accounts, then possibly liability accounts, which we don't work with quite as often. So if we do that, then way. If we double check that will say this is a credit balance and accounts payable. We need to make it go up the bad things going up because we bought something and didn't pay for it. Therefore o on it. So we do the same thing to it, which in this case, is another credit posting this out then We've got the merchandise Inventory 6000 Debit. We're gonna post that here too. The merchandise inventory account. We have 23,000 starting. We do the same thing to it. Another debit bringing the merchandise inventory to a balance of 29,000. Then the accounts payable. We're gonna post this to accounts payable 19,500. Credit represented by the brackets were posting this. We're just bringing this over and posting the 6000 there, bringing the balance up to 25,500. Accounting equation. We see that the assets are going up as merchandise is going up. They liabilities are going up because we owe more money and accounts. PayPal, equity not affected. If we see all the accounts, then we see that we are in balance by the green zeros deputy equaling the credits. And we see that there's no effect on net income, no effect on net income, which are gonna be these accounts. We did buy inventory. We have not yet used it. Therefore, put it on the books as an asset, not as an expense. It will be expense. When, when we sell it in the form of cost of goods sold a form of expense. Next transaction, another sale. So we have a sale on account. This will be the transaction that differs when we're going from a perpetual to a periodic system. How does it differ? Well, it will be the same on the sales half of it. And we will be eliminating the cost half of this transaction in a periodic system, picking it up at the end of the process. When we do a physical count as opposed to a perpetual system where we would record this as we go. So know what we're doing here on a periodic system. We're only gonna be recording pretty much the same thing. We would if we were not a merchandising company. If we were just a service company with no inventory, meaning we're gonna record the sale. Eso If we did work and we got money, we didn't get money yet, But we got accounts receivable. The accounts Aceval is going up. It's a debit balance account, so we're gonna do the same thing to it, which is another debit. So there's the debit toe accounts receivable. The other side then would be some type of sales account And if it was a service company, Feezer, and possibly possibly just on account, called income or revenue. When it's a merchandising company, all we do is change the name to sales. Typically, that's a normal name that often we will see in a merchandising company has a credit balance . We're gonna do the same thing to it, which in this case, is another credit. So here's our journal entry. It's that it's a more simplified method. That's all we need to dio what we are eliminating in the periodic method that we would be, including if it were a perpetual method. Is the inventory going down and the cost of goods sold, going upbringing net income down. We will do that at the end. When we do a physical count of the inventory posting this out, we're gonna say that receivable has a debit here. We're gonna increase it here. So the debit of 9120 in accounts receivable goes up by this 3 2042 a balance of 11,460. The sales has a credit here 3 2040 We're gonna increase this sales here. 3000 won 20 by that credit of 2342 8 Balance of 5460. Accounting equation. The assets are going up because receivables went up, the liabilities remain the same and the equity is going up. Because sales went up, revenue went up, bringing the net income calculation of revenue minus expenses. Up net income will affect the total equity in the same way that it is affected, meaning if net income goes up, total equity goes up. Here's the full transaction. With all the other accounts we can see, we are in balance by the green zeros, we can see that net income is increasing. That's this part of the calculation here. The sales are increasing net income. That's not a loss. That's revenue revenue going up. And of course, the assets are going up with the accounts receivable. Then we're going to see the Indian inventory. So we're saying we're at the end of the time period now we're at the end of the time period and we're trying to figure out OK, so it's the end of the month and we have accounts receivable and sales. But the periodic system is not very accurate until the end of the period when we do the physical count, because until that time it looks like revenue is way higher than it is because we're missing our most important our largest cost. That being the cost of us using the inventory in order to generate that the cost of us giving the inventory away in order to generate revenue that cost called cost of goods sold . So what we're gonna do is we're gonna do a physical count in order to figure out you know how much inventory is left. Now, we're gonna not go through the process. We're just going to say there's $24,800 worth of inventory. In other words, now, in real life, of course, we would have to count the inventory in units and then converted to dollars. That conversion can be a little bit more tricky. Then we would think at first, and therefore we're gonna go into that process later and use some different methods, including life. Oh, FIFPro average or specific identification at a later time. But now, for now, we need to just know on a periodic system, we're gonna count it now also note that if it was a very simplified system and all the all of this stuff is the same, the units are worth the same or cost the same then it's not a problem. It's an easy calculation. It's an easy conversion. But when we purchase things and that price changes over time, converting from the units to the dollar amount can be a little bit more tricky. So in any case, we're going to say that we counted it and we have $24,800 worth of inventory left. We're gonna use that fact in order, Teoh. Ah, just are Indian inventory to the correct amount because no, what we did not do through the time period, we never reduced the inventory even though we were selling it. Meaning we recorded the beginning balance plus purchases, but had not decreased it as we sold the items. And so that's what we need to account for in our periodic system now. So we're gonna do the cost of goods sold calculation, very important calculation. Whether be using the perpetual or periodic system and here it is cost get. So we have the beginning inventory 10,000. You can see that on the first try balance that we started with here and in real life, you can go to if we were working with this, we want to go to the General Ledger and see that beginning balance What? We started within the inventory accounts, $10,000 were increasing that bite purchases. These are the two purchases we made during this time period. 19,000. Again, If we were looking at the General Ledger, we would be able to see the increases. What we would not to be seen throughout this time period are any decreases to the merchandise. So that's going to give us her 29,000 which is big. They were half matches. What we have on our books right now and what we haven't done is, of course, record the decrease. Now, we don't know exactly what the decrease was. What we do know is we counted our inventory and we have 24,800 left. This number represents what we could have sold during the time period in dollar amounts, meaning we didn't have this at any given time. But throughout the month, we had $29,000 worth of different inventory going in and out throughout that time period. Meaning throughout the month, we could have sold a maximum of $29,000 worth of inventory, could not sell more because we didn't have more than that. That's the max that we could have sold. And then if we compare that been to our Indian inventory, which we got through a physical count. The 29,000 minus the 24,800 Indian inventory gives us the cost of the goods that we sold 4200. So this is what we're missing here. We're missing this 4200 and we're missing the fact that this merchandise inventory went down by 4200. So this merchandise inventory needs to match this. This cost of goods sold needs to match that, and we're going to do that with a journal entry. So here's our calculation. Once again, we're gonna we're gonna make the journal entry note. I've added some units here just so you can see that we could do this calculation with units as well. So if it told us that, I mean, if we counted that we had Indian inventory of 2480 units. That's how much we counted. And we said that they unit costs with $10. Then we can multiply this out and we can figure out that it would be 24,800 in terms of dollars. So if we have a nice even unit cost, that conversion is not too difficult. It would look something like this note. This cost of goods sold calculation can be done in terms of units here, as well as in terms of dollars. And you want to be sure, just like with any measurement method that we know which method we're using and not mixing up units $2 so then you can convert it through this conversion. So if we record this, then we got the 4200. We're gonna increase cost of goods sold by that. So here's the cost to get sold, and we're gonna increase the merchandise inventory. Here's the merchandise inventory. If we post this out, then we're gonna say merchandise, inventory eyes here, it's going to go down. And it might be easier to this to list out merchandise inventory first, even though it's on the bottom because it's often easier for us toe. Visualize what merchandise inventory is then cost of goods sold. Merchandise, inventory. We can think there's an asset, a physical thing that we're actually gave away during the sales process. Therefore, it must go down and it has a debit balance. We needed to credit it, so we're gonna credit it. So the merchandise inventory had 29,000 were making it go down by 4200. The amount of the cost of goods sold, we calculated, or the difference. In other words, between what we had on the books, the amount available for sale and what we counted. The ending in the inventory to be given us that 24,800 what we counted, the ending inventory to be and then the other side of it. This cost of goods sold is going to be calculated here, starting at zero, going up by 4200 in the debit direction, bringing us to an ending balance of 4200. If we take a look at the full transaction, we can see that we are back in balance. We could see that the total assets are decreasing because we decrease the merchandise inventory for the amount that we sold, we can see that the cost of goods sold is going up. That's going to decrease net income. Net income started here. That's not a loss. That's the revenue here, minus the expenses and the Contra accounts. Thes two are actually contra Counts and cost get sold is the expense. And then what we did is we had the 4200 cost of goods sold, which we put in place, which is the cost of goods sold not just for this day, of course, but the cost of goods sold for the entire period. The tired that whatever, we're doing this over a day, a month, a week, probably probably not a year, day, month or week. We have the 4200. So are ending result. Then we had 5460 over this time period. But now we're recording the fact that we had to expend not in terms of dollars at the point of time of sale, but in terms of merchandise, $4200 worth of merchandise. The difference now being 5460 minus to 4200. Given us the 1260. Note that the perpetual system and the periodic system will end up result in the same location, So we should be at the same point at the end of time period. The perpetual system, however, has the benefit of tracking it as we go. So it should be basically correct throughout the system and also gives us kind of that double check that it should already have this number at the end of the time period and then we can double check it through the cost of goods sold, which is a better method to check if we had anything like theft or sport ledger shrinkage, something other than a selling inventory that made the Indian inventory go down note. Under this method, what we're doing is we're just figuring out what the Indian inventory should be, and we're assuming that this difference was all due to sales that happened. But it is quite possible that the Indian inventory went down for some reason other than sales, and that could have been theft or spoilage. Our laws to breakage or something like that, and the perpetual system makes it easier for us to track that 5. 15 Perpetual vs: In this presentation, we will compare a perpetual inventory system and a periodic inventory system, comparing and contrasting the two. It's important to know both of the systems. The perpetual system is the one we will probably be focusing on most, and the one most seen win working problems. However, the periodic system is used when we have a small or less sophisticated type of software or type of process that we are using. And it's useful to know for that reason, and also because the cost of good calculation that we use in the counting of Indian inventory we use for a periodic system is something that we will need to use for a perpetual system as well. So the basic between the two of them will be that the periodic system will be used. When we have a less sophisticated system. The perpetual system will be used. Typically when we have a more sophisticated system. Let's see some comparisons. As we go, we'll take a look at a few different transactions in order to demonstrate the difference. We're gonna record the transactions here on the left side, where we have a both a debit and credit column credits being represented by a credit column and with the bracketed or negative numbers. When we post those to the trial balance, however, the debits will be positive. The credits will be negative. The zero at the bottom shows that the debits minus the credits equals zero. In other words, they are in balance and we have the net income down here. We're gonna have the assets in green. The liabilities in orange, the light blue, the capital, the dark blue. The income statement accounts will post our activity here and see a quick reference to the ending balance. First, we're gonna take a look at a purchase of merchandise. On account will start here because this will be the same under either method, no matter which method that perpetual or periodic, we will have the same purchasing journal entry. It's also not an estimate. So once we later get into different type of estimating methods like first in first out, last in first out average or using specific identification, it won't matter for the purchase. That purchase is what it is. We're gonna purchase merchandise. We're going to say we purchase it on account, and therefore we're not gonna pay cash. We're gonna pay the accounts payable. I would first think about the merchandise inventory. However, that's what we are getting. And it has a debit balance. Were making it go up by doing the same thing to it. Another debit. So we'll debit the merchandise inventory. The credit then will go to the accounts payable, which we already know because we credit merchandise inventory. We can also figure that by seeing that the payable is a credit balance represented with brackets, it needs to go up. The bad thing is increasing because we owe more money for purchasing something on account. We will therefore do that by doing the same thing to it as it's normal balance credit. So here is the journal entry. If we were to post that out, we're gonna post this debit on merchandise inventory right there. Too much of that inventory starting at 10,000 increasing by 13,000 to a total of 23,000. Then we have the accounts payable. Here. It has a credit to balance. The accounts payable will be posted here to the accounts payable accounts, which also has a credit balance. The 6500 credit plus day 13,000 credit gives us a total of 19,500 credit. The effect on the accounting equation is that the assets are increasing due to the inventory and asset increasing liabilities increasing due to the accounts payable a liability increasing no effect on the equity section. Once again, this will be the same for both methods, both a perpetual and periodic method for tracking inventory. Here is the total transaction. With all of our accounts here, note that we are in balance by the green zeros and there's no effect on net income, meaning neither revenue nor expenses or any contra revenue accounts are affected. We did buy inventory. We didn't expense the inventory because we have not yet used the inventory. We will expense it in the future. At the point in time, it is used to help generate revenue in the form of cost of goods sold Next type of transaction will be the sale transaction, and this, of course, will be the one that will differ. We're gonna differ when we sell things in the periodic system. What we're gonna do is just record the same half of the transaction. We would see if we were a service company, meaning there's gonna be a sales price that we will have and a cost to the merchandise we are purchasing. If we are in a periodic system, we're gonna ignore the cost. If they give that to us in a problem, we're gonna ignore it when we first record it. Because we are just going to record the sales half. We will get to the cost in the recording of the second component, but not until we count the inventory at the end of the time period and record it at that point in time. So we're going to say the periodic system then will be an increase to accounts receivable, assuming we sold it on account. And it's going to be an increase to the revenue account the income account in this case called sales. So this is just a revenue account for a merchandising company often called sales. That's where we stopped for the periodic system and we will move to the second component later when we count the inventory at the end, Then we have the perpetual system. That perpetual system has the same first journal entry, but then we also include the next journal entry that the one dealing with merchandising accounts, which will be the merchandise inventory and cost of goods sold. So the costs represents them? Asked, of course, and the merchandise inventory has a debit balance. We would make it go down with a credit, then the related cost of goods sold is an income statement account. It's an expense account, and they would go up with a debit. So this is gonna be the difference between the two. Why would we record them differently? Well, under a periodic system, we might want to simplify the process, meaning if we have a lot of sales in one time period and or we have a clerk that's running the sale and they need to concentrate on selling the items and or giving back change, we only want them to be concerned, really, With the sales price, which will be on the sticker price, it'll be known, and we'll be able to say, Hey, here's that. Here's the price and we can record the sale very easily at that point in time. What we don't know from the sticker price is the cost. The cost isn't gonna be on the stick, and when we go to the store, we don't know what the cost is. And therefore, if we don't really want to have to deal with that much complexity at the point of sale, if we have more of a manual system that we need to record the sale with. However, if we have a more sophisticated system like a scanner or something like that, then the scanner will know the cost, and we won't even won't even have to think about it will record it perpetually. Therefore, if we have a more sophisticated system, we could use the perpetual system. If we don't and we just want to concentrate on making the sale, we use that periodic. We record this and then we'll show how we're going to record the second component all at one point in time at the end of the period at the end of the month or week, as we do a physical count under a perpetual system. Of course it would be a better system if we have the capability of doing this more information that's added work as we go through the process, often being done with software to make that process more simple. Then we contract the inventory going down and the related cost of goods sold as we go, this process showing us where we stand at any given point in time. This process really only given us some information, not giving us a full picture of where we stand until we do the adjustment at the end of the month, week or whatever period we are working with the periodic system would look then something like this. Here's the periodic system journal entry where we just record the first half. We're going to say we made a sale and therefore we re crease increase the accounts receivable. So accounts receivable here starts at 6000 and increased by 3001 Trump 22 an ending balance of 9120. The second component would be the revenue or sales starting at zero. It's going up in the credit direction by the 3222 the 3220. So there's just recording this here that increases the net income so the net income is increased by this amount. This isn't a loss. It's increasing in the credit direction now this is deceiving because, of course, it looks like our revenue is way higher than it is because we haven't recorded the cost here, which would bring it down. So this is not really correct until we do that adjustment and we will do it at the end of the time period. If we do the perpetual system. On the other hand, we still have this first transaction, so we still have the increase in accounts receivable and the increase in sales. But now we have this new transaction, this new component cost of goods sold going from zero up to 2400. And there's the cost of goods sold that increase or decreases the net income. So net income went up by the sales component 1 3020 it goes down by the cost of goods sold the 2400. The difference between the two is a net increase in net income of 720 again, This is is not a loss that the brackets mean it's a credit balance. The other side, then the merchandise inventory is here, so it's taking the 23,000 down by that 2400 to the 20,600 recording an accurate merchandise inventory as we go accurate as far sales goal not accurate in terms of if there's any loss . If there's any theft, if there's any some type of inventory shrinkage, no matter which method we use, we still need to do a physical count at the end of the time period. And we still need to know the cost of goods sold calculation. So at the end of the time period, we're gonna do a physical count, will count the inventory. In this case, we're saying the physical count is come into 24,800. So we'll saying now note. We were estimating this because in real life, of course, we would count the units and then converted to dollar amount. We're just going to say that conversion is happening here. We'll talk about that later time. It can be somewhat complex if we have different differing costs for the inventory that we're purchasing. So we're gonna see the physical count is 24,800 cost of goods sold? Calculation, then is the beginning inventory working? It's 10,000. We would get this on the General Ledger, This would be the start of our transactions. We see we started