4. Merchandising Operations
Service Company vs. Merchandising Company
Service companies provide intangible services for their customers. Merchandising companies are middlemen that sell goods to customers, which they purchase from their suppliers.
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Alright. So let's discuss the difference between a service company and a merchandizing company. So a service company well, they provide services to their customers, right? They're gonna provide services. And when we talk about a service company, there's no physical good. So there's no actual tangible thing that's being handed to the customer. They're providing a service to the customer. So examples of service type companies is a tutoring company. Like when we did our clutch tutoring example, they were providing a service housecleaning shipping lawyers. Right. In all of these situations, there's no physical tangible good that's being transferred to the customer. You're doing, you're performing some sort of service for the customer And that is how we're going to discuss our revenue here. So when we talk about revenue for a service company, we have to remember first and foremost our revenue recognition principle and this revenue recognition principle is true for all companies. So let's see how it relates to a service company. Remember that revenue is recognized when the company fulfills its end of the bargain, right? That's when we're gonna make the journal entry to say, hey, we made revenue. When we do our end of the bargain has nothing to do with the cash being received. So a service company, it's gonna earn its revenue when it performs the service right? When it does whatever it's gonna do for the customer, that's when it earns a revenue. When the tutoring session is complete that the revenue is earned. When you clean the house, the revenue is earned when you finish shipping the supplies, right? When you handle the case for the for the client. If you're a lawyer in all these cases, you earn the revenue once you perform the service has nothing to do with the cash. So let's look at the this example squeaky cleaners cleaned squirts shirts at a price of $20. Right? So squeaky cleaners is going to make a journal entry when they clean the shirts right? They finished cleaning the shirts. Regardless of whether or not they've been paid by squirt, they're gonna make this journal entry. Right? So let's assume that squirt did pay them. Well let's let's assume that they did it on account. Right, squirt hasn't even paid them yet because the money doesn't matter. But they clean the shirt so they earned the revenue. So the journal entry. Well since it's on account they didn't receive cash they received an iou and accounts receivable. So our debit in this entry is going to be for accounts receivable And it's gonna be in that amount of $20. So that's our debit, right? We're increasing accounts receivable by $20 and we're going to credit our revenue in this case let's say service revenue because it's a service we provided, we'll call it service revenue, it could be sales revenue or just revenue. It doesn't really matter. I'm just trying to be a little more transparent here. Okay so we credit the revenue $20. That increases our revenue by 20 revenues go up with the credit. So how does this affect our balance sheet? Well, our accounts receivable, right. The accounts receivable is an asset. So we're going to see that the this goes up by 20, right? This doesn't affect our liabilities. There's nobody we owe anything to. And this revenue is increasing our equity in the company, the revenue over here. So we see we're still balanced, right? The assets went up, get out of the way, the assets went up by 20, the equity went up by 20, so the equation stays balanced. Right? Pretty simple. It's a simple example. So what I wanna do now is I want to take this over to a merchandizing company and let's see what the difference is there. Alright, let's do that in the next video.
