 Merchandising companies buy and sell inventory. Let's learn how to do that on a very simple level. When accounting for inventory, the first thing you must keep straight is there are $2 amounts we need to track. The first one is price. This is how much a company is going to sell the inventory for. The second one is cost. This is how much the company bought the inventory for. When we purchase inventory, this becomes the asset's cost. In this example, we bought $8,000 of inventory to resell. We debit inventory and credit accounts payable for $8,000. Now let's assume we sold that inventory for $20,000. We call the $20,000 the price. When we sell inventory, we have two journal entries to record. First, we debit accounts receivable and credit sales revenue for $20,000, the price. Second, we debit costs of goods sold and credit inventory for $8,000, the cost. We need to record both revenue and matching expense in order to adhere to the matching principle and not overstate income. When we follow the matching principle, we are matching revenues with related expenses in the period in which they were earned or incurred. Our sales, excuse me, our revenue is sales revenue. This type of revenue we earn from selling goods. Our expense is costs of goods sold. This expense represents the cost to us to sell the goods. As I noted in the slide, cost of goods sold is often the biggest, single biggest expense incurred by merchandisers and many manufacturers. Because of these two new accounts, merchandisers' income statements look a little different than those from service firms. We arrive at gross profit by subtracting costs of goods sold from sales revenue. Gross profit is the amount we sold our goods for above what we paid for them. Okay, more on gross profit and the new multi-step income statement in the upcoming videos.