Here, we discuss a few interesting topics related to Inventory.
Physical Inventory Count
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Alright now let's discuss a couple more issues with inventory at the end of an accounting period. Let's check it out. Alright. So whether you're using a perpetual system or a periodic system, all companies are gonna have to determine inventory at the end of the period, right? They're gonna have to know how much inventory is on hand to put it on their balance sheet and report it. So what do they do? Well we're gonna have a physical count, They're literally gonna go into the warehouse and physically count the inventory and see what's there. Right? And this is the inventory account that happens at the end of the period. So they're gonna count the goods, measure goods if they have to weigh goods to see how much weight they have left of that good, whatever it might be. So in a perpetual system we're gonna see that the count should confirm our inventory balance in the accounting records, right? Because we in a perpetual system we're constantly updating inventory, we're perpetually updating it. So when we count the inventory in the warehouse it should match up with the records, right? And we could do any discrepancies, right? Maybe we count and there's something missing. Well that could be some waste that could be shoplifting. Or maybe even employees stealing from you. Right? And there's gonna be ways to deal with all of that but we don't really talk about it in this course and then a periodic inventory, the physical count is necessary in a periodic inventory system. Remember that a periodic system? They only update the inventory account at the end of the period, right? They keep track of how much they purchased. They keep track of all sorts of things like that. But then at the end of the period is they physically count the inventory and back into the cost of goods sold. Okay, So in a periodic system, this physical count is necessary. Every time you see a problem about a periodic inventory, they have to tell you the ending inventory because of this physical count. Okay, So that's the physical count right there. Why don't we pause right here and then we'll talk about the next issue related to the end of end of period inventory. Alright, let's check that out in the next video.
Ownership of Goods
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Alright. Another issue that we come across when we're dealing with inventory at the end of the period is whether or not we own inventory that's in the warehouse or inventory that's on the way to the warehouse that's being delivered maybe we own some of that stuff. All right so let's see what could happen. We might have talked about this before already. The F. O. B. Shipping point F. O. B. Stands for free on board. And this is talking about shipping terms where you make a contract with the other person who's gonna own the shipment while it's being delivered. Okay So when we have F. O. B. Shipping point this means that the ownership of the goods it's going to change hands at the shipping point. Okay So look what we've got here we've got the supplier and then the supplier is gonna give the delivery to the give the product to the delivery in the shipping company and then they're gonna bring it to our warehouse. Right So F. O. B. Shipping point means that the the ownership is gonna change hands right here right? It's gonna change hands here because that's the shipping point right here is the shipping point. Right fo be shipping point. So what does that mean that if we have a purchase in transit? Okay well it belongs to the company that means that if we purchased something and on the day the last day of the year it's still on the way to the warehouse. Well in this situation we own these goods and they should be included in our inventory. Okay so if there were any um purchases we made that were fo be shipping point and they're still in transit, well they belong to us and we include those in inventory. Okay So let's look at the opposite an F. O. B. Destination right down here. Okay so still free on board F. O. B. This is where the ownership of the goods. Well this time it changes hands at the destination. Right? So now it's gonna change who owns it after it's been delivered. That's when it gets changed hands. So let's see in this situation we're gonna have a situation where we were going from our warehouse and then we put it on the shipping truck and then it gets to a customer. Okay So notice in the first situation that was when we were purchasing something, this is a situation where we're selling. So notice how how this sale is gonna be still belong to us right? Because in the F. O. B. Destination, well this is the destination right? The destination is the customer in this case. Right? So we own it during shipment right when we sell something F. O. B. Destination, we own it during shipment. So any F. O. B. Destination sales in transit belong to the company. Right? So on the last day of the year if we had sold something but it hasn't gotten to the customer yet and the terms were F. O. B. Destination. Well we have to include that in our inventory still, we haven't transferred it to the customer and we can't even take the revenue yet because it still belongs to us. Okay. So that's the deal with F. O. B. Shipping point in F. O. B. Destination. Obviously in this first situation, if we were purchasing something right? Where we have the supplier, shipping company and our warehouse up here and if we're purchasing, purchasing it, F. O. B. Destination? Well in that case, right. What would happen here if this was F. O. B. Destination? It would still belong to the supplier and we wouldn't include it in our inventory. So the main trick is to think about, do you own it during transit? Right. Whether it's a purchase or a sale, just try and focus on is it ours based on this kind of flow with the delivery? Alright, so there we go, let's move on to one more topic related to ownership of goods. Alright, let's do that now.
