Each time inventory is sold, two transactions occur: revenues (sales) are recorded, and inventory is used up to become an expense. This means two journal entries are recorded:

DR Cash (or accounts receivable if on account) CR Sales (to record sales revenues earned)

DR Cost of Goods Sold CR Inventory (To record inventory becoming the expense of the sale)

PLEASE ANSWER THE FOLLOWING QUESTIONS BASED ON THE STATEMENT ABOVE:

Consider the impact of recording these two transactions.

What key profit factor do you learn from this journal entry?

What does recording this transaction tell you about the gross profit on each sale?

Does this gross profit indicate overall profitability? (Hint: is the cost of selling inventory the only expense incurred during routine operations?)

• Why do companies go through a closing process?
• What accounts are closed in that process?
• Are they really closed and erased from the accounting system?
• Discuss the additional accounting issues faced by merchandisers/retailers that service companies do not address.
• What does a system of internal controls achieve? (You can apply this to internal controls over cash, or a general discussion of internal controls.)