Salam alaikum wa rahmatullahu and good morning this series of lectures will be talking about the topic of accounting for merchandising operations previously in our last lecture we looked at the complete accounting cycle for a service based operation so today we will extend our knowledge and look into how would witches merchandising operations have their accounts a little bit different from the service operation okay just as a recall a service operation is a business that conducts service in order to get cash or to get revenue to be obtained revenue from providing services such as an accounting firm such as a law firm such as car repair workshop okay but today we will be looking at the merchandising operations which which do purchase and sell items in order to obtain profit okay so for example Tesco okay supermarkets okay or you go to a shoe shop okay to you buy shoes at the shoe shop so the shoe shop is a merchandising merchandising operation so there are some differences quite significant differences in the way that they handle their accounts okay so today we were looking at the merchandising operations okay so so primarily the merchandising operations would conduct their operation in terms of buying and selling goods they would buy they will buy finished items from probably from factories or from wholesalers and then they will sell the goods to to retailers or to end consumers okay so their primary source of revenue is referred to as say revenue or just simply put as sales whereas in the surface operation we will we will state their revenue as service revenue okay so this revenue for for merchandising we call it as sales revenue or just sales so it shows here some examples like amazon.com is a opera merchandising company Walmart okay these are examples okay there are some differences in in terms of how income is measured okay because of the slight differences in the the operations that the two organizations go through okay so merchandising operations will firstly contact their sales so from their sales they will receive sales revenue okay and but before they conduct a series they needed to purchase the items for sale okay so in terms of matching of the sales revenue with the expense for that sale the expense for the sale is called cost of goods sold okay so when these sales revenue we - that with the cost of the sole or general speaking is the expense related to the sale it will equal to the gross profit that's the gross profit okay what do you mean by gross profit gross gross profit is the profit obtained from selling items okay the cost bit the difference between the cost of the item and the sale price of the item generally would be the with equal to the gross gross profit but then after after obtaining cross profit organizations will also incur other expenses or which not directly related to the sale okay not directly related to the items being sold so that is called operating expense and after deducting operating spends from the gross profit the company will achieve net income or yeah or not profit net profit or net income or loss okay so this is slightly different from the service operations because the service operations when they conduct their service when they achieve their revenue sales service revenue that service revenue will be deducted by the expenses and then they would obtain their net income so there's an additional two additional steps right there's two additional steps for merchandising operations okay here's a little bit ill astray Chinon the difference of the operations between the two organizations here the top diagram is for a service company okay so the firstly the service company would perform their service like in this picture these this mechanic is repairing the the car and after repairing the car they would charge to the accounts receivable okay after performing the service they would they would council is typically created because the the client has not paid for the for the for the service and then the the client sends money okay and the company receives cash and that will will involve the the debiting or the addition to the cash account and then they would continue doing next service for merchandising company there's some additional step which in the end will generally make the merchandising company to have a long operating cycle in rather than the service company okay so what a merchandising company needs to do firstly obviously with the cash they need to buy inventory okay the purchase inventory when they after they bought in venturi they will receive an update their ability accounts and from the elementary they will sell the sell their inventory and after selling them entry if by credit then they will create the accounts receivable because they have sold the inventory on credit and then after after charging the customer the customer will pay and the company will receive cash and here they will update the cash account so there's some additional steps it takes a longer period for the merchandising to the merchandising company from cash to receive to get the next cycle of cash ok as compared to the service company and let's see about the cost ok the flow of costs right so the operating of merchandising operations will have a beginning inventory okay so but usually the beginning inventory that they have is insufficient for them to make so big sales so they need to purchase additional inventory so they have a beginning energy and then they purchase some goods so the pictures of goods have some the cost to it so when the purchased goods are added to the beginning inventory the original inventory that we have this is called cost of goods available for sale now they have the original inventory they have a new set of inventory that they have purchased so this is called cost of goods available for sale because they had now they have these items available for sale okay so there's the cost for that one after the after they sold well when they sell those items that are available for sale not all of those items are we sold so those items that were sold that was successfully sold those will be called the cost for those items will be called cost of goods sold okay because they are looking at the cost of those items that have been