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Alright, so the last topic here is consigned goods. This could be goods that are in our warehouse or in our store, but they don't belong to us. Okay, so consigned goods. This is when you're selling goods for someone else, but they own them. So this happens a lot in like boutique shops or something like that. You'll generally see like the dresses in the shop. This is like the most common example. Usually see the dresses in the shop. The owner of the shop doesn't buy those dresses from the supplier, they just put them in their store and once they sell, well that's when they give money to the person who made the dress and they keep their cut, their commission of the sale. But if the dress doesn't sell, it still belongs to the supplier to the person who made the dress. Okay, so that's a consigned good. You do not own consigned goods. So they are not part of your inventory. Okay. So you never put them into your inventory. The only time that what matters is when you actually make the sale and you get some revenue. Okay, So that's usually what happens, you're gonna get some sort of commission when you sell the goods and that's gonna be revenue, but there's never an inventory transaction here. Okay, so let's see what a journal entry might look like here. Jan's boutique sells. Sophie's dresses on consignment. Sophie pays Jan $100 for each dress sold. So that's the commission there, right? $100 for each dress sold at the beginning of the month. Jan store displayed five of Sophie's dresses with a cost of $250 each. Jans sold two dresses. So she sold two dresses during the month for $1000 each. Right? Record Jan's journal entries related to the consigned goods. So remember these are consigned goods, so they're not going to be in her inventory. She would never have made an entry say to include in her inventory these five days is she would have never debited inventory for this. Okay. What entry she does make is when she finally makes a sale, when she sells the goods, she's gonna make an entry for the revenue and the cash received. Okay, So let's see what happened here. She sold two dresses during the month for $1000 each. Right? So two dresses times $1000. Well, that's $2,000, right? That's the amount of cash that she received from the customers, right? She received 2000 in cash, but she doesn't own all that cash, right? That's not all her cash. The most of that cash belongs to the to the um to Sophie in this case. Right? Because those are her dresses. So what does belong to Jan is her commission? Right? She earned a commission in this case. And what was her commission? She gets $100 for each dress sold. So she sold two dresses and she gets $100 commission on each dress. So $200 of it was her revenue, right? That was what what she earned from selling these dresses. But she received $2000. Right? So the trick is that although she received $2000 a lot of that money she has to pay to Sophie. Okay so a lot of that money is gonna go to Sophie. So this is how the journal entry would look. Yes she received cash, right? She did receive cash of $2,000 when she sold these dresses. So we're gonna debit cash for 2000 because she's holding $2,000 worth of cash. But what we have to do is we're going to credit our revenue right? Because we did earn some revenue so we're gonna earn revenue of $200 from those sales. But now we have to take a liability right? Because we owe the rest of that money we collected, we owe that to Sophie. So we could have some sort of payable to Sophie right? It could be like an account payable or something like that. We'll say payable to Sophie just so we're so we're super clear here in our example And that would be a liability right? Because we're eventually we collected this money but we have to give it to Sophie the only part that's ours is the $200. So in this case what is Jan's inventory balance in this question down below in the little boxes. Well Her inventory is zero, right? This is not her inventory. Sophie would have this inventory on her books. Jan would not have any of this inventory on her books. Her revenue is the $200 from the commission. Right? And she's gonna have liabilities of 1800 and that's the money that she has to give to. Sophie. Cool. Alright, so that's about it for consigned goods. It's not so tricky, you just have to remember that you don't own the goods. All you get is your commission. Alright, let's go ahead and move on to the next video.