The emphasis in previous chapters was on the accounting and reporting activities of an organization providing services. This amount minus operating expenses determines the net income or loss for the period.
Inventory refers to products a company owns for the purpose of selling to customers.
The cost of inventory includes the cost incurred to buy the goods, ship them to the store, and other costs necessary to make them ready for sale. Two different inventory systems are available to capture the cost of goods sold and the cost of inventory or hand. The cost of new merchandise is recorded in a temporary Purchases account. This requires updating the inventory account and determining cost of goods sold only at the end of a period. Accumulates the net cost of merchandise purchases in the inventory account and, when an item is sold, its cost is subtracted from the inventory account and recorded in a Cost of Good Sold account.