with 10,000 at the beginning of the period. Then we purchased the 19,000 and this again we could find in the General Ledger the increases and that would give us the 29,000. Now, note that this 29,000 is what we have in merchandise inventory under a periodic system. So when we do a periodic system, we have to do this cost of goods sold calculation in order to figure out the cost of goods sold and to adjust the merchandise inventory down because we've recorded here just what we had at the beginning, plus purchases. What we have not recorded is the decrease that decline that we have when we make the sale. So this would be the goods available for sale. This is what we could have sold during the time period. It's what? How much inventory went into our into her business at any given time during the period during the week of the month that we are covering here. And therefore it's the amount that we could have sold during that time period. What we will then do is do the physical count and say that we have 24,800 worth of inventory left. Given the count that we have, if we could have sold and 29,000 and we still have the 24,800 left at the end of the time period, our cost of goods sold is the different the 29,000 miles 24,800 giving us the 4200. So this then is gonna be the cost of goods sold and the ending inventory. So the Indian inventory for a periodic system needs to be reduced from the 29,000 to the 24,800 with the 4000 to being the difference. And the 4002 needs to be recorded in the cost of goods sold. Recording this transaction, we know the merchandise inventory is gonna go down by that 4002 and we know that the cost of goods sold is going to go up bringing net income downs. The journal entry would be a debit to cost a good sold cost. To get sold is an expense account goes up generally only goes up in the debit direction, we would increase that, then the merchandise inventory being the credit merchandise inventory is an asset account. Asset accounts having debit balances would then be going down in the credit direction. So if we post this out, we're posting this item here. We got the 29,000 debit. We are decreasing it, doing the opposite thing to it, making it go down to the 24,800. Then we have the cost to get that sold 4200 that's going to go here. We've got the zero. It's going up by the 4200 to 4200. Note here also, that we have a little bit more detail. We're showing the units and that unit costs and the total. So we could still do the same calculation we did over here when we had the 24,000 Indian inventory. But if we're given units, note that we can see this in terms of units to it, for if they gave us 4 2080 units and if they we assume they all cost the same $10 amount, then we can say the 4 22,080 times the 10 will give us the 24 8 Now it's Sometimes they're not all going to cost the same amount, and we'll have a bit of a complex, more complex problem. But on a simplification method, if they're all the same dollar amount, we can count. The units obviously multiply it times the dollar, and that would be our conversion method. If we see all of our accounts were going to say we're in balance by the zeros down here, we could see that net income now from this journal entry in the periodic system is going down. We increased the cost of goods sold. So here's our income accounts, the revenue and the expense in the Contra revenue accounts, and we brought it down at the end of the time period. So the 5460 revenue we had been recording during the time period minus the 4200 we had determined was the cost of goods sold through that time period gives us the net income of 1260. So, no, we're way off here in terms of net income until we do this final adjustment and we have the proper balance than at that point, we'll get to the proper balance. But it will take some time. If we're doing the perpetual system and there's no inventory, shrinkage will be directly to that proper balance, meaning if we were to see the same information in terms of perpetual system, we would already be there if there was no inventory shrinkage over loss or theft or anything like that. We have been under this system recording the reduction of inventory with each sale and thereby making the inventory correct as we go in a perpetual way. And we've been recording the related cost of goods sold. So we're still at the 1200 and 60 without this calculation. So you might think, Well, then we don't need this calculation, but we still need to do the physical count because there could be loss. And oftentimes there is. We need to count the inventory to make sure that we haven't lost any inventory, or if we have that, we can then write down the inventory to the current physical count. So if we do this, we're still gonna do our calculation. Beginning inventory plus purchases gives us the cost of goods sold, cost tickets available for sale. And then we're going to take that and compare it to the physical count to 24 8 And that will give us the cost of goods sold. Now, in this case, we're going to say that there wasn't any loss. We didn't have any inventory shrinkage. We didn't have any theft and therefore we come out to the same number that we had had under a perpetual system. But note that if there if there was lost, we would need to do the physical count. And we still want to see the cost goods sold calculation in order to figure out what the loss is and then record that difference will talk about that at a later time. How would we record it, though we would basically reduce the merchandise inventory to the physical count that we made were trusting our physical count more than the books. And then we would record the other side to the cost of goods sold 6. 20 500 Merchandising Transaction Explained Purchaser and Se: who will win this lecture? We're gonna talk about merchandising transactions, which will be the purchase and the sale of merchandise. We're gonna look at this from both the selling aspect as well as the receiver. From the standpoint of the company or person that is selling the inventory and the company or person that is receiving the inventory. We're gonna do this for a couple different reasons. One. It's good to know that there's two sides of any merchandising transaction to We want to know who we are. Are we the seller or are we the purchaser? In real life, this is pretty obvious whether we are purchased in the inventory or selling it in a book problem. It's not quite so obvious. That's the first question we want to answer to ourselves. Are we the purchaser of the inventory? Are we the seller of the inventory and three, we want to just know what the other side of the transaction is doing? We would like to know what the other side of the table doing, What does their journal entry look like? And that could give us a more inside in terms of what should we be doing on our end of the table. How can we make the negotiations and go more smoothly? In our example here, Owner A will be the purchaser of the inventory, and Owner B will be the seller of the inventory. We will imagine the invent a way that will be shipped overseas so Person B is going to have to ship the inventory overseas to person A to receive the inventory in order to initiate this process. It starts with a purchase order, meaning person A or owner. A realizes they have a shortage of Computer Inc in this case, and they're going to send a request a purchase order to the seller person B. In this case, I remember a person A is buying the computer rig and then is going to be reselling it. So they're buying bulk in terms of the computer, and we'll have a bit different of us in our than we might think of if we were to buy purchasing of computer it for our our usage, in which case we might go online or go to a store, purchased The Purchase Inc and put a credit card on their before the ink has been received by us, meaning we have a form of payment. At the point in time that we request the ink to be shipped to us in this case it for buying in bulk. It often is not that way. What happens is that we have the purchase order were requesting, but no payment has been made at that point in time. What that means is that owner A in terms of journal entries there are not know journal entry for a person. A because no payment has been sent, no inventory has been received. And on the seller side, we're saying that there's also no journal Itchy. Why? Because they haven't provided the inventory. They haven't shipped out the inventory and they haven't received anything. I haven't received an IOU. They haven't received a credit card. They haven't received any cash at that point in time. Bit unusual part in terms of the purchase orders one of those accounting ah, paperwork that really doesn't have a journal entry behind it, which is somewhat rare in terms of typical accounting paperwork, which is usually backed up by some type of journal entry. Then what's gonna happen at some point? Of course, is that the seller is going to sell the ink Teoh the purchaser. And at that point in time, the purchaser person a journal entry would be then inventory has now going up. We now have inventory, and that means that we have accounts payable. So as this inventory is received by owner, a often times it will have an invoice along with it. At that point in time, which basically is a Bill Teoh owner A and Owner A will now recognize the fact that the inventory has been received gonna count the inventory and recognize the fact that money is now owed to Owner be the seller on owner. Being inside that journal entry would then be accounts receivable is going up. Why's accounts receivable going up at this point in time? Because that's the point in time that the revenue has been earned when it hasn't been earned. Because the inventory was shipped under the revenue recognition principal, we'd recognize the revenue at that point in time. Also, inventory is going down because the inventory has been shipped and cost of goods sold. The expense related to that end toys going up. We'll take more deeper look at that journal entry later on. But that will be the essence of this journal entry. Now, there's gonna be some question as to when this actual transactions gonna happen between A and B because we're saying Well, did should that transaction happen when the inventory goes on the boat? In which case, if that was the case, we would call it F O B Shipping Point, meaning the seller put it on the boat. And the purchaser now has responsibility for that inventory as it is on the boat recording . The fact the inventory has been received at that point in time. And in essence, if the boat then got attacked by pirates or something and they lost the inventory, it would be on the purchaser's insurance. In that case, if, on the other hand, we're going to say it's F O B destination, we're gonna say it's got the boat has to reach the warehouse, and that's the point of time that we're gonna record the journal entry saying that the inventory is now in the purchaser's hands at that point. So this terminology is gonna be used often then what's gonna happen, of course, is the typical The thing that happens is now that of course, owner a ozone urbi the money for the inventory that was received Owner is not gonna pay the money at that point in Time journal entry would then be cash is going to go down and the accounts payables going to go down. The light build is gonna go down. Owner be the seller is going to say Alright, Cash has now been received. Cash is going up. And the receivable, the amount that is owed to us on the books is now going down. So they got one asset cash, the other acid, the receivable then going down. 7. 30 500 Merchandising Transaction Journal Entry Purchaser: Hello. When this lecture, we're gonna record the merchandising transactions. From the standpoint of the purchaser recording the debits and credits related to the process, first thing that will happen will be the purchase order. So they purchase there will say that they need more inventory. They're going to request that inventory in this case being ink. So they're gonna buy the ink from the vendor, and then they're going to sell that ink at a later time. Meaning they're making a bulk persist. That generally happens with a purchase order. When the purchase order goes out. Note that there is actually no journal entry. Why? Because nothing has been received and no form of payment has happened at that point in time . Unlike what might be the case if we were to purchase something on, say, Amazon or something, where we have the performer payment in the term of a credit card at that point in time, In this case, that's not the case. We're just requesting how many units we need and therefore no form of payment has happened . No journal entry then happens at that time period. Then what's gonna happen is the ink will then arrive So from the standpoint of the purchaser, we have the ink at that point in time. Therefore, we're going to say that the ink is going to go on the books. What we need to put it on the books for will be the cost of it. So this is an important point. It seems obvious. But later on we'll run into problems because we need to be able to convert from units $2 when we purchase the ink. Not as much of problem at that point because we know exactly what we purchased it for in this case, 6500. So we're gonna record the inventory for that amount 6500 not four units of inventory. Although we will track the inventory, we'll talk about how to do that at a later point. We're also gonna record the fact that we have the accounts payable at this point in time. When we got the ink probably came with a bill. We matched the bill to the purchase order to see that we got what we were expecting to get . And now we can record the fact that we owe this money for the inventory that we have received. Let's take a look at the debits and credits. So the debits and credits we're gonna record the journal tree up here on the left hand side on the trial balance just to see what the impact will be on the trial balance accounts. What's gonna happen first is we're going to say we got that inventory. Inventory is a debit balance account. We need to make it go up. We're gonna make it go up by the dollar amount. Of course, that we paid for the inventory. So we're gonna debit inventory for the 6500 if we post that out. We previously had 5000. We're doing the same thing to it. A deputy 6500 bringing the balance, too. 11,500 then we haven't yet paid for it with cash. The credit will then go to accounts payable. That's the I O U. For the same amount. 6500. We have zero and accounts payable to credit bounce account. However, it's gonna go up in the credit direction to the credit of 6500. If we look at the accounting equation, could see that assets are going up. Liabilities, air going up. And there's no effect on the income statement. Nothing happened in terms of revenue and expenses at the time of purchase the inventory, it will be affected when we sell the inventory. So here's the effect on net income, new effect on net income, all other accounts being pulled over at this time. Next thing that's gonna happen, we now owe the purchaser. Now those, of course, the money for the inventory that has been received at some point in the future, that money will then be paid. We now know what that amount will be. 6500. Therefore, journal entry cash is gonna go down by that 6500 and the accounts payable the IOU. What we owe is gonna go down by the 6500. Let's take a look at that journal entry upon the left hand side. We're gonna post it to the trial bounce on the right hand side where we now have that inventory of 11,500 that payable of 6500 credits. So what we're going to say now is cash is going to go down. Therefore, cash has a 120,000 and it's we're gonna do the opposite thing to it, crediting it. I'm gonna think about cash first all the time because it's gonna be the easiest way to know if it's gonna be a debit or credit. If we post that out, we're going from 120,000 to a credit of 652 ah, 113 500. The debit will then be a reducing the accounts payable accounts. So we've got the accounts payable. It's gonna be the debit. We have 6500 credit in it. We're going to the opposite thing to it, which will be that debit bringing the bounce back down to zero. So we have assets going down for the cash decreasing. We got the accounts payable going down in terms of liability is going down and the equity section will remain the same. Here's the summary noticed that there's no effect on net income for the purchasing transaction. Either when we get the inventory or when we pay for the inventory win, will it have an impact on net income on the income statement when we sell it in the form of cost of goods sold and sales 8. 40 500 Merchandising Transaction Sales Journal Entry COGS Jou: Hello. When this lecture, we're gonna journal eyes merchandising transactions from the standpoint over the seller. So our cellar here has now purchased the inventory and is now in the process of selling that inventory in the form of the ink cartridges to the end user of the customer. First thing that will happen here is that we're gonna provide the ink cartridges to the customer. The customer is going to give us an IOU for those in cartridges. We will record this journal entry in two parts. First part being the journal entry for the sales side of the transaction. When we have given the in cartridges, we, as the seller of merchandise have completed the job. When we complete the job, we can say that we have the IOU, the accounts receivable, going up at that point in time, the customer loneliness, money. We can also say that the sales happen. Sales is equivalent to revenue or income. So the income is going up at this point in time because we completed the job just as if we were a service company. We completed whatever job we dio on the service company side. We then have a separate part of this journal entry or a separate journal entry of the cost of goods sold side. Because in order to complete the job, what did we have to dio We had to consume or give up the asset of the inventory? So the other side of the transaction is gonna be that inventory is going down and that consumption of that asset, the consumption, buying us, using it by as giving it away is an expense. We consume that assets that expenses are most important expense called cost of goods sold. Although there's not expense in the title most important expense. Well, let's look at these transactions. One by one, we're gonna start off with the sales type of the transaction. It's easier to think of this in terms of separate journal entries because the sales side of the transaction very similar to what we have looked at in terms of a service company, meaning we have completed the work. We have earned the revenue at that point in time so we can then record the accounts receivable. What is owed to us at that point in time accounts is he pulls a debit balance accounting. We're gonna make it go up by doing the same thing in this case, which would be another debit bringing it from zero up in the debit direction to that 4 8050 other side of the transaction is income or sales in this case, incomes, always a credit balance accountant. Therefore, we're gonna make it go up by doing the same thing to it. Another credit of that 4 8050 So we're saying the 100 thousands going up by the 4 8052 the 100 108,450 The effect on the accounting equation will be, assets have increased, liabilities remain the same and equity has increased. If we look at the income statement, then of course, income has going up. We made the sale, but 100,000 is going up by the out 4 8050 to 1084 50. As we can see here, however, that's not the only thing that happens when we are a merchandising company. The other side of this is the fact that we had to give up the asset in inventory in order to generate that revenue. So we're gonna have to record the decrease in the assets of inventory. Note that the inventory on the books for that 6500. We sold it for that 4 8050 Of course we marked it up. That's why we're going to generate revenue. Therefore, we're gonna decrease the merchandise inventory. So we're gonna say the merchandising McCoy has a debit balance. We're going to the opposite thing to it, crediting it to make it go down. 18,000 debit minus the 6500 credit brings it down to 11,500. The other side of the transaction will be the new account that we have, which will be the most important account for the expense side cost of goods sold. It's gonna be an expense. Expenses all have debit balances. They all gentlemen go up. This is going to be no exception. Meaning that cost it gets old. Gonna go up by the 6500 in the debit direction to, in this case, 6500 effect on the count equation. Assets are going down, the liabilities are remaining the same, and the equity section is going down. Why? Because net income is going down notes that the cost of goods sold is an expense. The expense is going up. Bring in net income. Wanna wait 4 50 minus of 6005 income winning by 101 9 50 Let's analyze this transaction. First. We note that we have basically recorded this transaction in this format in two different transactions. So when you see it together, you often going around a write it down like this, we're gonna have the receivable debit, the sales credit. That's the sales side. Then you're gonna record the decrease in the inventory and the expense related to it. Now, if you see it in the computer system, it often looks like this. It's happening at the same time. And a computer systems gonna have that rule where it says the debits have to be on top. So we have the two debits on top and the two credits on the bottom. When we do this manually, we kind of kept with the rule by basically breaking up this journal entry. We said, Well, we still have the debits on top, but now we've basically broke up what is really one journal entry. It happens at the same point in time to two journal entries In order to do that. A couple things I want to note here one is that when we do things by hand, we probably want Teoh. I abandoned that rule in times when we want to record the journal tree in a way that makes the most sense to us one toe. Build the journal entry to make sure we get right when we put it in the system and to to go back. If we go back and look at it, we want to put in the best format. So we have the best chance of looking at and saying, Why did we do this? And so that's a couple ways that when we build the gentry, we might want Teoh do it in this format rather than do it in this format. But when we look at a computer system or a textbook, we need to be able to look at this transaction and see what happened here. We sold merchandise on account, also want to analyze this transaction as well, and analyzed the assets and the income statement accounts that are affected. So balance sheet accounts that are affected. The income statement accounts first. The balance sheet accounts note that accounts receivable is going up. That means that accounts table, the assets are going up and then inventory is going down when we take into account these two transactions. The difference then means that there's a net increase in the assets. In this case of 9 1050 on the income statement side, there's gonna be some symmetry here in that income. Sales is going up by the 4 8050 Expenses are going up by the 6500 meaning net income is same 9 1050 This should make sense if you spend some time and look at this, we're gonna say OK, yeah. When we record the sale on account, we're going to say that there's an increase and a decrease in assets and it's gonna be 9 1050 In this case, there's gonna be a increase and decrease in terms of the income statement counts in terms of net income, meaning revenue goes up, expenses go up. Revenue minus expenses go up by the same amount as the as the balance sheet accounts are going up by 9. 