Basic Accounting Principles: Cost of Goods Sold & Inventory Management

This report provides an overview of basic accounting principles, focusing on the determination of the cost of goods sold (COGS) with a practical example from Carrefour, a prominent merchant in Saudi Arabia. It explains how Carrefour, with its diverse merchandise ranging from food to electronics, manages its inventory and calculates COGS, considering wholesale prices, stocking charges, and minimal production costs. The report highlights Carrefour's use of a perpetual inventory system for accurate tracking of inventory variations and discusses the updates to various accounts such as purchases, allowances, and returns. Additionally, the report defines and provides examples of real accounts, which include assets and liabilities like buildings, vehicles, and wages payable, emphasizing the debiting of asset accounts and crediting of liability accounts. The document concludes with relevant references to support the analysis and findings presented.

Running head: BASIC ACCOUNTING PRINCIPLES
Basic Accounting Principles
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1BASIC ACCOUNTING PRINCIPLES
Table of Contents
Overview of the merchant and its merchandise:..............................................................................2
Process of determination of the cost of goods sold:........................................................................2
Real accounts:..................................................................................................................................3
References:......................................................................................................................................4

2BASIC ACCOUNTING PRINCIPLES
Overview of the merchant and its merchandise:
One of the popular merchants in Saudi Arabia is Carrefour, which has 17 branches in the
nation dealing with food, electronics, mobile phones, grocery, home appliances, beauty products
and others. Inventory is categorised by its usage. The retailers often have a single category,
which includes merchandise consisting of retail products that have been purchased ready for sale.
Process of determination of the cost of goods sold:
Cost of goods sold generally includes the wholesale prices of the products and stocking
charges such as storing cost or warehousing, packaging, delivery and others. In case of retailers
like Carrefour, production activity is minimal, which results in minimal or no production cost.
They preserve large amount of inventories, since the same is bought from the wholesalers at
wholesale prices and the retailers sell them to the customers by providing a needed mark-up on
each product (Kieso, Weygandt & Warfield, 2016).
Carrefour mainly incurs administrative expenses and it maintains a perpetual inventory
system so that it could maintain track of the variations in inventory accounts. The transactions
are recorded at the time of occurrence. The retail systems are highly accurate, since records are
updated or changes in inventory are recorded at the time of sale. As a result, both cost of goods
sold and inventory are updated. The other accounts updated include purchases, allowances,
discounts, returns and freight-in. The primary system of the cost of goods sold is to ascertain in
this manner:
Cost of Goods Sold = Opening Inventory + Purchase – Closing Inventory
This could be illustrated with the help of an instance, in which the opening inventory is
SR 350,000, closing inventory is SR 400,000 and purchase is SR 670,000.

3BASIC ACCOUNTING PRINCIPLES
Real accounts:
Real accounts include those accounts accounting for assets and liabilities
(Principlesofaccounting.com, 2019). In this system, the asset accounts are debited and the
liability accounts are credited. Some examples include building, vehicle, plant and equipment,
wages payable, salaries payable and bonds payable.

4BASIC ACCOUNTING PRINCIPLES
References:
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Intermediate Accounting, Binder Ready
Version. John Wiley & Sons.
Principlesofaccounting.com. (2019). Chapter 5: Special Issues for Merchants -
principlesofaccounting.com. Retrieved 5 March 2019, from
https://www.principlesofaccounting.com/chapter-5/