Lesson 028 - Accounting for Merchandising Operations 2: Transportation

Sir Chua's Accounting Lessons PH

31 Jul 202013:18

Summary

TLDRThis video script delves into the intricacies of merchandise transportation, focusing on key terminologies such as FOB (Free On Board) shipping point and FOB destination, which determine the transfer of ownership in goods. It also covers freight terms like 'freight prepaid' and 'freight collect,' explaining their impact on financial transactions. The script provides examples of accounting entries for purchases and sales, emphasizing the treatment of freight as an operating expense for sellers and an adjunct account for buyers, crucial for inventory valuation and financial reporting.

Takeaways

🚢 The video discusses the importance of understanding merchandise transportation in the context of buying and selling goods.
📦 Two key terms introduced are 'FOB (Free on Board) Shipping Point' and 'FOB Destination Point', which determine when the ownership of goods passes from seller to buyer.
📈 At FOB Shipping Point, the ownership of merchandise transfers to the buyer at the point of transit, while at FOB Destination, it transfers upon delivery to the buyer's doorstep.
📅 The script provides scenarios to illustrate the implications of these terms on financial reporting, especially regarding the year-end inventory and ownership.
💼 The distinction between 'Freight Prepaid' and 'Freight Collect' is clarified, with the former meaning the seller pays for shipping costs upfront, and the latter that the buyer pays upon receipt.
🔍 The video explains that 'Freight In' is an adjunct account to purchases, added to the cost of inventory, and is recorded as an operating expense by the seller.
🛒 An example is given where the buyer pays 'Freight In' charges of three thousand on a fifteen thousand purchase, affecting the accounting entries.
📊 Another example shows a seller's accounting entries when they sell merchandise with 'Freight Out' charges, which are paid by the seller on behalf of the buyer.
📝 The script emphasizes the importance of recording 'Freight In' and 'Freight Out' correctly in the seller's and buyer's financial statements.
📚 The video concludes by hinting at the next lesson, which will cover income statement for merchandising operations, suggesting further exploration of accounting for goods transactions.
🤔 The video encourages viewers to ask questions in the comments section, indicating an interactive approach to understanding these concepts.

Q & A

What is the main topic of the video transcript?
-The main topic of the video transcript is merchandise transportation, specifically discussing terminologies related to the buying and selling of goods and the recording of transactions.
What are the two key terms introduced in the script that one needs to understand in the context of merchandise transportation?
-The two key terms introduced are 'FOB Shipping Point' and 'FOB Destination Point', which determine when the ownership or title of the merchandise passes to the buyer.
What does FOB stand for and what does it signify in merchandise transactions?
-FOB stands for 'Free On Board'. It signifies the point at which the ownership or title of the merchandise passes from the seller to the buyer during transportation.
How does the ownership of merchandise change hands under FOB Shipping Point?
-Under FOB Shipping Point, the ownership or title in the merchandise passes to the buyer at the point of transit, not when the buyer physically receives the goods.
What happens to the ownership of merchandise under FOB Destination Point?
-Under FOB Destination Point, the ownership or title in the merchandise is only passed to the buyer when the buyer receives the goods at their doorstep.
What are the implications of goods shipped FOB Shipping Point on December 28th and received by the buyer on December 30th, in terms of ownership as of December 31st?
-If goods are shipped FOB Shipping Point on December 28th and received by the buyer on December 30th, the ownership of the goods would have already passed to the buyer by December 31st, regardless of when they were received.
What is the difference between 'Freight Prepaid' and 'Freight Collect' in the context of shipping?
-In 'Freight Prepaid', the seller pays for the freight charges, whereas in 'Freight Collect', the buyer pays for the freight charges.
Why is 'Freight In' considered an adjunct account to purchases?
-'Freight In' is considered an adjunct account to purchases because it represents additional costs incurred to bring the inventory to its present location and condition, and it is added to the cost of inventory.
How is 'Freight In' recorded in the financial statements by the seller?
-'Freight In' is recorded by the seller as an operating expense in the financial statements.
Can you provide an example of how to record a transaction where the buyer pays the freight charges in the seller's books?
-In the seller's books, the transaction would be recorded as a debit to Purchases for the merchandise cost, a debit to Freight In for the freight charges, and a credit to Accounts Payable for the total amount. The seller would also credit Cash for the freight charges paid by the buyer.
What is the next lesson mentioned in the transcript and what will it cover?
-The next lesson mentioned is about the income statement for merchandising operations, which will cover additional topics related to the financial aspects of buying and selling goods.

Outlines

00:00

🚢 Understanding Merchandise Transportation Terms

This paragraph introduces the topic of merchandise transportation, focusing on the importance of understanding specific terminologies for recording transactions related to the buying and selling of goods. It explains the two key terms: FOB (Free On Board) shipping point and FOB destination. At the FOB shipping point, ownership of the merchandise transfers to the buyer at the point of transit, whereas at the FOB destination, the transfer of ownership occurs only when the buyer receives the goods at their doorstep. The paragraph uses examples to illustrate the application of these terms in different scenarios, particularly in relation to the reporting of financial statements and the ownership of goods by December 31.