50 500 Sales Discount VS: Hello. When this lecture, we're gonna compare and contrast the sales discount and the purchase discount another area where we want to keep in mind what side of the transaction we are on something that seems obvious but can really get mixed up. A lot of the time we often times mix up. They sailed discount and the purchase discount when we are journal, izing these items when we think about these Adams, we want to think whether we are the person providing the discount or the person that is receiving the discount, we'll start off with the sales discounts. So we are the owner on the left hand side and we're making a sale to the customer on the right hand side, and we're gonna provide a discount on that sale. What we're imagining to happen, typically what will happen is we're going to say that we have provided the inventory already. We have the IOU already. We've provided that inventory at full price. What we do customarily and say customer, we would like to cash faster. We want to improve our cash flow. Therefore, if you give us the money within a certain amount of time period will give you a discount because you're paying us within that time period. If you don't pay us within that time period, then we'll just want the full price. Which means that if the customer pays within the time period and we give the discount, what will the discount dio? It's basically going to say that that I owe you the accounts receivable that we have will go down. We put the accounts receivable on the books for the entire sales price. Now we're giving a discount because of this condition that happened in the future, that payment being within a certain time period. That, of course, means that the eventual cash that we're gonna get is going to be less than we had originally recorded. Because the accounts table's gonna go down, we're gonna get less. Cash also means that net income is going to go down. Why? Well, if you think about it when we recorded the sale, we recorded it at the full sales price. Now we're going to give a discount, and we're gonna have to basically reduce net income in some format. Because of that, if we think about the journal entry, we're going to say that accounts receivable is going to go down. In this case, we're gonna reduce accounts receivable when we get done and we're gonna get less money. And then we're gonna say that the sales discount is going to go up. We'll talk more about that sale discount account. It acts like an expense. But it's more of a Contra revenue account. It's gonna go up, and that's gonna bring down net income. Then if we think of the purchase discount again, we're on the left hand side. Where the owner on the left hand side. Now we're receiving the discount. Were the person receiving the discount? Same thing happened here, but kind of in reverse, meaning that we requested the inventory. In this case, we've gotten the inventory, and the vendor says if you pay us within a certain time period, we will then give you a discount. So we put it on the books at the full price this time, and then we're going to say that something happened in the future. We paid within this discounted period, and therefore we are going to get a discount. So we're gonna have to adjust our books for that discount. The way to do that is that we're gonna say OK, the IOU, the amount that we owe is now going to go down because we paid within this time period, they're going to give us a discount, so we're not gonna owe as much. Therefore, the amount of money that we're ultimately gonna pay is going to go down. The place where many people get mixed up is the other side of the transaction here, and that is that inventory is going to go down. Reason is that if you think about it, we put the inventory on the books at the full price. We're not gonna pay the full price. Therefore, that inventory is overstated. We didn't pay that much for it. We've got to reduce the amount of inventory by the discount that we got on that inventory not going on the income statement yet because we haven't yet recorded anything on the income statement. It's gonna be recorded on the income statement when we sell the inventory in the form of cost of goods sold, journal entry, then would be accounts payable is gonna be decreased and the inventory is then going down notice. There's nothing that says sales discount in this transaction. That's often where people get mixed up. We've talked about the discount terms abstractly. What would these discount terms look like? Oftentimes they're looking something like this. Where says to dash 10 in slash 30 or something like that. What does that mean? This notation means that if we get the money within the 10 day time period, we will then have 2% off. That will be the discount. So we need to just know that that to represent 2% if we're paid within 10 that 10 represents 10 days. If we get paid anything greater than 10 days, then we're have going pay full price. So remember, we put it on the books at full price. And we're saying if you give us the money within this discount of time period, 10 days, we'll give you that 2% discount. Otherwise, we're just gonna keep it on what we have recorded to that which is the full price. This last part means that the payment is going to be due within 30 days. So if you don't pay us within 10 days, that's fine. The payments do then, under the normal circumstances are normal agreement, which in this case happens to be 30 days. And if it's not paid within 30 days, then we might take collection back collective actions like the repo man or something trying to take the inventory back or something like that. But the essence of this is a 2% discount if you give it to us within the 10 day time. Parents. Otherwise, it's due within 30 days. If you don't pay us within 30 days, then your past, the payment do period. 10. 60 500 Purchase Discount Journal Entry Explained: Hello. When this lecture, we're gonna be talking about a purchase discount. We will be the owner on the left hand side of this transaction. We are perchance seen inventory from the vendor on the right hand side of the transaction. The discount in this case will be going from the vendor to the owner. So the owner us we're getting a discount on the purchase that we are making. The new thing here are going to be the terms of the discount, which are in this case to slash 10 in slash 30. What does that mean? It means there's a 2% discount if we pay within 10 days. Otherwise we're gonna pay within 30 days. Why would the vendor give us those terms? They would be trying to increase their cash flow. So they say usually you have to pay normally within 30 days. If you pay us within 10 days, we'll give you this 2% discount. When we record the original transaction, we don't even really need to know the term. So it can be confusing when we're looking at a problem. We see these terms that can be very confusing. And then we don't even use the terms when we make the original transaction. Why? Because we're gonna post it as the full price in terms of the full sales price. And then if we pay within that 10 days time period, then we're gonna have to account for the discount that we will be receiving. So even though we have terms, we're gonna post it as if we don't have terms on the original transaction, which would be a journal entry of an increased to inventory for the inventory at 6500 an increase to the accounts payable representing that we over the vendor. That 6500 would look something like this would be the debit to merchandise inventory credits payable that we have seen before, increasing the merchandise inventory and increasing the liability. Then if we make the time the payment within that discounted time period, we're gonna pay within 10 days. In this case. Now we have to worry about that purchase discount. Now the vendor is going to say, all right, you don't have to pay us that 6500 in essence, reducing that I owe you buy that discount of amount. So we're gonna reduce the IOU, which of course, will reduce the amount of payment, amount of cash that we will then be paying to the vendor. The other thing that's less intuitive is that the ink is going to go down. The inventory is going to go down. That can be confusing, because on every problem, they're gonna have the sales discount account there. And that's the discount that we give to our customers, not the discount that we are receiving from the vendor. What happened here is that we overstated the amount that we reported on inventory at 6500. It didn't cost us examine 500 because now we gotta discounts. We've got to reduce the inventory in this case journal entry. We're going to say that accounts payable is going to go down and we're gonna reduce the inventory. So let's take a look at that first calculating what that discount will be. So let's calculate how much payment we will have to pay If, after the discount, we have a 2% discount. If we pay within 10 days, we paid within 10 days. Let's calculate the discount original amount 6500 the discount is 2%. Therefore 6500 times 2% means we're not going to pay 130 the discounted amount. That means that the sales price minus the discount amount is what we will pay 6003. 70. Now, there's a quicker way to get to the 3 6070 And this is very useful for normal kind of calculations. If we go and we're calculating Tessa Hill on something and seeing how much we're gonna pay in terms of a sale that we're making a purchase on, it would be a 6500 and then we're gonna say mine it our times one minus the discounted rate , or 100% minus the 2% meaning that if we're not going to pay 2% we are gonna pay 100% minus 2% or 98%. And that means we're gonna pay 6500 times 98% and we get to that same 6003. 70 3 6070 being what we're gonna pay after the discount. Now we can record this transaction, and we're gonna record the transaction up on the left hand side will post it to the trial balance on the right hand side. First thinking about the cash cash is going to go down by the amount that we will then pay 3 6070 So we're gonna record that out. Where we were at a debit of 120,000 minus the credit of 3 6007 brings cash down to 113 6 30 Normally, the other side of the transaction is accounts payable will be in this case as well, but it won't be for the amount of cash we paid. It will be for the entire amount that is owed for this particular debt. Meaning that 6500. Why? Because we're basically reducing it by the amount of the discount and now by the amount of the cash that we're gonna pay, So we have to take the entire amount off the books. If we do not do that, then we're gonna be left with the discount on the books representing that we still owe that and we don't know that. So we didn't take it off the books, so we're gonna dead with that, bringing it down to zero. Now we need a plug, and we know that that plug is going to be the amount of the discount and again because it's the amount of the discount that we're receiving, every problem you're going to see, and you're gonna say whom I see sales discount. Why don't we posted to sales discount? And the reason we don't post it to sales discount is because that's the discount that we give to our customers. And one of the reasons that's kind of confusing is because this sales is called our revenue account. When we're merchandising Cos sales revenue sales is our income account, and therefore the term sales discount is really, basically revenue discount that were given to the customer, not like a sales discount, that we get Anna sale if we're going to the store kind of thing. So we're giving a purchase discount in this case, and the account we're going to won't have the word discounted going. It'll have merchandise inventory in it. Why? Because we overstated the merchandise inventory by that 6500 what we put it on the books for. We're not paying 6500 for it. we're only paying 3 6070 Therefore, we need to reduce it by that discounted amount of the 100 thirty's. That's the most confusing part. The place where most people get confused. We're reducing the inventory. Bring in the inventory down to 11 3 70 In this case, that means that assets went down by the cash also went down. By this discount liabilities went down. No effect on equity, meaning there's no effect on the income statement. 11. 70 500 Sales Discount Explained Journal Entry Record Discou: Hello. When this lecture, we're gonna record the journal entry related to a sales discount. So we have our owner here. The owner is going to provide a sales discount to the customer. First thing we want to do with this transaction is look at the original transaction. That would be that in this case, we have our owner selling inventory in this case Inc to the customer. The customer has not yet paid for it. They're gonna pay with an IOU sales price being 4 8050 We'll also see we'll often see in the terms of a problem like this, terms of to slash 10 in slash 30 We saw last time what that means. This notation means in this case, we have a 2% discount if the customer pays within 10 days. Otherwise, we want to receive it within 30 days. When we first put the recording of the journal tree on the books. This doesn't have an impact on that original journal tree, meaning we're gonna put it on the books for the full 4 8050 Then if the customer does pay within 10 days, we will account for the discount at that time period. Therefore, the original journal entry will look something like this will have two parts to it. The journal entry will include the sale side where a countess he was going to go up. We have the IOU from the customer of the full 4 8050 we have the sales going up. We have the cost of goods sold side, which means that we have inventory going down and the cost of goods sold. Going up. That means that we recorded sales at the full price 4 8050 we record the receivable at 4 8050 It's possible for the customer to pay less than that if the condition happens in the future that the payment is received within 10 days. If we think about what would happen if the customer then paid within the 10 days, that means that the owner will give the discount. The owner will provide the discount. The impact of the discount would be that the IOU would then go down. The owner would not owe the entire self price of the 4 8050 that is on our books as a receivable and therefore the amount of cash that we would ultimately receive as the owner would be less than the original receivable of 4 8050 Also, net income will go down. Let's take a look at the journal entry and see why. First, we're gonna calculate the actual discount. We could do this a couple different ways. I'm gonna go the long way the way most people tend to calculate it and then have a shortcut way that might be a little bit quicker. This is important to know it's really useful because it is the same way we can calculate a discount for just go into a store and calculating a sale, meaning that if we have a two slash 10 and 32% discount, if we pay within 10 days, therefore, what with the amount of cash we would receive in this case, If there was payment within that 10 day period, well, we got the original sales price of 4 8050 If we multiply that times 2% we then have the discount amount of 1 69 That would be the discount. Therefore, how much would we receive? Well, we have the sales price of 4 8050 minus. The discount that we calculated to be 1 69 means that we would get cash of 8000 to 81 original sales price The money that we will actually have received after the discount. We can do that a lot quicker if we to a calculation such as sales price and then we recognize Well, if we're not gonna get 2% of the money, how much money are we going to get? 100% minus the 2% or 98%. So if we just take that sales price minus one minus the discount or 98% 100% minus the 2% we would then get this same 8000 to 81. That's how much cash we are actually going to get. Knowing that let's make the journal entry here. So here's where journalist is gonna be posted. Upper left hand side will record that to our trial bounds on the right. First we know that we're gonna get cash is a normal transaction where we got paid just one more factor in that we're going to account for that discount at this time because we got paid within the 10 day period, so cash is received. We got 8000 to 81. We gotta chak like that with the calculation we did prior. If we then post that out, then Cash is gonna be debited. Increasing cash from 1 13 500 by the 8000 to 81 to 1 21 7 81 Then if we get paid with cash , the credit usually goes Teoh accounts receivable. However, it's not gonna be credited for the amount of cash We got 8000 to 81 because it's on the books for 4 8050 Therefore, we gotta take the entire 4 8050 down, decreasing accounts receivable by the entire amount that is on the books. If we do not, If we just decreased by the 8000 to 81 then we'll have the amount of the discount represented as still being owed. And it won't be owed. It shouldn't be owed. It needs to be down in this case 20 bringing that entire amount down to zero. The entire mountain off the books. So if we post that out, then we're going to say the account state is gonna go down by the 8450 to debit balance. We're going credit making it go down to zero. But of course, the debits do not equal the credits. At this point, we need the plug. And what is that blood gonna be? The discount that we calculated, which was the 4 8050 times the 2% or weaken? Take the difference between the debits and credits to plug. To get this 1 69 we're gonna put that to the sales discount. Now, this is a new account that we haven't seen in the service companies. Why do we have it there? You might think that we should be reducing sales. Why? Because we overstated sales when we put the sale on the books. We recorded it at the full price of 8004. 50. And we're not really getting that much warmly. Getting 8000 to 81. We didn't really sell it for 4 8050 Why don't we reduce sales? With that debit reason being, we almost never reduce sales. If sales only goes up, we're gonna make another account. That kind of acts like an expense in that it's going to be debited. It always goes up in the debit direction, but it's really a Contra sales account. Really, What we're saying is that sales is going to be decreased pretty much by the discount. When we put it on the income statement, it's gonna be in the sales section. It's gonna act like an expense. However, in that we're debit, innit? Increasing it in a definite direction, which will bring down net income impact on the financials on the accounting equation. Assets have going up by the cash and assets have gone down by the accounts receivable. However, we have another activity that's happening as well, not the liabilities which are staying the same. But the equity is also going going down by that discount of 1 69 Therefore, for look at net income. It went down by that discount, meaning it was at the 108 for 50 minus the 6005 with 1019 50. And now we took it down. By that 1 69 the amount over the discount that brings it down to one A 17 81 which is this one await for 50 money is still 1 69 minus the 6500 that is net income, not a loss. 12. 90 Inventory Shrinkage: in this presentation, we will talk about inventory shrinkage, the idea of the inventory going down for some reason other than the sale of inventory. So the inventory is decreasing for some reason whether that beef through spoilage or loss or theft and the way that we're gonna figure that out is to do a physical count. We will account the inventory and double check that inventory to our records. Make adjustments as needed. It's important to note that this physical count process will be necessary whether we do a periodic system of inventory or a perpetual system will demonstrate it with the perpetual system. Because that's gonna be a system where we may get the idea that because we're recording the inventory as we go that we don't need to go back and do that physical count because we're doing it as we go, unlike a periodic system where the count is required in order for us to record the reduction in the inventory and related cost of goods sold. So in order to consider this, we're going to say that we have a physical count and we're going to say at the end of the time period that physical count is 23,000. Now we're talking $23,000 worth of inventory, and that's a bit of a step in that we obviously would be counting units of inventory and then converting them $2 in some way. We're not gonna get into that conversion at this point. We're just gonna get the idea of the concepts that we want. Teoh, adjust our books to the physical account. Once we see the physical count will say okay, if we look at our inventory on the books, it's 27,000. And which one are we going to believe? Even if we're using a perpetual system where we record the inventory reduction and related cost of goods sold as we go, we're gonna believe the physical count. Meaning we're gonna make our adjustment, agree, Teoh, the physical count. And therefore we would have to write this down. Now we can see, of course, that we would have to make the difference here. We'd have to credit this account in order to get it down to the 23,000. The other side of it, however, is something that we need to think through as well and often when we see something like this, we want to see and work it through by seeing the cost of goods sold calculation. And they will show us the other side of this transaction and all the components to it and will give us an idea. If we see this in practice or in multiple choice questions, they could ask a lot of different components within the cost of goods sold formula. So the cost of goods sold formula is going to be starting with beginning inventory. So we get that from the general Ledger, we can see where did the inventory start at the beginning of the time period? We're gonna say 10,000 in this case, purchases is what we bought in the inventory notice. There's no guesswork with purchases. I don't have to guess how many units we bought. We bought what we bought. We don't to guess about the purchase price. It is what it is. That's how much we're going to pay or have paid so far. And then we're going to say that if we add those two up the 10,000 plus the 22 we have 32,000 we're gonna call that goods available for sale. And that means that at, you know, during the month or year, whatever time period we're talking about, we could have sold up to $32,000 worth of inventory. We could do the same calculation, by the way, in terms of units. But we're looking We're looking at dollars in this case. So we're saying $32,000 worth of inventory that we could have sold doesn't mean we have $32,000 