There are two systems to keep track of inventory:the perpetual system and the periodic system.
Cost of Goods Sold:Perpetual Inventory
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Alright so let's dive a little more into the concept of cost of goods sold and consider a perpetual inventory system versus a periodic inventory system. So let's start here with the perpetual inventory system. And this is a system that updates the inventory account after each sale. Okay so it's perpetually updating the account, right? And as of late it's become a lot more uh used to have perpetual systems because of barcodes, right? So when you go to a store and they scan something out that's gonna be updating the inventory account based on what they sell, you know, they're gonna be taking it out of inventory. So the perpetual inventory system, it's gonna make two entries when a sale is made. Okay And let's see what those entries are right here. So things on shelves company sells things on shelves, Mandy walks in and buys a thing for $15. The thing cost $5. So in a perpetual system we're gonna make two entries, one for the revenue and one for the cost of goods sold. Alright so our revenue entry Has to do with the sale to the customer, right? We sold something for $15. So we had revenue of $15. Okay and let's say that mandy walked in and paid in cash. Well we would have some sort of entry like debit in cash, $15, right? We received $15. So cash is going to go up And we are going to credit our revenue right? We earned revenue of 15. So revenues go up with a credit. So there we go, that's our entry debit cash 15. Credit revenue 15. So that's our revenue entry. Let's see the cost of goods sold entry. And you might have seen this before already when we started this discussion and it would look something like this, we would debit cost of goods sold Cogs is how we usually abbreviate it. And this is an expense account, right? This is what it cost us to buy this product that we sold to mandy. Right? So when we bought this product it costs us $5. But we sold it to mandy for 15. So the cost of goods sold is gonna be that $5. Right? So we're going to debit cost of goods sold, which is an expense account and it goes up with that $5. And we're going to credit inventory For those $5. Right? Because that previously that thing that we sold to mandy was sitting in inventory and now it's no longer there. Right. We sold it to her, she owns it now. So it's not in our inventory. We credit inventory to to decrease it uh by by those five. I dropped my pen. Alright, so let's go ahead and see how this affects our our accounting equation. We see that cash went up by 15. Right? Cash is up by 15, but inventory is down by five. Right? So our assets went up by a net amount of 10. Right? They went up 15 and then down five for the inventory. Nothing happened with our liabilities, right? We don't owe anybody anything here, but our equity does change. Let me get out of the way. We're gonna see that the revenue increases our equity by 15, 15, and then the Cogs, the expense account decreases our equity by the five. So there you go. You can see that our equation stays balanced, right. Our assets went up by a net amount of 10. And so did our equity go up by a net amount of 10. Cool. So the main thing here with the perpetual inventory system is that we have these two entries. We have the entry for revenue and the entry for cost of goods sold. Cool. Now let's compare that to the periodic inventory system in the next video.
Cost of Goods Sold:Periodic Inventory
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All right, so let's continue with the periodic system. So periodic inventory system is only going to update the inventory account at the end of the of the accounting period. Okay so compare that to the perpetual where it's constantly updating here, We're gonna only update it At the end of the period and at the end of the period we're going to calculate our balance and inventory as well as our cost of goods sold. We're not gonna be doing cost of goods sold as we go, okay, so we're only gonna do a revenue entry. The periodic inventory system makes one entry when when the sale is made and that's the revenue entry. Okay, so let's see the same example things on shelves company sells things on shelves, mandy walks in and buys a thing for 15. The thing cost things on shelves $5 in a periodic system. We're not worried about how much it cost us as we're making these entries. Of course we want to be sure that we're making money right and we wouldn't be doing this if we weren't making money. But the idea here is we're only gonna do the revenue entry and we deal with cost of goods sold at the end of the period. Okay. So our entry here is just gonna be the cash we receive from mandy for 15 and the revenue we get from selling it to mandy for 15. Right? We debit cash to increase our cash and we credit revenue to increase our revenue with a credit. Cool. So same thing here, we're gonna see that the cash goes up by 15, And the equity also goes up because of the revenue by 15, and our equation stays the same right? We still have a balanced equation. So let's think about how we're going to calculate cost a good sold in a periodic inventory system. Okay, so remember this equation, this is kind of our standard equation for how an account flows, we're gonna have a beginning balance, then we're gonna add things to the account, subtract things from the account, and then we're gonna get to the ending balance in that account. So let's see how that works for inventory. When we're talking about inventory, we're gonna have some beginning balance, then we're gonna purchase more inventory, right? We're gonna have purchases during the period. That's going to increase the inventory, right? We're gonna buy some more and then we're gonna sell some stuff, right? That's how it gets out of inventory when we're selling stuff, we're gonna decrease our inventory and that is the cause, right? So that's what's gonna decrease our inventory balance is the cost of goods sold, and then we're gonna be left with our ending inventory balance. Cool. So if we do a little bit of algebra, we can rearrange this formula to solve for cost of goods sold, right? So I'm gonna go ahead and add cost of goods sold to both sides, and I'll add cost of goods sold over here, right, standard algebra stuff, and then I want to subtract the ending balance and inventory from both sides. So minus the ending balance. And I'm gonna do minus ending balance on this side of the equation as well. Cool so this cogs and this college are gonna cancel this ending balance and this ending balance are gonna cancel so only cogs is left on the right hand side of the equation. So let's see what that equals. We have cogs equal to the beginning balance. I'm gonna put bebe for beginning balance of inventory plus the purchases purchases. Mhm. Minus the ending balance in inventory. This is gonna be our cogs. Okay so in a periodic system what we're gonna do is we're gonna find out what our ending inventory is by physically counting it. We're gonna know are beginning inventory and we're gonna know what we bought. So if we know those three things by knowing the beginning, knowing the purchases and then counting what's left at the end we'll we can back into what the cost of goods sold were during the period. Right so that's just a little bit of algebra there to rearrange for cogs. And we could think of this same equation, this base equation, the beginning plus additions minus subtraction equals ending well that's the same as a T. Account for me it's a lot easier to think of these things in the tea account format because it's very visual compared to when we think of it as just a formula like that and we're doing algebra to some people that's easier, they like the algebra and they can figure it out quick. So for me what I like to do is think of it as a T. Account. So if I have this T. Account over here for inventory right? It's gonna have some kind of beginning balance in that account right? There's gonna be some beginning balance at the beginning of the period. And that would be a debit balance. Right? Because inventory has a debit balance it's an asset. So it would be sitting on that left hand side, the debit side of the T. Account. All right. And then when we buy more inventory that's going to increase the inventory account as well. Right So we're gonna be debuting inventory for purchases. So our purchases are gonna increase our inventory right? Those are gonna be debits to our inventory. And then the credits to our inventory is the cause right? The cost of goods sold is gonna take stuff out of our inventory. And then after those three things we can sum and end up with our ending balance. Right? So that would get us to our ending balance the beginning plus the purchases minus the cogs gets us the ending balance. And that's exactly what we went through right here. Right inventory plus purchases minus cogs equals ending balance while now we have it in a visual format in the T. Account. Right? So for me it's easier this way because I can go ahead in a problem if they tell you the amount of purchases you go ahead and fill it in in your T. Account, you know, you're beginning balance so you start filling in what you know into the T. Account and then you can solve for what's left over. Right? So that that's the that's about it for this periodic inventory. Alright, let's go ahead and move on to the next video.