If Item Z is sold in 2003, the cost will flow to the Income Statement for 2003, and the gross profit will be reported on that income statement. If Item Z cost $50 that is the amount that will be shown on the Balance Sheet.īalance Sheet Dec. There will be no sale to report, so the cost will remain on the Balance Sheet. Assume you buy Item Z for late in 2002, and you are still holding it. Now let’s think for a moment about Item Z. Nothing will be left on the Balance Sheet. This is the information that will be included in the 2002 Income Statement. Income Statement 2002 Selling Price of Item X If Item X costs you $40, and you sell it for $65, you made a Gross Profit on the item of $25. Everything about Item X relates only to the past. Nothing about Item X will affect the company in the future. If the customer has paid for Item X there will be absolutely no accounting left to do, except show the sale and related COGS on the 2002 Income Statement. If you buy, hold and sell Item X all in the same year, say 2002, the entire transaction relating to Item X will be a completed and realized transaction. Let’s think for a moment about a hypothetical inventory item, we’ll call it Item X. So the three important times in an item’s life are buying, holding and selling. Once the item is sold, the cost is transferred to COGS. It then holds the item on a shelf or warehouse, until a customer wants to but the item. The company must first order and buy the item. There are several important points, or events, in the life on an inventory item. That covers a large and broad group of businesses. This would include grocery stores, clothing stores, in fact all the stores you would visit in the mall, or shop at on a regular basis, are retailers. This lesson focuses on inventories of merchandise, those inventories held by retailers for sale to their customers. A journal entry transfers costs from the Balance Sheet to the Income Statement. Inventory cost is an asset until it is sold after merchandise is sold, the cost becomes an expense, called Cost of Goods Sold (COGS). In all cases, inventory is something the company will re-sell to someone else. Retailers have one inventory: merchandise. Manufacturing companies have three types of inventory: materials, work in process and finished goods.
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