worth of inventory at any given time throughout the time throughout the month. It needs that throughout the month. That's how much inventory we could have sold and have has going through our hands. We could have been selling it and buying it throughout the entire month. But we had 32,000 optimal or total, that could have been sold. If we compare that, then Teoh to the Indian inventory, which we're going to say to our physical count. This is gonna be our physical count inventory. Then we're going to say, Well, this is what we could have sold during time, period. This is what we still have left. Typically, that would be then the cost of goods sold. Now note here when we come, if we were doing a perpetual system, we would just say that's the cost of goods sold and it would include. I mean, if we were doing a periodic system, we would have to do this calculation in order to get this cost to get sold. And therefore, we were just assume that it was all sales that resulted in this cost of goods sold. However, when we're doing a perpetual system, we see here that we already are calculating this information and we're recording the cost of goods sold. And it doesn't match what we came up. Teoh, with our calculation here, we're difference between that. We have 9000 here, of course, and 5000 here. And that difference is most likely due to some type of inventory shrinkage, some type of theft, some type of loss, something like that that is going on here. So we're gonna basically compare that cost of goods sold to what we have on the books for cost of goods, sold that adjustment, then that difference that 9000 minus what we have the 5000 before 1000 then is what we need to make an adjustment for. So this will show us the whole adjustment. We're gonna At the end of the day, we need to be at 23,000 in our ending inventory because that's our physical count. And we need the cost of goods sold. Teoh be at the 9000 because that's that's what we calculated to be using our costs of goods sold calculation and the adjustment that we're going to do in order to do that is this 4000 adjustment. So if we were Teoh record this, then we would say we need that adjustment. We're going to say that the cost of goods sold needs to go up to 9000. So we will do the same thing to it as its balance A debit to make it go up. So we're gonna debit, cost of goods, sold the other side of it, then go into merchandise, inventory it, having a debit balance. We need to make it to go down because we had a physical count less than the amount reported . And therefore we're gonna do the opposite thing to it and credited if we were to post that out, then we're gonna say it costs a good soul is gonna go from 5000 up in the depth direction 4000 to a total of 9000. The merchandise inventory is going to start at a debit of 20. That 7000. It's going to go down with a credit of 4000 bringing us to the 23,000. That, of course, now matches out are 23,000 ending inventory matches. The physical count and the 9000 matches out to what our calls a good calculation says it should. Now it might be a little confusing that some people or it might might question, Why would we be putting something that's gonna be inventory shrinkage, loss or theft or something like that into cost of goods sold? Given the definition that it says cost of goods sold, meaning it should be things that we sold that are accumulating here, note that some of the rational one would be that the amount of shrinkage or loss are what not would be relatively small and therefore in material in relation. Teoh. The rest of the numbers that we're dealing with and therefore not material to decision making. And so the easiest thing for us to do is to record it to the same account related to the inventory. So this is the inventory accounts and asset account. The related expense account is cost of goods sold and therefore it would make sense to if we're just gonna put it to an account put into the cost of goods sold. If it was significant, if it was significant to decision making, then we may want to put it in another account and say that this is some significant loss that happened at this point in time theft or shrinkage or some type of loss that we would might want to break out. But most of the time we're just going to say, Hey, it's it's in material, It's related to inventory. We're going to write it off in some way with the account. We normally use Teoh right off the use of the inventory in order to help us generate revenue that then cost a good soul effect on the accounting equation. Assets going down because inventory went down liabilities staying the same, they haven't had any effect, and the equity is going down because the expense of cost of goods sold is going up, bringing the net income calculation down also. Then brain equity down. So the full, uh, all the numbers would then look like this. So if we bring everything out, we're going to start in balance. We entered something in balance. We end in balance. Here was our net income. Before this transaction, we are decreasing the net income by the 4000 for the loss for the shrinkage that we recorded in the expense account of cost of goods sold, bringing the net and come down to 98,000. 13. 100 Sales Return & Allowance Transaction: in this presentation, we will talk about sales returns and the transaction related to them the debits and credits that will be recorded when the merchandise is returned. In order to do this, we first want to talk about the sale of merchandise and review that journal entry because, in essence, when the merchandise is returned, we want to start from this journal entry and then reverse it, making a few modifications with that reversal. So when we make the sale, what happens is that we're gonna sell the merchandise here, and we're gonna receive not money at the point in sale. But an I. O U two things are happening. Remember, when that happens, we can think of it as two separate journal entries happening, the first being similar to a service company where accounts receivable will be increasing because we have not yet received the money and sales are revenue, account will be increasing. And then the other side, the side that is different than what we see in a service company will be that inventory will be decreasing because we sold it and the cost of goods sold the expense related to us selling that inventory will be going up when we think about the return when the customer returns the merchandise. We are, in essence, wanting to start with this process, this journal entry and then reversing it. Looking at that journalist Seymour fully This is the first half of it, the sales half where we said we're going to do the same thing as we would for service company in that we are increasing the accounts receivable and we're increasing the revenue account for merchandiser that often is called sales. If we post that out, then the receivables are going up. Here's the debit increasing the receivable. And then here's the credit increasing the sales both receivable and sales are going up, increasing net income here, then the other side of that transaction will be the reduction of the inventory, because this is, ah, merchandising company where we have inventory which must be reduced. So we're going to credit the inventory to make it go down and record the related cost of goods sold. And this is often the peace that most students have problems with. What is this expense? What is this cost of goods sold? That's the expense related to us consuming the inventory in order to help us generate revenue. So we are going to record that That's gonna increase the cost of goods sold, which will decrease the net income. And then we'll have the merchandise inventory going down. So these two journal entries remain related to the sale of inventory will, of course, be reversed, in essence, with a minor change when the inventory is returned. So if we go down to the return transaction, then we're going to say, OK, some of that inventory was now returned. The customer returned $300 worth of the sales price of the inventory and that's received here. So what would the journal entry be? Well, we're gonna have to components again, and we're gonna basically reverse what we did last time. The accounts receivable is going to go down. The IOU is gonna decrease. Because, of course, we never got payment. In this case, what happened is they owed us money. They never paid us, But they gave the merchandise back, and therefore we're just going to say, Okay, you don't know what's money anymore. The accounts receivable will go down. Then these sales returns going to go up Now, this is the minor tweak that we have to put in place here will see this with the journal entry. But note that we last time we had sales increasing when we made the sale, sales or revenue or income account increased. This time, what's happening is we're not decreasing the sales account because the sales account typically only goes up. What we're gonna do instead is create this Contra account that Contra account called sales returns and allowances, and it's going to be increasing acting like kind of a expense account. However, it's really kind of a contra sales account, So the way to think about that is basically that Okay, we want to reverse salesman and we want sales to go down. But sales never goes down. It's just kind of a rule we don't typically make sales go down. Therefore, in order to make this happen and no, to make the sale not really happen, because it didn't really happen because this $300 of sales that we recorded in the past was returned and we're never gonna get paid for it. We're gonna create a contra account which is gonna be called sales returns and allowances netting out against the income account, and that's how we're gonna reduce basically the sales. So that's the minor tweak that we need to make on the other side of it. Cost of goods sold and the inventory inventory is probably easier to think about. First inventory is going up because, of course we got it back. We got the inventory back now. If the inventory was damaged or something, we might have to write it off as as it was damaged. But if it's not, if it's just a return, then of course inventory is being received and therefore inventory is going to go up now. It's not gonna go by. The 300 will see the journal entry so the numbers will change. But the 300 applies to our sales price here and then the other side of it. The most confusing point component, most the time for most students, is that cost of goods sold will be going down. And this should look unusual because cost of goods sold is an expense and like sales, typically only goes up. But unlike sales were not gonna make that a rule that we never break. In this case, we're pretty much breaking that rule were going to say the expense is going down because we didn't really incur the expense. We sold it. We got it back. And therefore we're going to decrease the expense account the cost of goods sold account. Let's see that in terms of journal entries, if we start with our trial balance over here and we're going to say that there was a returned that had a sales price of 300 we're gonna record the reversal then of the transaction. Now, remember, if you think back to the actual transaction when we made the sale, that's the easiest way to do it. The first component of it similar to a service company, would be debit accounts receivable and credit the sales or revenue account. So all we're gonna do first you want to think we're gonna reverse that? Meaning we're gonna credit the accounts receivable to make it go down. That makes sense because we never got the money. The IOU is right here in receivables. This this customer were saying they always money, but they don't anymore because they paid it. They gave the merchandise back, therefore will reduce the receivable We'd also say this sales account is too high because we made a sale of $300. That didn't really happen because the merchandise was returned. So you would think we'd wanted to reduce that with a debit, which is what you would what would be the exact reversal? But that's where the exception is. We don't decrease this account because there's basically a rules and the revenue account never goes down. It just goes up until we close it out in the closing process. Instead, we're gonna make this account right below it. It's gonna be pretty much connected to this account. It's pretty much gonna be the credit half of this account, and it's gonna act like an expense going up in the debit direction, bringing down net income. But when we recorded on the income statement, it will be in the sale section. It'll be recording net sales, not net income net sales, which will be sales minus these two Contra sales accounts. So this will be the journal entry here. If we record that out, then we're going to say that the sales returns and allowances it's gonna be debited, and that's going Teoh increase the sales returns and allowances once again acting like an expense kind of similar to the cost of goods sold expense It going up in the debit direction, bringing that income down. But really, it's kind of reversing the sales item here. And then we've got the receivable. So it's a debit balance. We're gonna do the opposite thing to it. We're going to credit it, making it go down. Ah, and down to in this case, 8150 the effect on the accounting equation, assets going down, liabilities remaining the same and the equity going down. Why? Because the Contra account here is going to be increasing, and the Contra sales account is increasing, decreasing net sales, which is decreasing net income, which decreases total equity. If we see that completed here, we can see the transaction with all the numbers filled out, and we can see that net income is going down. So it started here. It's going down by this 300 to here, the second component of the transaction. Remember when we made the sale? There's two pieces one the sales piece that we just reversed. When we make a sale, we debit accounts receivable. We credit sales or inventory than the other component. When we make the sale is debit cost of goods sold and credit the merchandise inventory. So once again, the first component of of the sales to debit the accounts receivable and credit sales we just reversed that The second component when we make a sale is to debit, cost of goods, sold, credit the merchandise inventory. Now we're just going to reverse that. So if you think about their normal sales transaction, you just reverse it as we do here, we're gonna reverse that process, and we're gonna debit the merchandise inventory. Probably the easiest component to think about because the merchandise inventory eyes being received, we got it back. So the merchandise inventory is here, has a debit balance. We got it back. Therefore, it will be increasing. Note that it's not gonna be the same dollar amount, of course, because we sold it for 300 which would be on the invoice. But the cost to us is something lower than that. Hopefully because we sold it at a profit and therefore we gotta be mindful of that. And then the second component is gonna be the accounts receivable or the cost of goods sold , and that's gonna be the expense related to a selling it. And this will be the most confusing component typically. And it should look funny because it's making an expense account that typically only goes up , go down in this case so we can see the cost of goods sold never really happened because it relates to us the cost of us selling the inventory. And we got the inventory back, so we made it go up by 2 30 when we made the sale. Now we need to reverse it because it's not going up, and we're going to reverse that out at this point, crediting it if we post this. Then we see the merchandise inventory with a debit balance of 11,500 going up in the debit direction by the 230 to an ending balance of 11,730. We see the other side, then being to cost of goods sold. This is a credit. That's a debit. Those are opposites. Therefore, the debit balance of 6500 will be going down in the credit direction to an ending balance of 2000 6000 270. The effect on the accounting equation will be that the assets are increasing because we got the merchandise back, which is an asset liabilities remaining the same. And the equity section will be increasing usually the most confusing components being the equity section. Why is it increasing? Because constant gets old and expense is going down, which is kind of unusual the expenses going down. Remember that the net income is calculated as revenue minus expenses. Therefore, if the expense is going down, revenue minus expenses is going up for net income and the total equity therefore also going up. We see all the numbers here, we can see everything filled out, and we can see that net income here is going from the one the 1 650 before up by this 230 this change related to the cost of goods sold here to one a 1 880 So these are gonna be the two journal entries that are reversed are happening here when we have a return of merchandise. So remember what you want to do when you have a return. Think about the sale first. Think about what we are reversing when we made the sale. There's two things happening to journal entries. One is that we made the sale. And typically, if we make it on account, we debit accounts receivable and we credit the revenue account at typically called sales. If it's a merchandiser and two, we decrease the merchandise inventory where they credit and we debit the cost of goods sold when we reverse those, then we're just gonna reverse those with a minor tweak. One. The first journal entry. Reducing the accounts receivable with a credit and the other side not to go into sales were not going to be deputy and sales, but instead creating another account, a Contra account called sales returns and allowances. So here's the minor tweak that we will be making. The second component will be reducing the cost of goods sold account, which is probably the most confusing component, and it will be increasing the inventory. So the second component we would think of it as completely reversing what we did before or you and or you can think of it as the merchandise inventory is going up because we got inventory back, and then the other component of it will be the cost of goods sold. This is usually the most confusing one because it should seem a little bit weird because we're decreasing and expense accounts something a bit odd. If we consider the effect on the assets and the Net income, we can see that these two components of the journal entries if we put these journalist res together, here's the two journal entries that sales returns. It allowances the accounts receivable, the first half of the return journal entries and then the merchandise inventory going up in the cost of goods sold going down the second component. If these two components are the inventory or the acid type of accounts, so we can see the Net, of course between them to the accounts receivable is going down. So it's a negative in terms of assets, and we could see that the inventory is going up. So we got the inventory back. But of course, the accounts tables going down. The count's evil is over the inventory or more than the inventory, and therefore there's a net decrease of the $70 when looking at the net income component. We can see that the sales returns. An allowance is gonna be an income statement type of account. Now, this one's a little bit more confusing because we get mixed up on these on these equations . Remember that the net income is revenue minus expenses. Sales returns is not the same thing. A sale sales returns is gonna be the contra account that is going to be increasing. The contra counts gonna be increasing, but it's going to be bringing down the the sales. So it's really bringing down sales is bringing down revenue and therefore revenue minus expenses being net income, it's bringing down the net income. The other side of it's gonna be the cost of goods sold and the cost of goods sold is going down because we're reversing. Remember the cost of goods sold account, and so remember that's an expense. And the expense is decreasing. And therefore the net income, which is gonna be revenue minus expenses, is going up from the cost of goods sold. Decreasing the net then is going to be a decrease in net income of $70. And in essence, you can kind of think of this is. What's happening, of course, is we're reversing. We're getting rid of the sale. There's two pieces to it. The sales component is going down. It's going down by the Contra account that sales returns going up. And of course, we made the sales for higher than the cost of the goods sold so that sales are being eliminated and the expense related to it are being eliminated. And that results in a decrease in the net income. Of course, when we look at the two things here, when we look at the acid component and the net income component, they are there the same, they're going to be equivalent. This is what happened net to total assets, and this is what happened net to net income as well as equity. 14. 