 Hello in this lecture we're going to generalize merchandising transactions from the standpoint of the seller. So our seller here has now purchased the inventory and is now in the process of selling that inventory in the form of the ink cartridges to the end user, the customer. First thing that will happen here is that we're going to provide the ink cartridges to the customer. The customer is going to give us an IOU for those ink cartridges. We will record this journal entry in two parts. First part being the journal entry for the sales side of the transaction. When we have given the ink cartridges we as the seller of merchandise have completed the job. When we complete the job we can say that we have the IOU, the accounts receivable going up at that point in time, the customer owing us money. We can also say that the sales happened. Sales is equivalent to revenue or income. So the income is going up at this point in time because we completed the job just as if we were a service company. We completed whatever job we do on the service company side. We then have a separate part of this journal entry or a separate journal entry of the cost of goods sold side because in order to complete the job what did we have to do? We had to consume or give up the asset of the inventory. So the other side of the transaction is going to be that inventory is going down and that consumption of that asset the consumption by us using it by us giving it away is an expense. We consume that asset that expenses our most important expense called cost of goods sold. Although there's not expense in the title most important expense let's look at these transactions one by one. We're going to start off with the sales type of the transaction. It's easier to think of this in terms of separate journal entries because the sales side of the transaction very similar to what we have looked at in terms of a service company. Meaning we have completed the work we have earned the revenue at that point in time so we can then record the accounts receivable. What is owed to us at that point in time accounts receivable is a debit balance account. We're going to make it go up by doing the same thing in this case which would be another debit bringing it from zero up in the debit direction to that 8,450. Other side of the transaction is income or sales in this case incomes always a credit balance account therefore we're going to make it go up by doing the same thing to it. Another credit of that 8,450. So we're saying the 100,000 is going up by the 8,450 to the 108,450. The effect on the account equation will be assets have increased liabilities remain the same and equity has increased. If we look at the income statement then of course income has gone up. We made the sale the 100,000 is going up by the 8,000 450 to 108,450 as we can see here. However that's not the only thing that happens when we are a merchandising company. The other side of this is the fact that we had to give up the asset in inventory in order to generate that revenue. So we're going to have to record the decrease in the asset of inventory. Note that the inventory is on the books for that 6,500. We sold it for that 8,450. Of course we marked it up that's why we're going to generate revenue. Therefore we're going to decrease the merchandise inventory. So we're going to say the merchandise inventory has a debit balance. We're going to do the opposite thing to it, crediting it to make it go down 18,000 debit minus the 6,500 credit brings it down to 11,500. The other side of the transaction will be the new account that we have which will be the most important account for the expense side cost of goods sold. It's going to be an expense. Expenses all have debit balances. They all generally go up. This is going to be no exception, meaning the cost of goods sold is going to go up by the 6,500 in the debit direction too. In this case 6,500 effect on the account equation. Assets are going down. Liabilities are remaining the same and the equity section is going down. Why? Because net income is going down. Note that the cost of goods sold is an expense. The expense is going up bringing net income 108,450 minus the 6,500 income winning by 101,950. Let's analyze this transaction. First, we note that we have basically recorded this transaction in this format in two different transactions. So when you see it together, you're often going to write it down like this. We're going to have the receivable debit, the sales credit, that's the sales side. Then you're going to record the decrease in the inventory and the expense related to it. Now, if you see it in a computer system, it often looks like this. It's happening at the same time and a computer system is going to have that rule where it says the debits have to be on top. So we have the two debits on top and the two credits on the bottom. When we do this manually, we kind of kept with the rule by basically breaking up this journal entry. We said, well, we still have the debits on top, but now we basically broke up what is really one journal entry that happens at the same point in time to two journal entries in order to do that. A couple of things I want to note here. One is that when we do things by hand, we probably want to abandon that rule in times when we want to record the journal entry in a way that makes the most sense to us. One, to build the journal entry to make sure we get it right when we put it in the system. And two, to go back, if we go back and look at it, we want to put it in the best format. So we have the best chance of looking at it and saying, why did we do this? And so that's a couple of ways that when we build the journal entry, we might want to do it in this format rather than do it in this format. But when we look at a computer system or a textbook, we need to be able to look at this transaction and see what happened here. We sold merchandise on account. Also want to analyze this transaction as well and analyze the assets and the income statement accounts that are affected. So the balance sheet accounts that are affected, the income statement accounts. First, the balance sheet accounts. Note that accounts receivable is going up. That means that accounts receivable, the assets are going up and then inventory is going down. We take into account these two transactions. The difference then means that there's a net increase in the assets. In this case of 1,950 on the income statement side, there's going to be some symmetry here in that income sales is going up by the 8,450 expenses are going up by the 6,500 meaning net income is the same 1,950. This should make sense. If you spend some time and look at this, we're going to say, okay, yeah, when we record the sale on accounts, we're going to say that there's an increase and a decrease in assets and it's going to be 1,950. In this case, there's going to be a deep increase and decrease in terms of the income statement accounts in terms of net income, meaning revenue goes up, expenses go up, revenue minus expenses go up by the same amount as the balance sheet accounts are going up by.