 As we learn more about receivables, we need to consider the underlying events that create receivables. To start with, let's revisit revenue recognition. Hopefully you recall that revenue is recognized, meaning journalized, when services performed or goods are delivered. The amount of the journal entry is the fair value of the asset received. Usually that will be cash, but not always. So for service firms, we record revenue by debiting accounts receivable in this example. It could be cash in some cases, and crediting service revenue for $20,000. For merchandising or manufacturing firms, meaning firms that sell goods rather than services, we record revenue by debiting accounts receivable in this example, again it could be cash in some cases, and crediting sales revenue for $20,000. But that is only the first of two journal entries we need to make when we sell goods. We also need to record the cost of the goods sold. This is an expense account and the reduction of inventory for the cost, not the price, of the goods sold. In this example, we debit costs of goods sold and credit inventory for $8,000. If you need more understanding of this type of transaction, I would encourage you to watch the videos on buying and selling inventory. For the purposes of this video, we want to focus on the revenue component, not the cost component.