101 Income Statement Introduction: Hello. When this presentation, we're going to introduce the income statement, which will not be a statement declaring that we desire income. Last time we talked about the balance sheet and we asked the question if we were to ask you how much money you have on you At this point in time, it is possible to pull the money out of our pockets and say, Hey, this is how much we have at this point in time. We may not want to do that, but it's possible to do that on the income statement. We're gonna ask the question to introduce the topic of how much money do you make when we ask that question, then we need to ask some other questions. In order to answer that, we have to say, Well, what do you mean? Do you mean a month? A year? Ah, Week. We need some type of time frame. In order to answer that question, we often do that intuitively make an assumption of the time frame, but we need some type of time frame. That's gonna be the difference between the income statement and the balance sheet. The balance sheet. As of a point in time the income statement telling the story of how we got to that point in time. For example, we will be looking at the month of December 1st through December 31st. You can think of it similar to trying to see how many miles you can drive within that same months, time period. What you would do is probably set the odometer to zero and then drive upwards for a month and see how many miles that you drive. That's what we're gonna do with the income statement were saying as December 1st, we have revenue of zero as we drive through the month, we have revenue in this case that then ends at the end of the month, December 31st. At this case of 10,100 you might be asking, What does that mean? That we didn't make any money in November's is the first year of operations. And no, it's not the first year of operations. Unnecessarily, it means that as of the end of November, we reset the odometer. We said, Hey, we drove this many miles in November. We want to see how many miles we're gonna drive now. Next month So just, like, reset the odometer in something like a race like that. To see many miles we drive, we're gonna reset the temporary accounts In terms of the income statement, all income statements are gonna be zero as of December 1st so that we can count from zero upwards till the end of the month. And see, in this case that we're gonna say revenues gonna be 10,000. That's how much we earned during this period of time. That's gonna be the essence of the income statement telling the story of how we're doing. Usually that's represented by saying it's going to be four. The month ended in this case December 31st. That phrasing could be a little deceiving because we see the end point. We deceive December 31st but we don't see the beginning point. We don't see December 1st. We have to assume that month ended means it began at the beginning the month, which is December 1st through December 31st. The income statement can be represented by a formula in its basic form, which would be revenue minus expenses equals net income. When we think about the revenue side of things, there are usually less revenue accounts. Hopefully, revenue will be greater in dollar amount. But we usually specialized, meaning we're not doing a lot of different things. In this case, we're just going to be doing computer service. That's all we dio. That's the only type of revenue that we have as opposed to expenses, which is everything else that we consume in order to generate that revenue is going to be an expense. For example, the phone could be an expense. We can have the auto expense, not the auto itself, on acid, but the gas and the maintenance would be an extent. That's what we consumed. We could have wages, expenses. We could have supplies expenses again, not the supplies themselves. But as we use them as we consume them, then we are expensing them. We can have meals and entertainment, so we have the revenue, what we're gonna generate over this certain time period, this month's time period expenses, the things that we had to then consume. In order to help us generate that revenue, the revenue minus expenses is going to be the net income that's gonna increase the equity. So the owner here is receiving the net income doesn't mean that the owners necessarily gonna pull out the income. But what it does mean is that the own that the company in the separate sheet of paper now owes the owner more money by the revenue minus the expenses that was generated for that month. That time, period, we are now going to apply some numbers to the revenue and the expenses and look at the income statement. So on the revenue side again, there's only one type of thing we dio. So we're going to say the revenue that we earned was 10,000. We don't need any some categories. Sometimes some companies might have a couple different things they do for revenue, but typically not too many things. We specialize in a particular thing. And so we're just gonna one line item revenue $10,000 on the expense side. Of course, we're gonna have more things that we're gonna have to expend in order to help generate that revenue. The dollar amount hopefully, will be less, but the things that we spend that money on will vary more great. Therefore, we're gonna have the expenses Coghlan's sub categorizing, and we'll list out the expenses as wages of $2000 Auto expense. We're gonna say again, that's the gas and the maintenance. $600. We're gonna have the supplies 400. That's what we consumed. But we're gonna have the telephone expense $300 we're gonna have the meals and Entertainment 200. There's no particular order that the income statement has to be listed in, but we do want to list the expense, the expenses in some type of logical order so often times the the most expensive expense, or that the largest cost being on top is a logical format to list the expenses in. But the important thing is that if we add up all the expenses, 2000 plus the 600 plus the 400 most of 300 plus the 200 means we have total expenses, total things that we consumed in order to help us generate revenue of the 3500 in this case . Therefore, our income statement, which will be stated for the month, ended meaning December 1st 30 center for 31st we have income with one line item, the computer service 10,000. Then we're going to sub categorize all the expenses, wages, auto supplies, telephone meals, and that adds up to that 3500. So, in essence, are our equation in terms of the income statement equation. In terms of the equation for net income, the bottom line of the income statement was revenue minus expenses equals that net income in this case, 6500. That's how much the equity section has gone up again. The owner could pull that money out in terms of a drop, but doesn't have to if it remains in the business. That means the amount of money in terms of the point in time in terms of the balance sheet has going up for the period December 1st through December 31st by 6500 revenue minus expenses. 15. 110 500: hello in this presentation will be taken. Look at merchandising financial statements. We will be able to describe financial statements for merchandising company. Explain the differences and the similarities between financial statements for a merchandising company versus financial statements for a service company and explain the relationship between the balance sheet, Incan statements and statements of equity. So much of this stuff will be the same in that we have seen a service company. We've looked at the financial statements and the relationship between the financial statements In terms of a service company, many of the concepts will be the same. We're gonna make the financial statement from the adjusted trial balance. The financial statements will have a balancing concept. We will be able to see the accounting equation within the balance sheet, and we will be able to relate the balance sheet to the income statement to the equity section and with the equity statement in very similar ways. We want to refresh ourselves and be able to understand those concepts. And then, on top of that, we're gonna take a look off at what will be different from a service company which does not sell merchandise to a company, which does. And of course, those differences will focus around the sale of merchandise. So the sale of merchandise will it be a very substantial part of the reporting, Clearly, to a merchandising company? Just remember that everything else will be similar. So it's very important to look at the prior stuff as we move forward as well. We will not be emphasizing it as much because we're gonna build on the new material. But you always want to go back and refresh the concepts as we go. And this will be a good exercise. Teoh, refresh some of those concepts. I'm gonna start off with the balance sheet instead of the income statement because the battleship is the double entry accounting system. So clearly we will have pieces of the income statement building into the balance sheet. But I want to start off with the balance sheet because that shows you the accounting equation, that accounting equation being assets, equal liabilities plus equity. So the accounting statement, that balance sheet is the entire accounting equation. It is the balancing statement. It is the counting equation. It is the double entry accounting system. And so you want to be ableto see that conceptually as of a point in time. Now remember that the balance She only has one date. It has a point in time. In this case, December 31st. That means that there's no beginning and no end. It is as of now. So remember that similar to you watching this video? As of now you're watching this video. Nothing can change that. It is what it is. If you want to know why you're here or how you got here, you go to the prior day that you started the day. How did you wake up? What did you dio? And then you ended up watching this video. Whatever. But as of this point time, you are at this point in time, that's the same with the balance sheet. The equity section is where we stand. As of this point time. As of this point time, there's a book value of to 67 to 50. Can't change. It is what it is. As of this point time, what we can do is tell you the story of how we got here, basically going back a month or going back a year, going back multiple years in terms of what is the story that got us to this point in time. Now, when we look at the balance sheet, we're going to take it from the adjusted trial balance. Remember, we got the people entering that data in the accounting department, we're compiling the data. Then we go through the adjusting process. We make the adjusted trial balance. Then we make the financial statements which we're doing now from the adjusted trial balance . And then we're gonna do the closing process. That's the same cycle that we're gonna have, no matter what type of accounting what type of business were in within the normal accounting cycle. If we look at the trial bounce, remember that how these trap bounces are formatted. We are representing the debits and green. They generally have debit balances on side. We're representing the assets and green. They generally have debit balances, with the exception of a contra asset here which has a credit balance. That's gonna be an asset type account with a credit balance represented with brackets so that brackets represent credits. Excel season as negative numbers were representing the credits here in terms of bracketed numbers, up the accounts payable is going to be a liability type account liabilities represented with the yellow or orange color. And then we have all blue down here, but we got two different shades of blue. We've got the capital and the draws being this lighter blue. Those are gonna be part of the equity statement or the equity section and or the Equity section versus the Darker Blue, which is part of the income statements. Remember that Capital account has a credit balance. Draws is kind of like a contra capital account means the money that was drawn out from the owner and it has a debit balance cause it's gonna bring the total capital down. Sales has a credit balance and it's represented by the brackets. And then we have to kind of new accounts in terms of the statement, four merchandising companies being the sales returns, an allowance and the sales discount. And, of course, their new because they have to do with the inventory. Also note that the sales is an income account, just like fees earned under a financial statement for a service company. We can name it whatever we want, but notice it's under the equity section in terms of the order assets, liabilities, equity and then income, then types of expenses generally under that. So the sales account is gonna be an income account. All income accounts, no matter if they're called income, whether they're called revenue, whether they're called fees earned, if that's what our income account is or sales will have a credit balance. Now, everything under that has generally a debit balance, and they all act like basically expenses in that they bring down net income net income being calculated as sales less sales being a credit less all the expenses being debits, bringing us to net income in this case of 34 069 But these two accounts and remember, are actually going to be reductions to sales when we make the income statement, meaning a sales return and allowance means that we over recorded sales. And then there's someone gave the stuff back, so we should you would think kind of reduced sales. But we don't re Zeus sales. We make another account that basically reduces it as a net basis. On the income statement. A discount is a discount we give to a client or customer and therefore again it would replicate. We would think that we would reduce sales. But what we really do is put it on the sales side, not in the sales account on the income statement. So these air kind of contra sales account cost of goods sold our most important expense account down here, meaning it's the cost of the goods that we sold. So whenever we sell inventory, we report the expense of cost of goods sold, which is something that we use in order to help us generate revenue in the same time period . Note that it is generally our largest expense and eso that's one of our most important things. Of course, if we are a merchandiser, then we've got all the other expenses down here and net income being sales minus the expenses. If we put all of this information into the balance sheet in some way, then we should be in balance. If we find a home for everything and we make things go in the right direction, we should then be in balance. Noticed that the balance sheet does not have debits and credits. This balance sheet is not in terms of debits and credits. It's in terms of the accounting equation in terms of plus and minus numbers. Why does it not have debits and credits in it? Because we're preparing the balance sheet for people that may not understand everything. Credits. We don't want to report debit credit to individuals that were trying to present the balance sheet to note that I can get everything we want basically from this trial balance. But in order for us to present it, we want to put it in terms of an accounting plus and minus format. So in order to do that, they have format will be assets, equal liabilities plus owner's equity. And if we just find of home for all these numbers will be OK. So the assets were they're gonna break further out into current assets, property, plant and equipment. That's a breakout, basically, in terms of liquidity, mean we're gonna order the things in terms of the assets in terms of how liquid they are meaning, how easily can they be used in order for us to consume or by products or pay our liabilities with Obviously, cash is the most liquid, then receivables we expect to convert within 30 days. Therefore, it's the second most liquid and then the inventory. We're still gonna call a current asset because we do believe that we will be able to convert the inventory within a short term time period. Hopefully and then have cash or accounts receivable that will let me cash soon. So notice the format of the sections. Here we got current assets. Colon, we're gonna talk about current assets. We then invent them here and we pull them into the inside. These are not debit and credit columns here. This just means a sub total, and then we add up the sub totals. But 1 50 plus 76 plus 2 20,000 adds up to the 2 46 That is a sub total of assets that's up total being total current assets. So within assets, we have the sub total of current assets indented and then the total being out in the Outer column. That's are going to be a general format. If you get used to that format, then you'll get a lot better at reading a lot of financial statements. Then we have the property plant equipment, which, of course, accounts for this 1 35 1 35 and we have the accumulated appreciation. Now note that this is a credit here. We're not gonna represent credits here and personally, I don't even put in negative numbers in the financial statement. We know this is a subtraction problem. The way a lot of people tell their readers, this attraction problem is with words says less means minus mine's acumen depreciation. We have an abbreviation here. Therefore, we have a sub total. We brought that into the inside again. We got the 1 35 3 minus 99 50 Gives us the 36 to 50. You can see it up. Here is a debit minus two. Credit in terms of debits and credits terms and plus and minus the plot that this number minus this number will give us the 36 2 50 If you were to add all these up this place this place this place is minus this. It should add up to total assets of 2 82 to 50 in this case being the sub totals of current assets to 46,000 plus the sum total of property plant equipment 36 to 50 given us to 82 to 50. Why is it yellow? Because we're going to see that somewhere else. Where are we going to see it? In our account in question. Being assets equal liabilities plus equity. So now we found a home for all these. We've found a home for these. We're gonna move down to the liability side liabilities. We only have one of them. It's gonna be a current liability, that current liability being, of course, accounts payable. You'll note that it has a credit balance. We're not gonna put credits over here. We're gonna put it in terms of a plus in mind format. So we're just gonna put a positive number here? I put it to the inside, even though there's only one number just to show you that same indentation. And then I brought it out to the outside. Here. We're just adding that same 1 50 a similar format as we had over here. If we had long term liabilities as well as the short term liability, we would have another subcategory for long term liabilities because there are no other liabilities in this case, we're just going to sub total total liabilities and that will include just the current stuff because that's all we have. Long term liabilities would be things that are due after a year. Short term liabilities, remember, are things that are due within a year. So we have the sub total out here for liabilities, and then we have owner's equity. There's two has, of course, to this second side of the balance sheet, and the equity is usually the most confusing thing to think about because it includes the entire income statement and draws. So if we think about it in terms, the trap pounds. Now. We found a home for all of this stuff, and the the rest of it is all of this stuff, from capital down to the end and notice what we're looking at in terms of the balance sheet means that everything else is part of this number. So if I was to add this up and just work the balance sheet from the trial balance, it would be the capital of 2 48 1 81 minus the draws. Because it's a debit of 15 plus the sales because it's a credit of three or +43 80 minus, the sales returns minds to discounts, minds to cost gets old minus all other expenses. If we did that, then we would come up to the to 67 to 50. That is why the equity section is all blue here. All this blue represents the combination of the one number as of this point in time. So if we eliminated all of these accounts and just called its equity, we could still have a double entry accounting. But it wouldn't give us that much detail about the equity. And what detail do we want about the equity? We want to know how much we made last year. We want to know timing, but just so you can see the double entry accounting system and see how you can get the entire balance sheet from the adjusted trial balance, just note that if we just highlighted these in Excel or added up the credits minus the debits, we would come up to this number Then, if we if we add up the liabilities and the equity, we would come up with the to 82 to 50. Therefore, the assets equal liabilities plus equity. That's the balance sheet. That's where we stand. As of a point in time. Now what do we want to know? More than that, if we're decision makers, we probably want to know more about how we got here. This is basically where we're standing, meaning that if I want to know what the value of this company is on a book basis, we could take the accounting equation. Assets equal liabilities, plus Owner's Equity change it mathematically to assets minus liabilities equals equity. So if the company owns 2 82 to 50 they owe somebody else 15,000 then this minus. This means that they owe the owner or the book value. Whoever owns the company should theoretically be able to sell the company if they so choose , walk away with 2 67 to 50. Of course, that's on a book basis, but that's the book value of the financial statements. As of this point in time, how did we get to that book value so we could have a similar question if we were gonna ask Bill Gates? How did how did you get to this point? Time to have this much money? Well, then we'd have to tell the story, and the story starts with often an income statement. The income statement has a beginning and an end. We've got the beginning and the end. We have to. So if you were gonna ask somebody, how much money do you earn? They would have to basically assume What? What do you mean, a year? Do you mean a month? Do you mean a pay period without that knowledge or without assuming that knowledge, we cannot basically answer that question. In this case, we're gonna talk about the month ended for December 31st. What does that mean? Means the December 1st through December 31st. That's how we did for this time period. And what we're gonna do is take up the information from the income portion of the adjusted trial balance. So that's these numbers. So this number on down the ones that are are this darker color of blue starting with sales . So note that in a single step income statement and or in an income statement for a service company, it's really very basic. We have less sub categories, meaning we're just gonna have income minus all the expenses, and that'll be the end number. This statement looks a lot more complex because now we're gonna group it by other sub categories. Why are we doing that? Because we want to know more about these sub categories and how they affect our net income . So here's the bottom line. 34 old 69 Same bottom line here with just this simple set of numbers. But note that this income statement is much longer because we're adding subgroups. Why? Because they're gonna help our reader make certain decisions. Now if we have a very simplified reader and they just want the bottom line, we might just make a single step income statement say, Hey, here's sales. Here's the net income. That's what you want to know. If we want someone needs more detail, such as these types of relationships, we'll do a multi step income statement which will look something like this. Of course, sales will be up here. Sales is a credit. We're not gonna have credits on this side because we're in terms of a plus and minus statement. We've got the sales represented with this three or 43 80. Then we're gonna reduce those kind of contra sales accounts. Contra sales accounts are gonna be the sales returns and allowances and discounts. They act like expenses here. But they're really things that could have easily been seen as a reduction to sales. Sales was overstated by the fact that we sold stuff that then people returned. Sales was overstated by the discount that we didn't report. He reported at full price, then gave a discount. Therefore, we're gonna pull these in, and I'm gonna say less sales return less discount. So we're not gonna show a subtraction sign in this case with a negative number. Some financial statements may. Many financial statements will report it with words. It's a subtraction problem. If we add those two up noticed they've been pulled into this side. This plus this adds up to the 24 7 45 So these air to reductions and then that will give us net sales. That's a subcategory note that net sales is not the same as net income. So keep that very handy in mind because that will help with a lot of problems. Net sales means sales less returns and allowances, which is way different than net income, which is, after all, sales returns in allowances and all expenses, so that will give US net sales, which is the to 79. That's a subtitle. You don't see that here. That's this minus these two. Then we're going to subtract out the most important expense. That