Merchandising Company vs. Manufacturing Company
A merchandising company resells goods that it purchases from its suppliers. A manufacturing company produces goods from raw materials, which is later sold as a finished product.
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Alright let's quickly discuss the difference between a merchandizing company and a manufacturing company. Alright let's start here with merchandisers, we've talked about this a little bit before merchandizing company, they're gonna have one main inventory account, right? And merchandizing companies like we said they resell goods, right? They buy stuff that's already finished and they resell it to someone else, usually the final customer. Right? So it would be like a situation of a company that buys t shirts and then resells them as T shirts already? Right? So we usually call this inventory account, we call it inventory. Excuse me, inventory. Sometimes you'll see it called merchandise inventory great. But it means the same thing. So in a merchandizing company we would see something like this X. Y. Z. Company purchases goods from its supplier for $10,000 on account. Well of course we might have talked about the periodic system, the perpetual system. Let's just say it's a perpetual system and we're just putting everything in inventory. Um so in this case we would purchase goods, right? So we're buying inventory from the supplier on account. So our entry pretty simple, like we've done before, we would debit our inventory to increase inventory and that would be $10,000 and then we would increase our accounts payable, right? We didn't pay them in cash, We gave him an Iou and that would be a credit, right liabilities go up with a credit. So this entry would be complete. This is something you've probably seen before in this class already. So we're seeing that inventory has gone up by 10,000. Our accounts payable ap went up by 10,000. Right, so our equation stays balanced here. Alright, so merchandizing company. Remember these are just resellers? This is stuff we've dealt with before. Now. Let's compare it to a manufacturing company in the coming up video, let's do it now.
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All right, so let's continue here with the manufacturing company. I just want to know that in your first accounting class, you don't really go into a lot of depth with manufacturing companies. I just want to expose you to the difference here. Okay, So manufacturing company is gonna have three inventory accounts. Okay. And manufacturing, excuse me, manufacturers? Well, they're the ones that are actually producing goods right there, taking raw materials and turning them into a finished product. Okay, So we're gonna have three inventories when we deal with a manufacturing company, the first one being those raw materials and these are the inputs into the production. Okay? So if you think this is a company that bakes cookies, well, the inputs, you know, they would buy sugar, they would buy flour whatever you need to make the cookies, and then this is what the company is actually purchasing, Right? So the company actually purchases the raw materials and then they're gonna take those raw materials and turn them into a finished product. So the raw materials inventory, we usually just abbreviated R. M. For raw materials and then we've got work in process inventory, which that is gonna be whip is what we usually call that the working process. So you have to think there's gonna be a cut off point when we say, how much inventory do we have at this date? Well, on that date, there's gonna be some cookies that maybe we're still in production or whatever kind of company that there might be some that's still in production? Well that would be working process inventory. Okay, And then all the goods, once you put it all through production, they're gonna be finished goods, right? This is what we actually sell to the customer. So that's gonna be F. G. For our finished goods inventory. And remember in this class, we don't go into so much detail, probably just knowing that these this is the names of the accounts and how it flows will be enough. Okay? So what we see is in a manufacturing company, we're going to see that they have their um their raw materials inventory, R. M. Inventory, their work in process inventory. So remember these are all separate balance sheet accounts for inventory, Their finished goods inventory, right? So they have those three and then we'll get to the last one. So the company's gonna purchase stuff here, right? They're gonna buy raw raw materials inventory and then as they use it up, right? And remember this is a debit here for raw materials they're gonna use, they're gonna start using it, right? They bought flour and sugar and they're gonna put it into production. So at that point they would take it out of raw materials right here and they would put it into work in process, right? We don't have to worry about the details too much. Um So it would be in the working process inventory, we would work on it and eventually it would make its way out. And just so you know, we add some stuff in working process, right? This is maybe the labor of the person making the cookies or whatever. So all this stuff in working process, we're gonna finish it and then we're gonna take it out of work in process, right? We're going to credit it out of working process when it's finished and it's gonna make its way down to the finished goods inventory, right? And we'll have that value there. And what's gonna happen in the finished goods inventory? At this point we're eventually gonna sell this product to the customer's, right? The customers are gonna come in and buy the product and it's gonna go to cost of goods sold right? The cost of goods sold. So from the finished inventory when we sell it, it ends up on the income statement as an expense. Okay, so don't worry too much about the details here. Just notice that flow, right? We buy raw materials, we turn it into a finished good and then we sell it and it goes to cost a good soul. Cool. Alright, let's go ahead and move on to the next video