Hey guys it is Patrick and before you dive into this lesson I wanted you to know that you're about to start a new section of principles of accounting and you can actually head to my website at www.weather.gov/elko and then you can able to write notes along with the notes that I am showing on your screen so all you have to do is head to my website at .
WWE there you can purchase them and then download them and then you can use them on this and all of the lessons that are connected to this section so go ahead and do that and if you are ready let's head into our first lesson in this section right now hey guys welcome to section 6 in section 6 we're going to be .
Looking at merchandising operations these are operations that have to do with inventory so we're going to introduce you to what we would call inventory and this process of selling inventory and what the journal entries would look like when a company brings in inventory and then subsequently sells inventory from merchandising operations .
Now if you don't know what merchandising operations are that's okay in this lesson we're going to be taking a look at service industries versus merchandisers so if you're ready let's get started here with kind of giving you an understanding of these two types of businesses now we can really drill down the different types of companies into .
Three categories so if we were going to take a company we can drill it down to or put it into one of these categories and those categories include service companies these are companies that provide service as a form of how they make money we also have merchandisers merchandisers our companies that provide goods in the form of .
We would call inventory which they have not produced and that's a key word is merchandisers typically do not produce their own inventory and I say typically there are some industries in which the merchandiser does also produce their inventory but for this purpose let's assume that they are not producing their own inventory and then we also have .
Manufactures so manufacturers are those companies that provide goods or inventory that have been produced from raw materials into finished goods so let me give you an example of each one of these so service companies would be like Southwest Airlines what is their main purpose their main purpose is to provide you a service transportation service .
From one point to another if we look at a merchandiser like Target what does Target do target buys inventory or goods from manufacturers and then puts it in their store for you to buy and then we've got manufacturers so a manufacturer would be someone like coca-cola or Frito Lays what do they do they transform raw materials so for .
Coca-cola sugar water syrup into coca-cola coca-cola cans sprite they're actually taking the raw materials and transforming it into a finish good for Frito Lays they're taking flour maybe corn water and transforming that into chips that you buy at the store so those are the three different types of companies there are if we were to break .
It down now again this doesn't mean that companies don't overlap other ones so if we go back to our example of Southwest Airlines they are a service company but they also sell stuff in on their planes and at their at the airport and so they do dip a little bit into the merchandiser area because they're not a manufacturer but they do dip into the .
Merchandiser but that's definitely not what they do what do they do they provide a service that's their main source of revenues for that company so when we look at that that's what we're talking about in this course we're only talking about service companies or merchandisers so we're gonna leave manufacturers to what .
We would call cost accounting or principles of accounting – so we're gonna focus strictly here on service and merchandisers so some key difference from an accounting standpoint and we've been talking about companies as if they were service companies up until this point so if you really think about everything that we've talked about we've .
Really talked about those companies that provide a service so what's the difference between what we've been talking about and Merchandising companies and the accounting standpoint well the key difference between service and merchandising companies is what we would call inventory merchandisers have inventory service companies typically do .
Not have inventory and that's what makes it a little bit different now inventory is what we would call items that a company sells to its customers so if we think about what does a company sell to their customers that is inventory so for instance you might go to let's say a office supply store and you could buy this box of staples right so a company .
Like staples for instance will buy these staples from swing from echo brands that's what it says on the back your echo brands so they buy this from echo brands and the whole point of them buying this box of staples is to sell it to the end-user so this is called inventory okay so whatever they expect to sell to their customers would be .
Inventoried now for instance they might also buy for instance let's say this is a pencil I mean it's an Apple pencil or I think that's what it's called anyways it's an Apple pencil let's say they use this to take orders so this is not something they would sell to a customer this is for their internal use this might be called for instance supplies .
Okay so there is a difference between supplies and inventory inventories what a company would sell to their customers supplies is what a company would use in their normal operations okay so that's kind of a difference there so inventory is what we call items that a company sells to its customers now when we buy inventory for .
Our businesses inventory is considered an asset when we first acquired so when we buy this box of staples to sell to our customers this becomes inventory in the form of an asset this is an asset does it provide future benefits for the company it absolutely does how we can then sell this to a customer and make money which .
Will usually generate more money than what we paid for this inventory item okay so this becomes an asset when we first buy it and we bring it in to our company a company doesn't expense the cost of that inventory until it is sold and that is because of the matching principle we're going to match the expense to the revenue so if I were to .
Buy this from echo brands for $1 I will book this inventory item into my books as inventory for $1 and then when I sell it then I will expense that dollar so we don't expense it when we buy it we expense it when we sell it and that's one of those accrual accounting things that you're gonna have to think about is it becomes an asset first and then we .
Sell it when we sell it it becomes an expense so looking at some of the difference between service companies and merchandisers we've got some financial statements that we can look at the first one here is the balance sheet so this is an example on your screen of a balance sheet for a service company notice we have cash AR supplies prepaid insurance .
And equipment now let me go ahead and put on the right side what a balance sheet would look like for a merchandiser so for a merchandiser notice we have cash we have AR but we also have inventory in this case of $92,000 so in a merchandiser company or a merchandising company they would have inventory on their balance sheet notice .
That we also have supplies so we can have some flies on our merchandising company because they're gonna need supplies to operate their business pens pencils maybe boxes to ship product out to their customers so there are supplies that accompany a merchandising company may need as well and then prepaid insurance .
Now some people might ask why didn't I put an equipment here I could have put equipment here below but I wanted to keep it kind of the same for aesthetic reasons all right so that's the battle chief let's take a look at the income statement now notice here on the income statement we've got service revenues and then .
Operating expenses operating expenses would be all the other expenses that the company incurs to operate their business ok and then we get to net income of 45 thousand now here's the difference with our merchandising companies for our merchandising companies notice that we also put something called cost of goods sold so we've got revenues of one .
Hundred and twenty five thousand and cost of goods sold of fifty thousand dollars now I'm gonna explain this later on but to give you a little bit of preview of a cost of goods sold is cost of goods sold would be the company's cost of inventory that they've sold to a customer keyword it has been sold to a customer so we said that this cost us a .
Dollar from a Co brands and then when we sell it later on for let's say $2 once we sell it we will expense this cost of $1 on our books where does it go it goes into an account a new account for you called the cost of goods sold so we have a cost of goods sold of 50,000 dollars so if we were to say look at this we generated 125,000 dollars of sales from .
Inventory that only cost us the business $50,000 which means we had a gross profit of 75,000 and then from there we pay our operating expenses so that's kind of how we look at it from a merchandising company okay so let's review some of the differences service companies earn revenue for providing a service whereas merchandiser companies .
Earned revenue from providing sales the sale of goods in the form of inventory merchandisers have inventory which is a current asset because we don't expect it to be around for longer than one year or the operating cycle of a company and when they sell their inventory the cost gets transferred to cost of goods sold .
Again we'll show you that a little bit more later rot but usually we'll take the cost of the item we'll put it through the inventory first and then when it's sold we're basically transferring the cost from inventory to cost of goods sold so we'll go over that later on when we show you kind of a picture of how that works so that is .
Kind of a introduction or an understanding of service versus merchandisers in this section we are only going to be concerned with merchandising companies those companies that buy product in the form of inventory from their vendors they put it on their shelves or they put it in their warehouse and in turn they basically .
Flip that product or inventory to their customers at a higher price therefore giving them a profit at the end of the day so that's services versus merchandisers I hope you enjoyed this lesson and we'll see you in the next video hey guys it's Patrick before you skip ahead to the next section just wanted to come on here and tell you to .
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You in the next video