ACC201 Financial Accounting Recognize Revenue Southern New Hampshire University

Southern New Hampshire University

ACC201 Financial Accounting Recognize Revenue Southern New Hampshire University

So, there are two main types of companies– those that are merchandisers who sell a good or product,so it will be a tangible item. And these are going to be called inventory items or inventory units. So, they either purchase this inventory or they create it, and they then sell it to customers. So, merchandisers use an inventory account, which is an asset account on the balancesheet, and a cost of goods sold expense account on the income statement. A service business sells a type of service. So, it’s not necessarily a tangible product. And so, they then recognize service revenue. And they typically do not have inventory accounts, or a cost of goods sold expense account on their financial statements. So as we can see, comparing the income statement between these two types of companies, the service business on the lef, you can see does not have any gross profit cost of goods sold items,because they are not selling a partcular product. Now on the right-hand side,we can see a merchandising business who has their sales revenue and then they subtract their cost of goods sold, which is the cost to them of creatng or purchasing the product for resale. And that comes down to their gross profit or the amount that they make on the profit itself before they take out any operatng expenses. As we can see here on the balance sheet, service business on the lef-hand side has cash, accounts receivable, office supplies, prepaid rent. Now the merchandisingbusiness on the right-hand side has that extra account ttled, inventory. And so, this represents the amount of product that they have on hand at any given point in tme. Now when accountng for inventory, there are two systems that companies can use. They can use a periodic system of accountng for their inventory or a perpetual system. Periodic systems are not as common today, because most companies are using a computerized system. But a periodic system is important to know. And within these systems, they do periodic physical counts of their inventory in order to update their inventory records. So, as I said, this is typically for small businesses who don’t have a computerized system, they can’t afford one, or they don’t have a whole lot of inventory. So, you won’t see these very ofen. But the periodic system does involve some additonalaccounts that you need to be aware of, such as purchase discounts, freight in, and purchase returns and allowances that they’ll use in order to update their inventory at the end of a partcular period. A perpetual system is a computerized inventory system. So, every tme a sale is recorded, or a purchase is made, inventory is affected. While a perpetual system updates everything constantly, they stll need to have a physical count at least once a year. In this way, they can make sure if there’s been any thef, oritems that have just disappeared, or miscounted, or the computer made a mistake, they can go ahead and update their inventory to reflect what is actually on hand. So with this perpetual system, it takes outthe need for some of those additonal accounts that you have in the periodic system– the purchase discounts, your freight in, and your returns and allowances– because the computerized system is going to account for these directly in inventory when these issues occur. So, here’s a few confusing terms related to inventory and transportaton costs of either bringing goods in or shipping them out. So, FOB shipping point– this essentally means that you own goods when they leave the seller. So, once they’re on the boat, on the train, on the plane, however they’re being shipped,you own goods once they have been shipped. So, you own them. So, you assume that liability of their transportaton and you pay for the shipment of those goods. Now on the other hand, FOB destnaton means you don’t own the goods untl they are delivered. They’ve been placed at the dock, they’ve been delivered to your warehouse, wherever the goods are coming to, you don’town them untl they’ve reached their destnaton. So, in this case, you don’t pay for shipping or assume that liability of transportaton. Now freight in is going to be the cost to ship goods into thepurchaser’s warehouse. So,this would be the freight cost of bringing in any purchased items. Freight out is going to be, of course,the exact opposite– shipping the goods out of the seller’s warehouseand to the customer or the end user of these products. So, this would be a component of the cost of goods sold, because you must pay for that to get that out to the customer.

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