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Alright, so let's continue here with the merchandizing company. So different from a service company, A merchandizing company provides a physical good to the customer. So now there is actually something tangible. Physical good something tangible that's being handed to the customer. So when we talk about a merchandizing company, I want to be specific that we're talking about companies that resell, so their resellers, they're not gonna have a factory where they're producing a product and then selling it to the customer, know they're just going to a supplier, who maybe this is a T shirt company, they go to the supplier, they buy the T shirts from the supplier and then they sell them to the customer at a higher price, right? So that's the merchandizing company model there. And I mean there's tons of merchandizing companies, right? Anything that's pretty much any clothing store, grocery store walmart these types of stores, they're all merchandizing companies, so they're all selling goods to the customer. So let's see what happens when we take a revenue entry in a merchandizing company. So a merchandizing company earns its revenue basically when it delivers the good, whoops, delivers the good to the customer, right? So basically whenever we hand the good over to the customer, whenever we do our end of the bargain, right, we earn the revenue when we do our end and our end of the bargain in this case is handing the good to the customer. Alright, so in most cases they're gonna just be standing in front of us and we're literally just handing them the good and we earned the revenue, Okay, so let's look at this example things on shelves T. O. S. The things on shelves. Company sells things. Mandy walks in and buys a thing for $15. The thing cost T. O. S. $5. Okay so now when we deal with the merchandizing company we're generally gonna have to make two entries when we take revenue. Okay there's gonna be the one entry for the revenue where we earn the revenue for selling something but then there's gonna be a second entry for the cost of earning that revenue. Okay so let's see these two in action. So the first one here the journal entry for revenue. Mandy walks in and buys a thing for $15. This is us providing our our goods to the customer, right? This is the reason we're in business is to sell things to the customer. So this is our revenue right here Mandy walks in and buys a thing for $15. So let's say she paid us in cash. Well we would debit cash to increase the cash by $15 and we would credit um our revenue. So in this case we'll just say sales revenue, right? She walked in, she went to the shelf found a thing she wanted and bought it. Right So there we go the cash is debited 15. The sales revenue is credited 15. Cool so that's pretty standard. But let's look at the other side of this also because there's the cost to the company, right? When we sold this we want to match the expense, right? This this thing that we sold to mandy, it costs the company something, right? So we want to match the expense of what it costs the company to the revenue, right? That matching principle. So let's see. It says that the thing cost T. O. S. $5. Okay. So if you think about it when when T. O. S. Bought all these things, right? When they were going to buy all the things that they were gonna sell, they put it all into inventory, right? Let's say you're going to purchase this big box of things like with 500 things in it to sell. Well they would have paid their supplier, right? And they would have debited inventory, right? They would have put the value of all of those things in inventory. So when we sell the things we have to get it out of inventory, right? So it was sitting in inventory and now we've sold it. So we have to credit our inventory to get rid of it. Okay so if we're crediting inventory and let me write that in, this is gonna be a credit to inventory here at the price of $5. Okay that was the $5 credit to decrease inventory because that thing that we sold to mandy is no longer sitting there in our warehouse, we've sold it to her. So we have to decrease our inventory. But we're going to debit this account called cost whoops cost of goods sold. Okay. And it's abbreviated just like we have above C. O. G. S. Cost of goods sold, we call it cogs. Okay? And we're going to debit this and this is an expense cogs is a special expense account that we use and it's like our main expense account in in a merchandizing company because this is the actual cost of what we're selling right? The actual product that we're selling to customers. What did it cost our company? Okay so this is where those costs are gonna be put in an expense account that shows the amount the company paid. Okay so remember there's two values here. There's the value that the company paid for the goods and then there's the value that the customer paid for the goods right? Whatever the customer paid. Well that's the revenue, whatever we paid to our suppliers. That's gonna be the cost of goods sold. Okay so notice this entry right here, these two entries that I've made. The entry for revenue and the entry for cost of goods sold. Well this is very standard you should expect whenever you're in a merchandizing company to be making two entries like this any time we have a revenue transaction. Okay and we're gonna learn about different ways that we deal with the inventory um About when we're gonna make these these entries. But in general this is the rule. Okay, so you're gonna sell something, you're gonna have one entry for the revenue and one entry for the cost of goods sold. Cool. Alright. So what would happen in this situation? We see that our cash has gone up by 15, right? And our inventory Went down by five, right? So there was a net increase in our assets of about of $10 there, right? Not about 10, exactly 10. And then we had revenue, we had this increase in our equity from the revenue of $15 And a decrease in our equity from this expense of $5. Right? The Cogs is an expense and it decreases our equity. So you can see that our our equation stays balanced here, right? Our assets went up by 10, our equity went up by 10. So our balance, our equation stays balanced. Alright, so that's about it for the merchandizing company. So so take a look at the service company above and the merchandizing company that we just went over and noticed the difference in the journal entries. Right? We made this extra journal entry for the cost of goods sold in the merchandizing company. Alright, cool. So let's pause here and let's move on to the next video