So far in this course we have examined the theory and practice of accounting for service firms. Accounting for the operations of service firms is relatively simple, as there are no goods for sale to account for. In this lecture we will introduce accounting for retail operations. Grace Brothers, Coles, Clints Crazy Bargains and Club X are all examples of retail outlets. Goods that have been purchased with the intent of on-selling, but have yet to be sold are called Inventories.
Inventories are an asset.
When we sell inventories, the cost of these inventories becomes an expense. The difference between Net Sales and COGS is called Gross Profit. By subtracting other expenses from Gross Profit we get Net Profit. There are two types of inventory accounting systems, the periodic system and the perpetual system. Periodically, a stocktake is performed to determine inventory balances and, indirectly, the Cost of Goods Sold.