expense being cost a good soul. It doesn't have the word expense in it, but it isn't expense. Why? It's the fact that we had to consume inventory and asset in order to help us generate this revenue in the same time period. It's the most important expense because if we sell just inventory, the relationship between the sales price and the cost of the stuff we sold is the most important relationship. That's what's really affect the income statement the most. Therefore, we're gonna make a separate, subcategory cost of goods sold. Notice this numbers pulled in. Here we have the subcategory of net sales, less cost of goods sold. I'm not going to say less in this case because it's fairly assumed with fairly standard that will give us what we call gross profit again. New terminology for merchandising company because this gross profit, this relationship between the sales and the gross profit, the sales in the cost get sold is such a big relationship we want to break that up. So that's gonna give us gross profit. Then we're gonna have to do everything else, and we're gonna have to more sub categories here because, uh, we could have selling type expenses and we could have general and administrative expenses. And again, oftentimes we wanted to separate those two. We want to say, Hey, what's the store doing? How are they doing in terms of cost? And how is the office doing in terms of like the account department and the people running the office situation? So we have expenses here. Notice we have the colon again. Then we have selling expenses. Colon again. Then we've indented one more time and all these indicating that these are part of the selling expenses. So know what the selling expenses are. We've got the selling salaries which, of course, of being pulled here, pulled here and all these store supplies advertising everything related to the sale sales. Those are pulled inside one skin these air, not debit and credit columns. This is just sub categorizing the selling expenses. Then we add those up. So the 41 7 plus a 14 306 plus 23654 plus 2 25 8 72 equals the 85 5 31 which is Ah, the jet, which is the total selling expenses. Then we're going to calculate the rest from that general and administrative expenses, which will include the office expense, the rent expense and the office supplies. So again, we Indian phase. And then I'm gonna indent again, adding up this subcategory out here so we can now see that this subcategory this subcategory in this subcategory represent all numbers under sales and below We found a home for all these numbers. We know that the credit minus all these debits equals this 34 069 If we do this correctly over here, it should also equal 34 069 We're gonna add the outer column or do something to the outer calm actually subtracted at this point. Notice we're not jumping from column to column. We're only gonna do things with one column in this case. Uh, and in this case, we added up the expenses being 85 5 31 Plus the 42 9 19 gives us the 1 28 4 50 That's gonna be the expenses other than the cost of goods sold. Then we're gonna take the gross profit 1 62 5 19 minus that 1 24 50 gives us the net income finally of 34 69. So this looks like a very complex process, and it is a lot of sub totaling, but notice in simplistic ways, it's just basic gonna be that credit less all the debits or the income less all the expenses, the thing that has changed. Of course, of these sub totals, these subtitles could give us a lot of useful information to analysis of the financial statements. All right, last financial. Now we know that that 34 069 wise that yellow it's going to be included in other financial statements included in, in this case, the statement of Owners Equity. So now we found a home for all these and the balance sheet. We found a home for all these specifically on the income statement, even though they were included in the blue number on the balance sheet. What we have not found a home for is the capital and the draws. So that's what we're gonna do on the statement of Owners Equity. The most confusing thing to most people, or was to me, is that the capital account reported on the adjusted trial balance. Is this number 2 48 1 81? It does not get pulled over to any financial statement just in that format, because on the financial statements, we've got two capitals on the statement of Owners Equity. We've got where we started and we've got where we ended. And that's not clear on the trial balance. The amount on the trial bounce that says capital in this case is where we started. Why is it where we started? Because we know that all this other stuff is gonna be in this number as we saw on the balance sheet when we're done. So when we're done, if I added up all this stuff, you would add up to where we end of to 67 to 50. So this number here's where we start notice again. We were gonna represent it as a plus and minus number. These are not debit and credit columns. It's represented as just a positive number. I pulled it to the outside. Just That's just the format we usually take, then net income, which comes from the income statement we just calculated. Or you can see it's right here. Once again, it's a credit. I'm not represented with a credit here, just a number that we're gonna put in there. We're gonna add income, and then we're gonna say less draws. I notice I don't say a word. Add income because the assumption is just like if if there's no negative, it's generally positive. So the adding is often just assumed. If it's a subtraction problem that will often put less less draws. The last thing we haven't found a home port is draws draws represents the money that was pulled out from the owner. Therefore, it's going to reduce the amount that is owed to the owner, and so it needs to reduce the owner's equity. So the 34 old 69 less draws gives us a net increase 34 miles to 15 of the 1969 therefore, that to 48 1 81 beginning capital minus. Basically everything else that happened noticed these two numbers represent everything else . This is represented by the yellow number, the net income and of course draws is represented by draws. So this represents all blue numbers and therefore the 2 48 plus the 1969 gives us the any balance of to 67 to 50 which we already calculated on the balance sheet. So here it is, on the balance sheet right there. So where does this number come from? Well, we know it should tie out to the statement of Owners Equity. So there's the statement of owners Equity. If we look at the numbers that will tie out, we see that the assets, of course, must equal that the liability and owners equity. And then you might be saying, Well, how does this tie into the other statements? Well, we know that the capital account is gonna be one number that is coming from the statement of Owners Equity. And in order to get to the capital, count on the statement of Owners Equity. It's gonna be the beginning equity, plus the activity for the year. How did we do? That's called net income. So net income should tie out to the statement of Owners Equity minus the draw. So this is how the statements are related. Remember that The entire balancing statement, though, is as of a point in time on the balance sheet, total assets equal liabilities to plus owner's equity. All right, so we are now able to describe financial statements for merchandising company, explain the differences and similarities between financial statements for a merchandising company versus financial statements for a service company, and explain the relationship between the balance sheet income statement and statement of equity. 16. 20 Discussion Questions Merchandising Company: In this discussion, we will discuss the discussion question of describe the difference between a periodic and perpetual inventory system. If we see an essay question such as this, were basically looking at two terminologies that we will then combine and compare and contrast. So we're talking about a periodic system and a perpetual inventory system. Obviously, one of the approaches we could do here is to define these two types of systems now, because these are kind of closely related at periodic any perpetual system, part of the definition of them might be used. Or we can use a comparison between them in order to define what these two things are. So a periodic system. If we're talking about appearing out of inventory system, it means that, of course, we're only tracking or recording the inventory periodically. And ah, perpetual inventory system, by contrast, would mean that we are recording the inventory perpetually as we go in a perpetual process . So why would that be the case? How would this happen? And just from a practical standpoint, we typically have more of a periodic system when we have a less sophisticated system, often times and the periodic system for small businesses could be something that will be useful because it doesn't take as as much components in the system doesn't take much as much work as much data input to do a periodic system, whereas a perpetual inventory system, of course, takes more data input and more tracking as we go through the process. Why would that be? When we think of most problems in a textbook, we think of a perpetual inventory system most of the time, meaning when we make a sale, there's basically two components that happen if we are a merchandising company. One is that we if we made a sale on account, we debit accounts receivable and we credit sales or revenue, that first piece is the same as would be there if we were a service company. Then there's the second component, which is the reduction of inventory. We're selling the inventory and we're recording their related costs, the related expense to that sale of inventory called Cost of goods sold. It's that second component that adds more complexity here. Why there's a couple different reasons for one is that if we think about a store or something like that, if someone picks something up in the store that has a sticker on it. That's the sticker price, and it's if it says $100 on it. That's how much it costs. If you ring it up and you ask them to pay you, they can give you that $100 you can record right there. Obviously, the you got cash, you got paid cash would go up. The other side would be revenue would go up. We know exactly what that is. However, they cost side. Whatever that item. That inventory item cost isn't given to you. It's not on the sticker price clearly, and therefore we would have to basically know that. So every time we sell something, we need to know more than just a sticker price. We would need to know that cost of goods sold. Ah, and in order to record the other half, the debit acosta get sold and the credit to inventory so often times that we want the cashier or someone who are all were our selling process to be as easy as possible. I don't have to worry about its many components, so therefore, when we're making the sale, were concentrated on the sale process and therefore way may not be recording on every sales component. Sails transaction the other side of it. Or that would be a periodic system in which we would not record it if we had a computer. However, as we do in, like a grocery store or something like that, which basically records the other component the cost side without us needing to know it, meaning we can be the cashier and just ring up the price and asked for how much money is owed to us while the system being sophisticated enough to record the transaction and track the inventory record the cost of goods sold, record the reduction in inventory perpetually as we go, then that's gonna be a good system. So that's gonna be impracticality when the difference would happen in a periodic system. If we don't have ah computer system, that's gonna help us out with that process. What we could do is we could just calculate the sales half as we go through the whole process, and then we can count the inventory at the end of the system and say, Okay, what? We started with this many units. This is how many units are left at the end of the day, the week or the month, some type of period of time and the difference. Then we presume to be what we sold, and then we could fit. Then we can record the cost of goods sold in the inventory periodically daily, weekly monthly. Uh, at that point in time, when we do the physical count by doing the physical count and figuring out what the cost of goods sold waas. 17. 30 Discussion Questions Merchandising Company: in this discussion, we will be discussing the discussion question of described the operating cycle for a merchandising company when thinking about the operating cycle for a merchandising company were really contrasting that with the operating cycle from a service company, meaning we're focusing on that cycle of inventory, that purchasing and the selling of inventory So we can think about that process as if we're going to have a business where we make money by purchasing something, then marking it up and then selling up selling it. That will, in essence, be the cycle that we are talking about here. So the first component in the cycle is we're gonna take any money that we have. We're gonna purchase merchandise, merchandise that we intend to resell. We're gonna hold on to that inventory or that merchandise till the point in time we can sell it. We're gonna mark it up, of course, so that we sell it at a profit, and then we're gonna make the sale Now, Typically, when we think about this cycle, we think about it as making the sale on account. Although we could make it for cash. If we made it for cash, then we would just take that cash and buy more inventory. That would be the cycle. But typically, when When you're asked a question like this, we think of the longer type of cycle where were we would make the sale on account, we would give the inventory and we would have an IOU and accounts receivable. We would then get payment on the receivable at some point in time. And once we have the money once again will use that money to buy more inventory, that we will then plan to sell. And that's gonna be the cycle we want to think about when considering a merchandising company. 18. 40 Discussion Questions Merchandising Company: in this discussion, we will discuss the discussion question of what does fo be mean and how is it used. So when we hear the term F o. B in terms of the shipping, it's gonna mean free on board. Now, free on board is not the term that we really need to understand when we cf will be, because it's usually in place when we see it in terms of F. O P Shipping Point or F O B destination. So, really, the key component to this would be the F O. B. On and then the shipping point or the destination point, and it's gonna determine when the inventory is going to change hands, meaning who is gonna be responsible for the inventory at one at what point in time. So if we're talking about F. O B a shipping point, that would mean that if we had the seller here and the buyer here and the shipment point of shipment was here to get it over to here, then we're saying that the shipping point it's going to transfer at that point in time from the seller to the buyer at the point in time of shipment and it's gonna be really important if we're talking about things like liability in terms of when the shipment is going to be applied here. And it can also determine who is probably paying the cost of the shipment. Obviously, if the transfer has happened at this point in time, then it's likely that the buyer is paying for the cost at the shipping point, and therefore it is going to need Teoh include that cost in the cost of the inventory. On the other hand, if we're talking about F o B destination, that means that we're exchanging the inventory at the point in time that it reaches the destination it reaches. Basically, we think of the warehouse or something on the other side of things that we have. The seller over here is selling something, and it's not gonna change hands in terms of us recording it until it reaches the destination. And again, that's gonna be important because this point in time of the shipment process, it's still in the Cellars books. It's on the sellers books, and typically they have responsibility for it. If something happened to it along the way, it would be the responsibility most likely of the seller in that case, rather than the buyer. And then when we get it over here on this side, it's most likely the fact that we didn't we possibly did not pay for the shipping, most likely in that in that case and therefore wouldn't have the issue of including it in terms of the inventory cost. So when we CFO be, if if we see an effort, an essay question related to it, we want to remember it's free on board. But more than just knowing that component of its, you want to be able to expand on that and say, You know, what does it mean in terms of theft will be shipping point vs F o b Destination. Why is that important? And be able to explain the transfer of the inventory and the issue of the costs of shipping and or loss or an insurance type of loss of the inventory whose be responsible for it at on during the shipping process, or just some key components related to this term? 19. 10 Multiple Choice Questions Merchandising Company: In this presentation, we will be taking a look at multiple tours. Questions related to merchandising company. First question beginning inventory plus net purchases is a gross margin be net receivables see ending inventory de net income or E goods available for sale. So once again, we're gonna say that beginning inventory plus net purchases is what it's gonna be some type of calculation beginning inventory plus purchases, gross margin. And if we start to think about these, we probably want to go through this and think, if we can think of the calculation for each of these transactions or possibly think of the the calculation, of course, that would be resulting first of this transaction and then see if we can find it in the answers here. So gross gross margin is going to be the difference between what our sales prices and what we are charging for it. That's gonna be the margin that we're getting on it. So beginning inventory plus purchases doesn't sound like growth margin net receivables. That's gonna be the accounts receivable minus the allowance account. And this might be something you haven't seen yet. We might not have seen net receivables, but you can probably think well, doesn't have much to do with inventory, so it doesn't look like it. So I'm gonna cross that out. With the process of elimination Indian inventory beginning inventory plus purchases, we might think I'm that seems like, kind of on the right track there. So that might be something we leave for a second and then net income inventory plus purchases. We don't see anything related to income unless it's doing something kind of funny these air to income statement accounts and it's going to get to something. I mean, these air to balance sheets, type of counts or inventories and balance sheet type of account, net incomes on income account. So unless we're kind of backing into it, that doesn't seem quite right. And then goods available for sale. I'm gonna leave that one for now. We got the sea and the E beginning Inventory plus net purchases is either see ending inventory or e goods available for sale. Now, when we see this, we really want toe start to recognize this as the cost of goods sold, type of calculation. So we're trying to get this is I would think of it as all in one calculation they cost a good sold calculation is going to be the beginning inventory, plus what we purchased. And then there's a subcategory, which will be goods available for sale. That's gonna be goods available for sale minus ending. Inventory would get to the cost of goods sold. So what we really want to do when we approach some problem like this, I wouldn't try toe memorize it as to kind of calculations. I wouldn't try to memorize it as a goods available for sale calculation followed by the cost of goods sold calculation. It should all be, I would think, one type of calculation that you can plug any type of problem into. So it's gonna be if you have beginning inventory. This is gonna be terribly written. Plus purchases, purchases is gonna be this goods available for sale minus this ending inventory will give us costs of goods sold. So you want to have that down because there's gonna be you can ask any question within this this type of calculation. Here we did it with words asking for this component. If you just know the entire if you just memorize this entire calculation, you will be able to get that component. If they ask for the calculation of any of these components, they can give you this number, this number, this number and just leave you with one number that you don't have. What you don't want to do is remember of 10 different calculations. Teoh. Try to figure out the one number that's not here, meaning reorder this in order to solve four each component. What you wanted to just fill out this equation and just leave the missing component there and then solve for it. That's gonna be the 1st 1 next question, which is not true of gross profit. A can also be called growth margin be net income. Calculation includes gross profit. See gross profit is calculated on the single step income statement. D equals net sales, less cost of goods sold. Let's go through those one more time crossing out using process of elimination for question . What's again, which is not true of gross profit? A can also be called gross margin. That's actually true, So that sounds good. Be net income calculation includes gross profit, so you might not really understand that one right off the off the bat so I'm gonna leave that for now. See, gross profit is calculated on the single step income statement. So in that one, we have to figure out what is a single step income statement. And is it different than a normal income statement? I'll go back to that one and then D equals net sales. Less cost of goods sold. Net sales, less cost of goods sold is the growth profit calculation. So that's gonna be true. And of course, when we when we think about this, we do want to think first, of course. What is the gross profit calculation? So when we that in that probably is the thing you want to calculate in your mind first, before we should even read through these and that will help us toe process these out and just look for the correct answer. So gross profit calculation is net sales. Whenever you see the term net sales, remember that. That doesn't mean net income don't get those two mixed up. Net sales is just going to be that sales or the revenue minus those to kind of contra accounts, which is sales returns and allowances and discounts. So this is really net sales is really sales after these Contra accounts, which are really just decreasing or negating the sales. That didn't really happen. So net sales is just really sales minus the cost of goods sold. And that's going to give us the growth profit this relationship really hugely important if we are a merchandiser. Therefore we break it out separately in a multi step income statement. And so if we read through this again, which is not a true of gross profit, we're left with B and C B. Being net income calculation