Recognize Inventory Sales - Journal Entries

All right, how do we differentiate between manufacturing business and service businesses

That's where this chapter or this video comes into play. We're going to talk about how do we actually recognize these things

What do they look like in a journal entry? Now pretty much from here on now, I'm going to make the assumption that you know how to convert journal entries into T-Tables

Because it's pretty straightforward. If you haven't, go back to chapter, I believe, two and re-watch those videos

For right now, I'm just going to, when I move forward, it's really going to be, forward it's really going to be on these examples just the journal entry because

that's really where the you need to know that hopefully you know how to turn them into T tables so how do we recognize the events that happen typically

in a merchandising business well let's talk about the first the obvious one

and that is how do we recognize us buying the inventory or purchasing the

inventory so we the company purchase inventory we bring in the inventory into

our business in order to sell so we're just looking at that point first

bringing it in Okay so what would that look like on a journal entry Well whatever the date is I just going to put 1 And I going to put merchandise inventory or inventory of whatever amount That what I debiting because remember that is an asset account I own that inventory until I sell it

So my inventory is going up by that amount. And then I'm going to credit however I pay for that inventory

Maybe it's cash, maybe it's accounts payable. It should be payable. I'm not sure why it says accounts receivable

But accounts payable because it's a liability to us if I go that route. So that is what just the simple purchase of inventory journal entry would

look like. Very straightforward. My inventory goes up, my cash from my AP goes or my cash goes down or my AP goes up

My liability goes up. It's a lot of moving pieces to this. But that's the purchase. Now let's look at the

cell. The cell is where the difference happens. The cell is where you're going to see a major difference here

So when we sell inventory, there are a couple things that's happening. So each cell involves two things, two parts, and therefore require two entries

Okay and each entry will have its own debit and its own credit at minimum So we really talking about a minimum of four accounts being affected here Okay the first thing we need to recognize is the recognition of the revenue We sold inventory We gave the product or service therefore we got inventory or we got revenue Okay that the first part So let go ahead and do the journal

entry for that. My debit is going to be however I was paid. So it's either going to be cash or it's

going to be accounts receivable. That one's right. Uh, of however much. Okay, so how much

however much I sold it for, that's what I got in cash. My cash went up or my AR went up

whichever one they pay with. Okay. That's also the amount that I earned. So my credit is going to be sales revenue, or sometimes you'll just see it called

sales. That's part one. That's step one of the sales of inventory. The second step is now we have

to recognize the expense side of it, or what we call the cost of goods sold. Remember

we purchased this inventory with the intent to sell, which means we're not going to use it. Remember

we don't expense things until we use it. We're not going to use it until we actually do sell it

And at that point, we have used the inventory for what its purpose was

So therefore, not only do we have to recognize revenue, we have to expense it as well

So the second step of this is going to be the expense side and we use what called cost of goods sold You can kind of think of it as inventory expense but we use the term cost of goods sold as a account name So the second part of this will be I going to debit my expense account which is cost of goods sold So cost of goods

sold for whatever that amount was to me, not what I sold it for, but what it cost

me. And then not only did I gain something, I gained cash, I also lost the inventory

because I gave it to my customer. So my credit for this one would be merchandise

inventory or inventory for the same amount. It is important to do that you recognize the different numbers because the cash and the sales revenue are what we sold it for

And the cogs or cost of goods sold and the inventory is what it cost us

You don't want to have the same numbers on there because that means you're not making your profit and that's a very bad business strategy

We'll go out of business very quickly. Okay, that's it in concept if you want it more practical sense

I would just like we've been doing from the beginning when we talk about journal entries we do all the debits first and all the credits last

This is what a more practical one would look like I do my two debits together and then I do my two credits together. Still the same thing most of the time

it's not that big a deal. But that is how you recognize the purchases and the sales of inventory

Appreciate it