 Hello in this lecture we're going to talk about merchandising transactions which will be the purchase and the sale of merchandise. We're going to look at this from both the selling aspect as well as the receiver from the standpoint of the company or person that is selling the inventory and the company or person that is receiving the inventory. We're going to do this for a couple different reasons. One, it's good to know that there's two sides of any merchandising transaction. Two, we want to know who we are. Are we the seller or are we the purchaser? In real life this is pretty obvious whether we are purchasing the inventory or selling it. In a book problem it's not quite so obvious. That's the first question we want to answer to ourselves. Are we the purchaser of the inventory? Are we the seller of the inventory? And three, we want to just know what the other side of the transaction is doing. We would like to know what the other side of the table is doing. What does their journal entry look like? And that can give us some more insight in terms of what should we be doing on our end of the table. How can we make the negotiations go more smoothly? In our example here, owner A will be the purchaser of the inventory and owner B will be the seller of the inventory. We will imagine the inventory that will be shipped overseas. So person B is going to have to ship the inventory overseas to person A to receive the inventory. In order to initiate this process, it starts with a purchase order meaning person A or owner A realizes they have a shortage of computer ink in this case and they're going to send a request, a purchase order to the seller person B in this case. Now remember person A is buying the computer ink and then is going to be reselling it. So they're buying bulk in terms of the computer ink. We're going to have a bit different of a scenario than we might think of if we were to buy purchasing of computer ink for our usage, in which case we might go online or go to a store, purchase the purchased ink and put a credit card on there before the ink has been received by us, meaning we have a form of payment at the point in time that we request the ink to be shipped to us. In this case, if we're buying in bulk, it often is not that way. What happens is that we have the purchase order we're requesting but no payment has been made at that point in time. What that means is that owner A, in terms of journal entries, there are none. No journal entry for person A because no payment has been sent, no inventory has been received and on the seller side we're saying that there's also no journal entry. Why? Because they haven't provided the inventory, they haven't shipped out the inventory and they haven't received anything. They haven't received an IOU, they haven't received a credit card, they haven't received any cash at that point in time. A bit unusual part in terms of the purchase orders, one of those accounting paperwork that really doesn't have a journal entry behind it, which is somewhat rare in terms of typical accounting paperwork, which is usually backed up by some type of journal entry. Then what's going to happen at some point of course is that the seller is going to sell the ink to the purchaser and at that point in time the purchaser person A journal entry would be then inventory has now gone up. We now have inventory and that means that we have accounts payable. So as this inventory is received by owner A, oftentimes it'll have an invoice along with it at that point in time, which basically is a bill to owner A and owner A will now recognize the fact that the inventory has been received going to count the inventory and recognize the fact that money is now owed to owner B, the seller. On owner B side, the journal entry would then be accounts receivable is going up. Why is accounts receivable going up at this point in time? Because that's the point in time that the revenue has been earned. When it has been earned because the inventory was shipped under the revenue recognition principle, we'd recognize the revenue at that point in time. Also inventory is going down because the inventory has been shipped and cost a good sold the expense related to that inventory is going up. We'll take more a deeper look at that journal entry later on, but that will be the essence of this journal entry. Now there's going to be some question as to when this actual transaction is going to happen between A and B because we're saying well did should that transaction happen when the inventory goes on the boat? In which case if that was the case we would call it FOB shipping point meaning the seller put it on the boat and the purchaser now has responsibility for that inventory as it is on the boat. Recording the fact that the inventory has been received at that point in time and in essence if the boat then got attacked by pirates or something and they lost the inventory it would be on the purchaser's insurance in that case. If on the other hand we're going to say it's FOB destination we're going to say it's got to boat has to reach the warehouse and that's the point of time that we're going to record the journal entry saying that the inventory is now in the purchaser's hands at that point. So this terminology is going to be used often then what's going to happen of course is the typical the thing that happens is now that of course owner A owes owner B the money for the inventory that was received. Owner A is now going to pay the money at that point in time journal entry would then be cash is going to go down and the accounts payables are going to go down the liability is going to go down owner B the seller is going to say all right cash has now been received cash is going up and the receivable the amount that is owed to us on the books is now going down so they got one asset cash the other asset the receivable then going down.