successfully sold but then some of those items available for sale were not successfully sold so those who will become the ending inventory okay so they have originally they have some inventory they will buy new new items that will those two will will come into a pool of items available for sale but then after the sales transactions then the most of those available for sale will become a course of good souls item to be sold but then they were some of them will be remaining as an ending inventory okay here also we need to know that there are two types of maintaining or looking at the cost of items but i oh yeah cost of items cause of the soul there are two types here and the first time is the perpetual inventory system and the second type is the periodic inventory system we will look at both of them in more detail in in later slides okay right so the first one is the perpetual system okay we look at the different symptoms of the wording okay before we even go before we even look at it in more detail the difference is in the first word this one the first one is called perpetual and the second one is called periodic okay so perpetual relates to being continuous okay period that means broken into time periods okay perpetual means is continuous periodic means it's broken into specific times now we look into the perpetual inventory system okay so in the perpetual system the pair because I maintained for the cost of each inventory when they are purchased and when they are sold okay so when inventory is purchased we will we will update our inventory records when we so all those inventory we will update our records okay so it's a is ongoing and continue our inventory account is continuously being updated due to purchase transactions as well as sale transactions okay because our because our records is maintained all the time all the time therefore we at any particular time we should be able to show the amount of inventory that we have on hand okay because we always update our inventory account we should be able to know at any particular time how much is the end inventory that we have in our in our warehouse for example okay so in the particular computer system company also this determines the cost of goods sold each time the sale occurs okay so when we go back to the matching principle okay and the revenue recognition principle and the expense principle okay we recognize revenue when we incurred when we perform our service or in this case when we sell our items we should recognize this as a revenue but at the same time whenever we make a sale there's some cost associated with the sale which is the cost of the item so at that particular time at the moment we immediately recognize that there's a cost that we need to expand okay so in the perpetual system whenever there's a sale we should also recognize a cost with and that cost is called cost of goods sold and this should be recorded every time we do we make a sale okay we will show how we do this okay but for the a periodic system we do not keep details to the costs of the goods on hand okay our inventory accounts it's not updated all the time according to the purchase or say transactions okay instead the the inventory account as well as the cost of goods sold is the determined by counting the amount of inventory the remaining inventory at the end of the accounting period meaning that in order for us to determine the amount of the cost of goods sold we need to go into our warehouse we count the individual items physically and we calculate how much is the value of all the total in inventory and we know now that will become the ending inventory and from that ending inventory only then we will be able to calculate the cost of goods sold so this is how we calculate the cost of goods sold so we have a beginning inventory at the starting of the period and then we have net purchases okay the amount or the cost this is the cost of purchase okay cost of goods purchased and so adding the inventory and the purchases we will have goods available for sale but then to know how much is the good cost of goods sold we need to look at the ending inventory so this is this is the cost of available inventory and then at the end we look at the ending inventory the all the ending that is left so the difference is the acted the difference is the inventory that has actually been sold okay the difference between available inventory and the ending inventory is the event inventory actually being sold so that will be recognized as the cost of goods sold which in the end we will deduct from our sales revenue in order to calculate cost I mean to calculate gross profit okay all right there are some advantages of the perpetual system okay usually the perpetual system is used for merchandise with high unit values because in perpetual system additional in the world needs to be done because we have to keep track of our invent we need to update our inventory the courts as well as our cost of goods sold every time well for the inventory we need to we need to update our inventory account every time there's a purchase or sale transaction and the cost of goods sold needs to be updated every time we have our sale transaction therefore traditionally organizations that sell low values of their items don't take up the political system because it has cost yourself which is a extra work okay so traditionally the papito system is used for higher unit values the poacher system shows the quantity and cost of the inventory that should be on hand at any time so at any particular time we will be able to know what is the inventory that we have on hand because we always update our inventory as well as our cost of goods sold account and it provides better control of the inventories than a period system because now we have we have we have an evaluation system we have one we can check their record we have an updated record but secondly we can also check that against the actual quantity on hand so there's a there's a checking mechanism whereas in the periodic system there's no checking mechanism because we only had there's only one way for us to rely on getting the inventory amount which is by looking at the accounting the ending inventory in our warehouse at the end of the period