 Hello in this lecture we're going to record the merchandising transactions from the standpoint of the purchaser recording the debits and credits related to the process. First thing that will happen will be the purchase order so the purchaser will say that they need more inventory. They're going to request that inventory in this case being ink so they're going to buy the ink from the vendor and then they're going to sell that ink at a later time meaning they're making a bulk purchase. That generally happens with a purchase order. When the purchase order goes out note that there is actually no journal entry. Why? Because nothing has been received and no form of payment has happened at that point in time unlike what might be the case if we were to purchase something on say Amazon or something where we have the form of payment in the term of a credit card at that point in time. In this case that's not the case we're just requesting how many units we need and therefore no form of payment has happened no journal entry then happens at that time period. Then what's going to happen is the ink will then arrive so from the standpoint of the purchaser we have the ink at that point in time therefore we're going to say that the ink is going to go on the books. What we need to put it on the books for will be the cost of it so this is an important point it seems obvious but later on we'll run into problems because we need to be able to convert from units to dollars. When we purchase the ink not as much as problem at that point because we know exactly what we purchased it for in this case 6500 so we're going to record the inventory for that amount 6500 not for units of inventory although we will track the inventory we'll talk about how to do that at a later point. We're also going to record the fact that we have the accounts payable at this point in time when we got the ink probably came with a bill we matched the bill to the purchase order to see that we got what we are expecting to get and now we can record the fact that we owe this money for the inventory that we have received let's take a look at the debits and credits so the debits and credits we're going to record the journal tree up here on the left hand side on the trial balance just to see what the impact will be on the trial balance accounts what's going to happen first is we're going to say we got that inventory inventory is a debit balance account we need to make it go up we're going to make it go up by the dollar amount of course that we paid for the inventory so we're going to debit inventory for the 6500 if we post that out we previously had 5000 we're doing the same thing to it a debit of 6500 bringing the balance to 11500 then we haven't yet paid for it with cash the credit will then go to accounts payable that's the IOU for the same amount 6500 we have zero in accounts payable it's a credit balance account however it's going to go up in the credit direction to the credit of 6500 if we look at the account equation we can see that assets are going up liabilities are going up and there's no effect on the income statement nothing happened in terms of revenue and expenses at the time of purchase the inventory it will be affected when we sell the inventory so here's the effect on net income no effect on net income all other accounts being pulled over at this time next thing that's going to happen we now owe the purchaser now owes of course the money for the inventory that has been received at some point in the future that money will then be paid we now know what that amount will be 6500 therefore journal entry cash is going to go down by that 6500 and the accounts payable the IOU what we owe is going to go down by the 6500 let's take a look at that journal entry up on the left hand side we're going to post it to the trial balance on the right hand side where we now have that inventory of 11500 and that payable of 6500 credits so what we're going to say now is cash is going to go down therefore cash has a 120,000 in it we're going to do the opposite thing to it crediting it i'm going to think about cash first all the time because it's going to be the easiest way to know if it's going to be a debit or credit if we post that out we're going from 120,000 to a credit of 6500 to 113,500 the debit will then be reducing the accounts payable accounts so we've got the accounts payable it's going to be the debit we have 6500 credit in it we're going to do the opposite thing to it which will be that debit bringing the balance back down to zero so we have assets going down for the cash decreasing we got the accounts payable going down in terms of liabilities going down and the equity section will remain the same here's the summary notice that there's no effect on net income for the purchasing transaction either when we get the inventory or when we pay for the inventory when will it have an impact on net income on the income statement when we sell it in the form of cost of goods sold and sales