05:04

📦 Distinguishing Between FOB Shipping Point and FOB Destination

This paragraph delves deeper into the differences between FOB shipping point and FOB destination, emphasizing the moment when the ownership of merchandise is transferred to the buyer. It provides scenarios to illustrate the application of these terms, such as goods shipped on December 28th and received by the buyer either on December 30th or January 3rd. The paragraph clarifies that the ownership of the goods is determined by the shipping terms and the date of receipt, highlighting the significance of these terms in financial reporting and inventory management.

10:31

📈 Freight Terms and Their Impact on Financial Accounting

The final paragraph discusses additional terms related to merchandise transportation, specifically 'freight prepaid' and 'freight collect', and their implications for financial accounting. It explains that while the shipping company may handle the freight, the payment remittance can be either prepaid by the seller or collected from the buyer. The paragraph also introduces the concept of 'Freight In' as an adjunct account to purchases, which is added to the cost of inventory and recorded as an operating expense by the seller. Examples are provided to demonstrate the accounting entries for purchases and sales involving freight charges, illustrating the accounting treatment for these transactions in the financial statements.

Mindmap

Keywords

💡Merchandise Transportation

Merchandise transportation refers to the process of moving goods from one place to another, often over long distances. In the video, this concept is central as it sets the stage for discussing the various terms and conditions that affect the buying and selling of goods. For example, the script mentions that merchandise can be transported by air or sea, highlighting the importance of understanding different transportation methods.

💡FOB (Free On Board)

FOB is a shipping term that specifies at what point the ownership of goods is transferred from the seller to the buyer during the shipping process. The video distinguishes between 'FOB shipping point' and 'FOB destination point', indicating that the transfer of ownership can occur either at the point of transit or upon delivery at the buyer's location, respectively.

💡Ownership

Ownership in the context of the video refers to the legal right and control over the merchandise. It is a critical aspect of the buying and selling process, as it determines who bears the risk and responsibility for the goods. The script explains that with FOB shipping point, ownership passes at transit, whereas with FOB destination, it passes upon the buyer's receipt of the goods.

💡Financial Statements

Financial statements are formal records of a business's financial activities, including its assets, liabilities, equity, income, and expenses. In the video, the script mentions recording transactions related to merchandise transportation and how they affect financial statements, such as the statement of financial position and the income statement.

💡Inventories

Inventories represent the goods that a business has on hand for sale. The video script discusses how the ownership of these goods can impact the reporting of inventories in financial statements, especially in relation to the timing of goods shipped and received.

💡Freight Prepaid

Freight prepaid is a term used when the seller pays for the transportation costs upfront. The video explains that this can affect the accounting entries, as the seller records it as an operating expense, while the buyer does not incur any freight charges.

💡Freight Collect

Freight collect is when the buyer pays for the transportation costs. This term is contrasted with 'freight prepaid' in the video, indicating that the responsibility for freight costs can shift between the buyer and the seller, affecting the financial transactions and accounting entries.

💡Operating Expense

An operating expense is an expense incurred by a business in the normal course of its operations. In the video, when freight is prepaid by the seller, it is recorded as an operating expense, which is a key aspect of the seller's financial accounting.

💡Purchases

Purchases refer to the acquisition of goods or services for the purpose of resale or use in production. The video script includes examples of accounting entries for purchases, such as debiting purchases and crediting accounts payable, which are essential for understanding the financial impact of buying merchandise.

💡Sales

Sales represent the revenue generated from selling goods or services. The video discusses how sales transactions are recorded, including the impact of freight charges on the sales amount, which is a fundamental aspect of merchandising operations.

💡Income Statement

An income statement is a financial statement that shows a company's revenues, expenses, and net income over a specific period. The video mentions that the next lesson will focus on the income statement for merchandising operations, indicating its importance in understanding the profitability of a business.

Highlights

Introduction to merchandise transportation and its importance in buying and selling of goods.

Explanation of the two key terms: FOB (Free On Board) shipping point and FOB destination point.

Clarification on when the ownership or title in merchandise passes to the buyer at FOB shipping point.

Description of FOB destination, where ownership passes to the buyer upon delivery at the buyer's doorstep.

The significance of understanding who owns the goods by December 31st for financial reporting.

Scenario analysis of goods shipped FOB shipping point and received by the buyer on different dates.

Problematic situations when goods shipped FOB shipping point are received by the buyer after the reporting date.

Discussion on the difference between FOB shipping point and FOB destination in terms of ownership transfer.

Introduction to the concepts of freight prepaid and freight collect in merchandise transportation.

Explanation of the payment remittance for freight charges: freight prepaid by the seller and freight collect by the buyer.

Freight in as an adjunct account to purchases and its impact on the cost of inventory.

Accounting treatment of freight in as an operating expense for the seller.

Accounting entries for a company purchasing merchandise with freight charges paid by the buyer.

Accounting entries for a company selling merchandise with freight charges paid by the seller.

Upcoming lesson on income statement for merchandising operations and its importance.

Invitation for viewers to comment with questions for further clarification and engagement.

Closing remarks encouraging viewers to have a great day after learning about merchandise transportation.