Download Revenue - the price received, or to be received from a service

If you pulled weeds for a living, your company would produce income from the
money you charge people for pulling weeds from their yards. Lets say you pull
weeds this month and charge $10,000. Great, now do you have any expenses? Lets
say you hire someone to help you and you pay them $1,000 this month. How did
you do? The income statement would report a net income of $9,000.
Fees Earned
$10,000
- Op Expenses - Wages $1,000
NET INCOME
$9,000
But what if instead of pulling weeds (providing a service) you decided to make your
living by selling baseballs. Lets say you sell a number of baseballs this month and
you charge $10,000 and you pay an assistant $1,000 to help you. At first glance,
would it be appropriate to report net income of $9,000 this month? Can you really
be $9,000 better off? Well, yes you can if you found the baseballs or stole the
baseballs (the baseballs have no cost to you) - but if you had to buy the baseballs
(which a merchandising company would have to do) you obviously have another
cost of doing business that did not exist for a service type business and that cost is
Cost of Good Sold. If the baseballs cost you $2,000 to buy, then the income
statement would report the following:
Sales
- Cost of Goods Sold
Gross Profit on Sales
- Operating Expenses
Wages Expense
NET INCOME
$10,000
$2,000
$8,000
$1,000
$7,000
A difference that you will find between a service business (earn income by providing
a service) and a merchandising business (earn income by buying and selling a
product) is that a merchandising business will have an additional expense on the
income statement (Cost of Goods Sold -COGS) and assuming at the end of the year
they still have some merchandise on their shelves, the balance sheet will report an
additional current asset (Merchandise Inventory - MI).
So, we are faced with the accounting required to keep track of COGS and MI. We
have two separate methods/routes/systems (whatever you want to call it) that we use
to accomplish this task. A deciding factor as to which method we choose depends on
how critical it is to have up-to-the-day information concerning COGS and MI; and,
as usual, the method that keeps the current or real-time information costs more to do.
So, that is the quandary, real-time info for more costs or info calculated when needed
at a reduced cost. These two methods are (1) perpetual inventory system or (2)
periodic inventory system. Under perpetual, we keep the value of COGS and MI
perpetually, or always up to date as a result of each merchandise transaction. Under
periodic, we know the value of our COGS and MI periodically (at the end of the
accounting period), and these values require calculations to determine their amounts.
Perpetual Inventory
The golden rule using perpetual inventory system is that the account "Merchandise
Inventory must always reflect the proper balance for the dollar value of
merchandise." This requires the following entries to be made for transactions which
affect inventory.
When inventory is purchased.
Debit Merchandise Inventory
Credit Cash or A/P
$Cost
$Cost
When inventory is sold.
To record the revenue
Debit Cash
Credit Revenue from Sales`
$Selling Price
$Selling Price
To follow the golden rule and record the change in MI and COGS
Debit COGS
$Cost
Credit MI
$Cost
SO, THE ACCOUNT MI ALWAYS REFLECTS THE PROPER CURRENT
BALANCE FOR THE ASSET MI.
Periodic Inventory
The periodic inventory system does not desire to keep up-to-the-minute balances for
COGS and MI. The entries to record MI transactions are as follows:
When inventory is purchased
Debit Purchases (of Merchandise)
Credit Cash or A/P
$Cost
$Cost
When inventory is sold
Debit Cash or A/R
Credit Sales (of Merchandise)
$Selling Price
$Selling Price
THERE IS NO ADDITIONAL ENTRY TO RECORD THE CHANGE IN MI AND
COGS.
Instead, at the end of the accounting period when we are preparing financial
statements, we obviously need to include the COGS expense on the income
statement and MI on the balance sheet. How do we do it.
The first thing we must do is to determine the value of our ending MI by taking
physical inventory (this step is also required for perpetual to double check the
amounts reported in the accounts). We must actually go out and count the number of
units we have of each item in the inventory. We then multiply the number of units
by the unit costs to determine the ending inventory.
Once we have the ending inventory, we are ready to make the remaining calculation
for COGS which is done as follows:
Beginning Inventory
+Purchases
Goods Avail for Sale
- Ending Inventory
COGS
$Cost of merch on hand as of the beg of the acct period
$Cost of add'l merch acquired during the acct period
Total cost of merch we could have sold during the acct period
Total cost of merch we did not sell during the acct period
Total cost of merch we did sell during the acct period
Don't try to memorize this, this is easy. If you go home today and want to drink
some beverages and you look in the box and you only have 2. This isn't enough so
you run to the store and buy a six pack. The next morning you wake up and there are
3 beverages in the box - how many did you drink?
BI
2
+Purchases
Bev avail to drink
- Bev not drank
So - BEV YOU DID DRINK
6
8
3
5