includes growth profit. Now, if we're on a multi step income statement, that's true. It's one of the components on the way to net income. We have the gross profit calculation and then gross profit minus everything else gives us net income. So I'm going to say That's not It's got to be see here, which says gross profit is calculated on a single step income statement. So why is that not true? Well, it has something to do with a single step income statement and remember a single step asked . Compared to a multi step income statement, a single step we can think of usually would happen. A service company kind of uses more of a single step income statement just because they don't have the components typically used in a multi step income statement. They mean meaning they don't have merchandise and therefore they don't have cost of goods sold. So all the expenses we can think of being grouped in one category weaken do that same type of thing for a merchandising company grouping all expenses, including cost of goods sold into one category into a single step income statement providing much less information. But if we do that, of course, we don't have to subcategory of grills profit. So gross profit is not calculated on a single step income statement. It would be used on the income statement most often seen for a merchandising company, one that sells inventory that is a multi step income statement so once can answer will be question, which is not true of gross profit. C. Gross profit is calculated on the single step income statement. Next question. One periods ending Inventory is a always zero. Be the next periods beginning inventory. Um, see the prior periods beginning Inventory D is overstated. E always the same has beginning inventory once again reading through this one periods ending inventory is process of elimination. See, if we can see which which thes we can get rid of, it will be a always zero now, one periods Indian inventory. Now that one could be referring to the temporary closing process. If we close something out, then we're left with zero at something after the closing process. But, um one, it doesn't indicate the closing process really here and to its, um ah, permanent account. It's inventories and asset, so it doesn't go down to zero. Only income statement accounts, revenue and expense draws or dividends will go down to zero permanent council. Not so, I would say that doesn't sound right. B says the next periods beginning inventory. So one periods ending inventory is the next periods beginning in Victoria. That sounds reasonable to me. I would think that that sounds fairly reasonable. I'm gonna leave that one for now. Then see says the prior periods beginning inventory. So one periods ending inventories. The question is the answer. The prior periods beginning inventory. It seems kind of backwards, right? If it's the Indian inventory of one period, it's not gonna be the prior period beginning inventory. It might be the prior periods. Indian inventory. So this one doesn't sound right to me. And then the next one D says, is overstated. One periods. Indian inventory is overstated. I don't know how how exactly we would know that from the questions that seems like it doesn't quite apply. And in the last 11 periods ending inventory is e always the same as beginning inventory. So we're gonna say the Indian inventory is always the same. Is beginning inventory again? That, yeah, doesn't sound quite right. I would think it would change from the time period. So we're left with be here. And so if we take a look at the question and answer one more time one periods, Indian inventory is be the next periods beginning inventory. 20. 20 Multiple Choice Questions Merchandising Company: In this presentation, we will take a look at the multiple choice questions applicable to merchandising companies . First question to dash 10 comma in Dash 30 means a 2% discount if paid in 10 days or full balance due in 30 days. Be 10% discount if paid in two days or full balance due in 30 days. C 20% discount if paid in 10 days or full balance due in 30 days over D, 10% discount if paid in 30 days or full balance due in 30 days. Let's go through these one more time crossing out what we can using the process of elimination question once again two slash 10 comma in slash 30 means What now? First we might want to thank Okay, what does that mean? First to us and put that down in our in our minds and then go through these and see what closely matches what we believe it to mean. So when you see this, this is gonna be terms typically terms of when payments should be do when when we make a sale or purchase in terms, so it typically will be in this kind of format and We just got to know what this format means. Trickiest piece of it is, this first number means the discount now the discount they didn't put a percent on it. It's just they just basically put this to here, and you've got to know that it means 2%. So that's the trickiest piece of this kind of, ah way they write this so 2%. And then what is the 10 mean? That means that we're gonna give you a 2% discount and especially a cash discount. It's It's a discount related to getting paid sooner. So, recognizing the time value of money, we're saying if you give us the money sooner, then we'll give you a 2% discount, meaning If you pay us within 10 days, we'll give you that 2% discount. If not, then comma. If not, then the normal terms. That means that we, when you normally have to pay us, is gonna be the 30 days. So if you think about this, if he made a sale on account, then we would typically say that way. Want to be paid within 30 days. That's standard at whatever that that is. It could be 30 it could be 60. Whatever. The standard payment period is often 30 days. That'll be when we expect payment. If we don't get paid, then then we might have collection action taken after that point. But if you pay earlier within two days, we will give a discount for the time value of money for doing that. All right, so let's go through the answers to slash 10 AM slash 30 means process of elimination a 2% discount if paid in 10 days or full balance due in 30 days. That seems exactly like what we're looking at. So that looks like the one. Let's look at the rest of them to make sure that we're not messing anything up, though, be 10% discount if paid in two days or full balance due in 30 days. Now a 10% discount looks a little backwards. If we pay 10% discount in two days, you can think of that two ways. One. It's just backwards because if you read this, it should be 2% discount in 10 days and two ah, 10% discount. When you're talking about a cash discount is pretty pretty big because typically were talking about a fairly small discount that might be applied to a large ah, large sales for, for the time, value of money for a cash discount. This isn't like a discount in a store where we might have marked up the merchandise and then market weight down for a discount. This isn't a negotiating the sales price discount. This is basically a cash discount to get paid a little bit sooner. Eso We're not going to give a huge 10% discount, possibly just because we got paid 20 days sooner, we might. That might be a sales thing within the store, but that seems awfully high, so that's not gonna be it. And then see says, 20% discount if paid in 10 days. Oh, are full bounce to in 30 days, and that just seems I don't see where the 20% came from it all, so that doesn't seem right. And then D says 10% discount if paid in 30 days or full bounce due in 30 days, and once again that 10% is backwards. So we're gonna say that doesn't seem right, so the answer looks like a so if we read through this once again, we're gonna say the question to flash 10 comma and slash 30 means what, a 2% discount if paid in 10 days or full balance due in 30 days. Next question. The term cost of goods sold A means sale of inventory be is an asset, See is used in a service company. De is a revenue account. E is the expense related to inventory being used to generate revenue. Let's read through this one more time and see if we can cross any of this out. We're gonna say the term cost of goods sold. Now again, you might want to just kind of to find that in your mind. Of course. What is cost of goods sold to you before we go through this and know that what? It's gonna be an income statement account? It's basically an expense account. It's gonna therefore bring down net income, and it's related to the inventory account. So it's related to inventory being used in order to help us generate revenue. So if we go through these, then we're going to say the term cost of goods sold a means sale of inventory. Now you might look at it. Go ahead, kind of. I mean, that cost of goods sold means that we did so inventory. So because that's were recording the calls of the sale of the inventory. So let's keep that for now. And he says, is an asset. So and we should be able to say it will cost to get sold, not an asset. The related asset account is inventory and ask it. But cost of goods sold is an expense related to us consuming that asset. So I'm gonna say that that doesn't sound right. See Says is used in a service company. So C is used in a service company. The cost of goods sold relates to a selling inventory, and a service company doesn't have any inventory. So we're gonna say no, it's it shouldn't be in a service company. They shouldn't have cost a good soul. And then D is a revenue account. Ah, revenue account cost of goods sold and it's an expense account. So across the goods sold is decreasing net income. It relates to us consuming the inventory in order to generate revenue expense account, not a revenue account, and then eases is the expense related to inventory being used to generate revenue. And that sounds pretty good. So we're left with A and E. So if we read through this one more time, the term cost of goods sold either a or e a means sale of inventory or E is the expense related to inventory being used to generate revenue Now. Of those two, if we record cost of goods sold, it seems like we did sell inventory because that's why we're recording it. But e sounds better. And often times if you look at these multiple choice questions, when you see a really specific answer, as opposed to answers that aren't asked a specific, that could mean that the person putting together that the question it's trying to, you know, make any make, make an answer that doesn't have any possibilities or times when it's not true. And therefore they have to add a few more words. So if you see a really specific answer, that sounds pretty good as compared to another answer, which is a little too short and compared to it, it might be the more specific answer because the more specific answers designed to be right in all cases, which means it might take a little more terminology. So we're gonna say it's gonna be e here. And so if you read through this, we're gonna say the term cost of goods sold E is the expense related to inventory being used to generate revenue. Next question. A debit to the sales returns and allowance and a credit to accounts receivable. One more time. A debit to sales returns and allowances and a credit to a accounts receivable. A makes accounts receivable. Go up. B is part of a journal entry for a return of merchandise. See is a journal entry related to a sale at a discount DE is recorded when a customer takes a discount, or E is a journal entry related to the payment of accounts receivable. So one more time this question will be a deputy to sales returns and allowances, and a credit to accounts receivable is what. So before we go through these, we might want to think about what that might be. If we were to do this, you might want to actually write this out. It's often helpful, the citizen journalist reformat, so you might just want to say OK, accounts receivable and just make up a number possibly is going down or credit of 800. And then we debit something for the sales return. So sales return and that might make it say, Huff, you've worked a couple of problems. You might say. You know, it might have seen that somewhere. One account to see if I was going down. Why would accounts you see it will go down well, Typically, we get paid and therefore the customer no longer owes us the money and we decrease the accounts receivable. However, in this case, we didn't debit cash, meaning we didn't get paid. We debated instead, sales returns and allowances. Now what is that? It's basically reversing its the sales account that it's this Contra account that reverses the sale. So what's happening is, for whatever reason, it's an income statement account. We're reducing basically the sales here, which possibly probably happened because of a return. You know, we had to reverse the sale for some happen. Something happens to the sale. Didn't really happen. Meaning we're basically not giving the money back. They didn't give us money. The customer didn't give us money. We are saying you no longer always money because we're just whatever. The sale just never happened. Basically, we're taking it off the books. Okay, so a makes accounts receivable go up and we have a credit to accounts receivable that makes accounts receivable go down. So that doesn't look right. B is part of a journal entry to return their entry for a return of merchandise. Now, that could be one reason why the accounts receivable would go down. And we're not getting cash. But in other words, in instead recording something to these sales returned an allowance so that one looks like it's a possibility. See, is a journal entry related to a sales discount sale at a discount? And this isn't really a sale happening, cause accounts receivable would be going up if we made a sale. So whether it be a discount or not, it's not really looking like that De is recorded when a customer takes a discount. Uh, you know, we might say it. Wife. There's a discount. We could say Yeah, accounts. Evil would go down, but the other side going to sales returns doesn't look quite right If we had a discount. So you might be questioned. That could be some one that we would question say, You know, it might be the case that if there's a discount, we would decrease the receivable because they, you know, they don't always as much because they got a discount and then e so we'll keep that one. For now, he says is a journal entry related to the payment of accounts receivable, and it does have accounts receivable going down. So you think that seems kind of reasonable, but we didn't get paid because that would be a debit to cash. Instead, we got this, um, the sales returns it allowances. So I'm gonna say that doesn't seem right, cause it didn't get cash. So we're left with B and D reading the question one more time. A debit to sales returns and allowances, and a credit to accounts receivable is either A or D. A is part of a journal entry for a return of merchandise or D is recorded when a customer takes a discount. So I'm going to say that a sounds more reasonable because we're going to say that we reduced sales and we put this sales returns account here, which Typically, you would think we're reversing the sale if the merchandise was returned to us. So the customer returned the merchandise. We decreased the accounts receivable and record the other side there now, so I'm gonna say B is the answer now. I noticed that D is similar to see here. See says, See says is a journal entry related to the sale at a discount? And D says, recorded when a customer takes a discount. And if we think that those two are related, they're not exactly related or not exactly the same. But note that if you do see since two that are kind of similar or pretty much the same thing, that we can only choose one answer so you could use the process of elimination in cases like that. Okay, a region. The final answer. Then we have the question of a debit Teoh sales returns and allowances, and a credit to accounts receivable is A or B. B is part of a journal entry for a return of merchandise. Next question, which is true of inventory shrinkage? A inventory shrinkage is the loss of inventory. Be inventory shrinkage can be found by comparing a physical count with amount on record. See inventory shrinkage is recognized by debuting miscellaneous expense. De inventory shrinkage is recognized by deputy cost of goods sold and see. Inventory shrinkage can be caused by theft or deterioration one more time, which is not true of inventory shrinkage. So we got a first. It might be helpful to see if we know the definition of inventory shrinkage and then go through and see if we can apply that definition out. So inventory shrink. It's usually has to deal with the inventory going down for some reason, reason other than a sale. So remember that obviously inventory is going to go down when we make sales. But there could be some other components decreasing inventory. One of those components might be, You know, we just locked it, spoiled. We lost. It could be theft or something like that. Ah, that inventory would go down and we'd have to course record that when it happens, let's go through these and see if we can use the process of elimination once again. Question of which is not true of inventory shrinkage. A inventory shrinkage is the loss of inventory. So we're looking at something that's not true. So inventory shrinkage is the loss of inventory. So that's kind of true. We lost something, you know, something it might spoil. There's something like that. But we lost them and we didn't sell it. In any case, we said we lost it. Somehow we got to write it off in some way, Be someone I'm gonna say. That's true. I'm gonna cross it out. B says inventory shrinkage can be found by comparing a physical count with the amount on record. And that isn't indeed the case of how we find the inventory shrinkage we're gonna look at. You know what we think we have in terms of our bookkeeping? Calculating what what we are doing, especially perpetual inventory system, and compare that to a physical count. The difference, then, if it's less than which it often is, is due to something happening, theft, spoilage, something. So we're gonna say that's that looks correct. Someone across that out see, inventory shrinkage is recognized by debuting the miscellaneous expense so that I mean, if we don't know how to talk to record that we might think, I don't know, because we're going to obviously have to decrease inventory and inventory is a debit balance. We're gonna decrease it with a credit, and then we're gonna debit something and I don't know, miscellaneous expense. Possibly Where do we want to put it? Don't know. So I'm gonna leave that for now, De, we're gonna say inventory shrinkage is recognized by debuting cost of goods sold, and we have the same kind of issue that Well, we know inventory kind of went down, so we'll probably have to credit inventory to decrease it. We're gonna debit something but costs a good soul that you might think, Well, you know, that relates to a selling inventory to help generate revenue. And we didn't really sell it here. It kind of got lost or something. Or still, Leonard, or, you know, it's spoiled. So I'm gonna leave that for now. E says inventory shrinkage can be caused by theft or deterioration, and I believe that is correct. It could deteriorate or be theft, ID or spoil, or something like that. And so I'm going to say that sounds correct. So I'm not gonna say it sound, So we're gonna left with C and D reading the question one more time. We have which is not true of inventory shrinkage. See, inventory shrinkage is recorded by debuting miscellaneous expense or D. Inventory shrinkage is recognized by deputy and cost of goods sold. So we're just basically down to what type of journal entry do we have? We know we're gonna credit inventory to decrease it. Where's the debits going to go now? It could we could say miscellaneous or cost a good soul. Now, miscellaneous is where we put something that small and we and we don't know where else to go. So that seems like kind of reasonable that, you know, if it's this doesn't something, not something that's gonna happen normally, eso we might think that and the cost of goods sold is usually what we put when we make the sale. So they both seem kind of, you know, if you didn't have any idea, they both seem kind of reasonable. But the cost of goods sold is actually what we're gonna use here. And whenever you think of inventory, ah caught the related expense account, the inventory, the asset account, the related expense account is always caused a good sold. So that's gonna be our first kind of go to area. The reasoning that we're gonna put it in the cost of goods sold even though it's not a sale , is because the same reason that we would put it into a miscellaneous is it small? And if it is small, then we're just going to say it's in material to decision making, and therefore we're gonna put it to the normal account that's related to inventory. Teoh. The cost of goods sold account in this case. 21. 500: using the following year and infirm acclamation, Catholic, the current ratio and the asset ratio. All right, so we're gonna need the current assets and current liabilities as well as quick acid assets or acid acid. So let's calculate that first gonna say current assets and we have to decide of these. Which ones, of course, are current and course caches current, Ah, short terms receivables current account receivables. Current inventory is current as well as prepaid expenses. So they gave us all these current assets Things that would not be current would be if they give us unlike property, plant and equipment, I was gonna put those here gonna bring those numbers down. 386 9000, 40,000 and 24 All right. And 17 4 And so the total then would be here gonna go and some that up of an underlying home tab font crude and underline. And just add those numbers up those numbers. Adding up to the sum equals the sum of this. Plus this plus this plus this Plus this giving current assets of 3 45 Now let's do current liabilities. So current liabilities then would be just the payable and the other current liabilities. So those are the current liabilities. Long term liabilities would be like a long term notes and stuff like that. So they didn't give us any of those. So we're just gonna say, All right, So we got a 22 3 And if we some of that up underlying total, the total current liabilities, then would be the some of those. And so if we were to calculate, then the current asset ratio, we would just take the current assets divided by the current liabilities. So that's gonna be equal to the current assets. This 3 45,000 divided by divided by the current liabilities, 1095 And so that's not quite three, because we need to add some decimals. We do that by going the home tab numbers and increasing the decimals 3.15 It's a little bit longer than that, but we're gonna round it to 3.15 which Excel will do automatically elects. Oh, Okay, So then the quick ratio or the acid test ratio is the next one we're gonna have. So I'm gonna So they call it the acid test ratio. And it's a similar ratio, but it's going to be more restrictive in terms of the assets, meaning it's gonna include cash. Well, let's just do the the acid assets or acid assets or quick assets. That's the thing that differs. So we're going to say that the current assets are gonna be more restricted. We're gonna have cash. We're gonna have short term receive what we're gonna have accounts receivable. But we're not gonna have inventory and we're not gonna have prepaid expenses. So I'm gonna copy these and say these are the more restricted assets in our ratio that we will been calculate. And so we're gonna some those up. Those are acid or quick assets. And then we're gonna have the, uh what is it? Acid ratio? I said, Okay, ratio. That's good enough. All right. And that's gonna be the same. It's gonna be the same current liabilities, but we're gonna have the current or quick assets with the acid assets divided by the current liabilities. So that will give us one. We're gonna go to the home tab, we're gonna go to the numbers, and we will add the decimals on that. So note that, of course, the current ratio is always gonna be higher. And that's because we're trying to see how many times we could pay the liabilities off with current assets. But the quick ass it's gonna be mawr kind of restricted. And that's gonna be more, I guess, conservative in that we're going to restrict the assets to things that are closer to cash. More liquid assets Next one says that accompanies our current assets are 23 9 20 It's quick assets are 14 90 its current liabilities, or 12,000 to 70. It's acid test ratio equals what? So that's when they actually just gave us the numbers. It's just a matter to know what the ratio is, and the ratio for the acid test ratio are going to take the quick assets, which are the more restrictive assets, which don't include inventory. And that, they say, had quick assets of 14 090 it's always gonna be less than the current assets, and we're gonna divide that by the current liabilities current liabilities, which were 12 to 70 So we then will take the 14 90 quick CASS. It's over divided by 12 to 70 current liabilities then we need to add some Desa miles. So I'm gonna go up to the home tab the numbers group and add decimals like so 1.15 again. It might be a little bit longer, but we're probably going to Most problems will take it to places out. Like so. Next Wound says that corporations quick assets are 1,111,000. Its current assets are 13 million to 60,000 and its current liabilities air one million won 36,000. It's acid ratio equals what? So the same thing. We just got to know what the acid ratio is. So we're gonna take the quick assets could include the quick assets, which are less than the current assets 6111 000 And we're gonna take the current liabilities current liabilities, which are, Ah, quick assets, current assets and current liabilities. 8136000 and we will then divide those out. So we're just gonna take the quick assets divided by the current liabilities, and it's not. It's not one it's gonna be home to add. I'm going home to have gone to the numbers group and we're gonna add some decimals and we get 2.75 now. This one's interesting, of course, because we have the current liabilities are greater than the quick assets, meaning we can't pay off the current liabilities with our quick asset's less than net. Also note that if we're dealing with these big numbers and you're talking about ratios, of course you can. We can knock off these three zeros in a ratio if we wanted to do it a little bit faster. If we have a time constraint and just be 6111 knock off the three or divide by 1000 both sides you ate. So we have here. We've got the 8136 And if we divide that out, then we should come up with the 6111 divided by the 8136 once again adding the desk. Most Home Tab Numbers group adding decimals, and we get the 81360.75 once again. Next. One company had company had cash sales off 95 5 25 Credit sales of 84 200 sales returns in allowances of 2200 sales discounts of 97 3005. Net sales for the period would be what? So it's important here not to confuse net sales and net income. So net sales, remember, is basically the sales minus the contra sales accounts, kind of which include sales returns and allowances and discounts. So we're gonna If we were to calculate this, then we could take the sales amount, and they gave us two sales numbers a week in sub. Categorize that and say we had cash sales, which is part of sales of 95 525 And we had the credit sales credit sales of That's the 84 200 that gives us total sales. And so sales is the some of the cash, plus the credit sales. That's our sales amount. Now we have the sales returns, an allowance returns, and allowance is gonna breathed it like so that's gonna reduce sales so that I'm gonna put that in as a negative in this case, reducing the sales 2200 and the sales discount sales discounts. That's gonna be a discounts we gave to our customers Negative 3975 And that gives us net sales not net income net sales. I'm gonna go ahead and some these up. And as we do some that equals s, um it's this number minus December minus this number because those air in their ass negatives if we were to put it into a calculator giving us the 1 73 5 50 Now note that these these amounts here are contra sales accounts like basically act like expenses in that they're going to reduce the net income as well as the net sales. And at the end of the day, But they're basically kind of contra sales, and they're up in the sales area. Next one says that a company's net sales were 7 16 900 It's cost get sold was to 43 $30 its net income was 55 900. Its gross margin ratio is what Okay, so to do that, we have to figure out first the gross margin that gross margin will be the sales minus the cost of goods sold. So our most important relationship generally if we sell stuff inventory So we take the sales number which they gave us to be 716900 We're gonna take the cost of goods sold number which they gave us to be 243030 That subtraction problem will give us the growth of profit . That's the gross profit and will subtract those out. That's gonna be the sales 7169 minus the cost of goods sold to 43 30. That gives us the gross profit. I'm gonna underline that Home tab font group underline now to figure out the profits of the gross profit margin. We're gonna take the gross profit divided by the sales. So that's I'm usually put that been next to the gross profit. And I would say that equals the gross profit divided by the sales. And I'm gonna go ahead and go to the home tab. We're gonna go to the numbers group and add decimals on that like so and we could also it often in the form of a percentage, remove the decibel two places to the right. We would then get a percentage. And if we want one more decimal, depending on how it would be formatted 66.1 or you know as many as we want, we need one, apparently, and there we have it. So, basically, for every sales that we make, we're kind of going away with every dollar. We're going away with 66 cents. Basically, that's gonna be the growth profit ratio. 22. 500: So with this lecture, we're gonna continue on with some shorter test type problems that could be in the format of multiple choice problems. So here the next one has. On September 12th V company sold merchandise it in the amount of 9 3052 J company with credit terms to 10 in 30 So 2% of paid in 10 days. Otherwise it's due in 30 days. The cost of the item sold is 7 2025 V uses the perpetual inventory system. On September 14th J returned some of the merchandise that selling price The merchandise is 3 40 The cost of the merchandise is to 40. R. K. J pays the invoice on September 18th and takes the appropriate discount. That journal entry that V makes on September 18th. Okay, so we basically got to get to this last journal entry over here, and I'm gonna put over on this side. Basically, what we are tracking at this point is accounts receivable. So we're gonna try to see what the accounts receivable is at the end, and then we'll have to make that adjustment in accounts people. So I'm gonna have our tea account for accounts receivable cause the ultimate payment will be what is owed less the discount. Then I'm gonna go ahead and go through our journal entries, and this might be a bit longer way of doing it, but it will give us the bigger picture on how you know this is we're gonna get to where we want to get. So on September 1st, the ah, the company sold merchandise in the amount of 3950 So if we sold merchandise, what would happen? We would. I'll put it up here. We would debit accounts receivable for 3950 and we were credit sales or income or revenue. I'm gonna make mine negative for the credit column Here would also what happened? We could put it in the separate journal entry or we can keep it in the same journal entry. I'm just gonna keep it up here. Costs of goods sold would then be affected. And that would be for the 2725 and we would have the fact that the inventory is going down . Inventory is going down by the to 7 to 5. So these are the two you can think of them as two separate journal entries. Basically, they happen at the same time. This is the sales half this. The fact of the inventory is going down and the expenses of Casa gets cold are going up. What happens to our tea accounts right here? Well, we can see that Accounts receivable is here, and that's gonna increase the receivables. And if we some these up with the some of these, he's gonna equal the sum of these. And of course, the debits are beating the credits at this point. And then we're saying that September 14 J returned some of the merchandise. The selling price is 3 40 So that merchandise came back, returned it. Basically, we reverse this transactions for the most part, with a bit of it. One exception, basically. So if we reverse this first half of it, we would have to debit sales. But we don't usually debit sales. We did what we called allowance for, um, sales returns an allowance. So that's like a contra sales account account that we put in place just for this type of occasion because we don't like to reduce sales. Everything else is basically going to be an exact reversal. Meaning the credits gonna goto accounts receivable because they don't know it anymore. Then we have to reverse this half. Meaning we're gonna debit inventory. The inventory came back and the inventory, the amount of the inventory that came back was to 40. And we're gonna credit costs of goods sold for the 2 40 and in terms of our accounts receivable, then we have a reduction here of this to 40 in terms of our t account. So, of course, the debits are still beating the credits. And now by that 3000 uh, 6 10 So if I take that 3610 and we're gonna take that, multiply it times the discount rate If it was paid within the discount rate, we're gonna say the discounters 0.2 That means that I'm gonna put decimals on that home tab . Numbers add decimals. Gonna go ahead and underline this. Multiply that out. We're gonna say this equals the 3610 that is owed after the return times. The discount means that we have a discount of 72 ads and decimals. 2072 20. So our journal entry, then is going to be something like this. We are going to say once cash is received, we're gonna get cash. And it would have been for the 3610 But we got a 72 discount and there's a couple of different ways. I mean, that could put this number minus this number. It's also the fact that if they owed us 3610 and we've got a 2% discount, then we were paid 98% right? So I could say times 980.98 and I'd get the same thing is, if we took the 3610 minus 72 20 I'm gonna add some decimals Home tab numbers adding decimals because they want some some change on this one. So we got the cash and then accounts receivable. Put this on the bottom. The council cibeles gonna go down, but it needs to go down by the entire amount here, so it needs to go down by the 3610 the entire mountain that is in there. And then the difference which we can calculate is, of course, you know the debits minus two credits, or it's also just this amount with calf here. If we add those two up the debits, then equal the credits and that amount needs to go into sales discount. So sales discount will be that item sales discount up here. So this is the final journal entry that we've got to get. Teoh. We need to basically go through the story to get there so that we can see what was in accounts Evil Boat. Before this transaction, x one A company purchased 11 7 of merchandise on June 15 with terms to 10 in 45. So 2% discount if paid within 10 days. Otherwise, it's paid within 45 days and f will be shifting point. The freight charge was 3 1050 was pre paid by the seller on June 20th. It returned 1 2060 of them merchandise on June 24th. It paid the balance owed for the merchandise. Taking any discount it is entitled to the cash paid on June 24th equals wet. Okay, so I'm gonna go through the story again here. We're basically tracking accounts payable this time, so I'm gonna break out the t account. Four towns payable over here and just kind of make that up so that we can see that item. And so there that is. All right, So now let's go through the story here, and I'll just do the journal entries we could probably do is a bit quicker than this. But this will tell us the whole story if we do it this way. So a company purchased 11 7 of merchandise on June 15th. So we got merchandise. I'm gonna call it inventory inventory for short. And we got 11 7 debuting inventory, increasing inventory. And what will the credit to be accounts payable? We didn't pay cash for its gonna be accounts payable. All right, the freight charges on if we track that inner accounts payable, then we're gonna be over here. That's gonna be the credit into accounts payable. And then we're going to say that there was freight charges. Now, this is the trick of this Problems promise. Bit tricky because of these freight charges they were paid, but and we've gotta pay back for them, but they're not gonna be included in the discount. So what's What's gonna happen is we're gonna have an increased to inventory because it's going to be part of the purchase price. 1350 That's the debit, the credits going to go to the payable cause it's going to show up on our invoice, so it's still going to go to the payable. It's gonna increase the payable, but we're not gonna have to. We're not gonna get any reduction. We're gonna get a 2% duck reduction. In other words, on the amount that is freight. So I'm gonna highlight that just to remember that. And that's kind of a trick to this problem here. That will be a bit frustrating to look at. And who were going to say on June 24th it paid the balance. Oh, okay. And then on June 20th it returned to some of the merchandise, said we returned merchandise, so that means the inventory is gonna go down. I'll put that in first. Inventory is going down because we gave it back for Ah, June 20 foot to 160 and then the Dev it's going to go not to cash because we still have the 80 owed. So that balance owed then is going to be debited. So if we look at our accounts payable now we would say, OK, the accounts payable some in the debits, Some in the credits. The credits will then win. That's going to be the case all the time when accounts payable, Of course, by the 8 10,090 that's what we would owe if we didn't have to account for this fact that we got this discount on. But we got this discount now, so we need to account for the discounts. So the now this is where it's a bit tricky because we can't We can't take the 10 8 90 owed times to discount because we're not gonna get a discount on a freight here. So basically, we have to take the discount before the freight. So the amount due is equivalent Teoh the 11 7 plus, uh, the amount that was returned. Or I could say, flipping the sign this, uh, minus this. So if we subtract us to 11 7 minus the to 160 that's how much is owed. That's not part of the freight in that part. We're gonna get a discount on. We're gonna get a 2% discount, which we could calculate its 20.2 and I'm gonna go to the home tab Font increased the decimals 0.2 Multiply that out. This equals this amount. Not including the freight. Times the 0.2 gonna go ahead and underline this home tab. Ah, numbers increase. Did underline. So, student, one more time. This equals the 954 times, 2%. That's the amount of the discount. Therefore, if that's the discount, the amount that we will pay is this minus this? So we're going to The amount that will be paid is the amount that is owed, not including the freight minus the discount here. And I don't give us the amount that we have to pay. And then we have to had to that the fact that we have this freight here, So we've got the 13050 that we have to tack on for the freight. I'm sorry the freight is up here in green. That's why I made a green 1350 And that means the amount that we are going to pay at the end of the day will be the 9349 plus the 1350 And that's gonna be the 10 699 Now, that's what they're looking for here. But if we wanted to see that journal entry, we might want to just record that journal entry as well. So we know that cash would be credited. Cash would go down. I'm gonna put that over here. Credit of 10. 69 10 699 is cash. Then we're going to debit the accounts payable. But remember, we're gonna have to debit the accounts payable for the amounts that is in here, which is the 10 8 90 So we have to because we're not going to pay the difference. Because we got a discount. We're not gonna pay it back. So we got the 10 8 90 We're gonna need more credit. So this number minus this numbers a difference 1 91 which is the course of the discount we got. I'm gonna do that with a negative some formula. So all I'm doing a sane this minus list is going to be the plug so that this plus this equals the debits, equal the credits here. Now, you might be thinking we should put that to some account with discount in the name, but notice that this one is not going to be a discount because what happened is we overcharged our inventory. We put our inventory on the books for the amount before the discount the 11 7 plus the the freight. And it should be the amount after the discounts that we need to reduce it for the discount that we got because we overstated our inventory. And that's why we're gonna credit the inventory in this case. Next one says that a company purchased three dying 50 worth of merchandise transportation costs are merchandise. Transportation costs were an additional 3 50 The company later returned 2 70 worth of merchandise and paid the invoice within the 1% cash discount period. The total amount paid for the merchandise is what. So in this case, once again, we're gonna be tracking the AP, So I'm just gonna make it t account for accounts payable over here and track that as we go . So I'm gonna put underlying here, and we'll put a line there completing the tea. Okay, So the company purchased 3950 of inventory, So we're gonna say inventory then is gonna go up on. And I'm gonna try to put all this in all the journal entries in here. And we paid for it, not with cash, but with accounts payable. That, of course, would increase our T account. That payable is going up like so. So we're gonna go that at the end of the day, the company later. I'm sorry than transaction costs. We're an additional 3 50 transportation costs for additional 3 50 So that's gonna be included in this item here. So we're going to say that the transportation costs are going to be part of inventory, and that's going to be for the 3 50 and and again, I'm gonna basically say that we're gonna pay that to the vendor. That's what this problem is assuming. So it's gonna be on the invoice, meaning it's part of the payable. But we're not going to get the discount on that amount. So we gotta basically be careful of that. When we calculate our discount, it's not gonna include that amount. And then the company returned 2 70 worth of merchandise, so we returned it. So that means the inventory is gonna go down. So I usually think about that. First to 70. We're getting lots going down cause we're getting rid of it. We're gonna debit something and that, Deb, it's not gonna be cashed. In this case. It's gonna be accounts payable, accounts payable, and Artie accounts now is the to 70. And so if we sum up are payable here. We've got the 2 70 debit, and we have the credits of ah, for 300 Meaning we have a balance of 4030 Now, we're assuming that we are going to pay within the discount period. And so you would think we would take that. Battles do for 030 times 1%. But note that ah, once again, it's not, uh, gonna get a discount on this 3 50 We're not getting a discount on the 3 50 So what? What we're have to calculate then is we're gonna take this was Put it over here. We're gonna take the 3950 this number, and we're going to subtract from that the 2 72 70 And that's the difference. This it's in essence, this minus this, which is a credit of the 3680 So that's the portion that's not including the 3 50 or you could take You could do it this way. We could take that balance, Do 4030 And we're not wanting to include this 3 50 okay? And then we're gonna multiply that times two discount 20.1 And if I put my cursor, their home tab increase and I'm gonna go ahead and underline that and if we multiply that out, it's the 3680 times, the 1% giving us 37. So 37. And that means that we're actually going to pay. Then this 3680 minus the 37 there. And that's how much we would pay before the freight. So that's how much we would pay, not including the freight. And remember that what they're gonna do is we're gonna attack on the shipping costs, and they're going to say we're not giving you a discount on the shipping costs. Remember that was this 3 50 that we took out. So if we add to this the 3 50 I'm gonna go ahead and underlying whom Tab Font underline. We're gonna take the 3643 plus the 3 50 That's what we had actually end up having to pay at the end of the day. May have to add some decimals to that if depending on whether they want those or not. Now, I'm gonna move this over here one more time and they didn't ask for this. That's what they asked for. But if they did ask for the journal entry, we can put the journal entry in place, and that's the amount of cash that we're going to pay. So we put that on the bottom. Cash is going to go out. Four, uh, this amount. I'm gonna make it a credit with a negative. This amounts the amount that's gonna go out, accounts payable. It's gonna be the other side of it. But the accounts payable, remember, is gonna have to be the debit of the entire amount that's in there, which in this case is 4030. And so the difference, then meaning the debits minds to credits. We need a credit here. So this number minus this number by highlighting both 37 this 37 here, I'm gonna do it with a negative some which was space. You can say this number minus this number and flip the sign. That's the plug. That's that 37. We may need to add decimals so we can add decimal that we want to, and we put the pennies in there and again. You might be thinking that should be some kind of discount account. But what happened is we overstated inventory again. We overstated the inventory by the fact that we didn't account for the 1% discount. Now we need to account for it in reducing the inventory by the amount of discount that we are now getting. That's why we're reducing inventory with the credit of that 36.8.