People say that when you sell on credit your entries are:
Receivables Dt
Sales Cr
when money is received:
Bank Dt
Receivables Cr
Let's say I produce chairs and sell them. My chairs are my assets. When I sell them my assets decrease. Why in entries above nothing is said about the fact that my assets decrease as I sell chairs ?
-- Edited by rafapak on Saturday 2nd of January 2016 12:21:10 AM
Your confusion is because you are missing a step completely.
You have the credit transaction side ok but you have missed the inventory side.
The full entry is :
Dr Receivables
Cr Sales
And also
Dr Cost of goods sold
Cr Inventory.
If you think about it if you are going to make a profit the two sides of this have to be divorced from each other otherwise how would you sell inventory for more than it cost you!
Using your example, lets take the example of Acme Chair company. All that the company makes is chairs of one type. It costs them £5 to make one chair and they sell those chairs for £20.
One chair is made and sold from inventory on credit. The entries are :
Manufacture the chair
Dr Inventory £5
Cr Bank £5
Sell the chair on credit
Dr Receivables £20
Cr Sales £20
And for the inventory account the entries are
Dr Cost of Goods sold £5
Cr Inventory £5
When the money is receieved from the customer the entries are :
Dr Bank £20
Cr Receivables £20.
There are no movements to the inventory accounts when the payment is received.
See how all of the accounts now match the financial reality of the scenario.
Bank is £20 better off (It cost £5 to make the chaor so the balance is £15)
Inventory is £5 lower (which means that it will be £0)
Cost of sales is £5 higher
Sales is £20 higher
Receivables is £0
Now think about that from the perspective of the financial statements at year end (gross simplification here of the business selling one chair and having no expenses or overheads).
There was no inventory to move back from the manufacturing account in the P&L so all that we have is a current asset on the balance sheet of £15 in the bank.
Balancing that from the P&L Sales of £20 less cost of sales of £5 gives £15 profit to carry over to the capital account so everything balances on the balance sheet.
Simples.
I know that the above is over simplified but I think that it demonstrates the mechanics of whats happening quite well.
HTH,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
P.S. when talking about things that you own rather than just using the term "Assets" does not differentiate the category of asset sufficiently, get into the habit of using the following terms :
Non Current assets for things that the business owns for the long term
Current assets for everything else
Within current assets treat inventory seperately. Inventory (sometimes refered to as stock) being current assets held for trading.
HTH,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Hi Rafal It was a point well made (apart from the use of the word 'asset' in the title of your post), but I am sure your training book stated that is was going to ignore the stock side of the transaction at this point in time. That is confusing for someone who is aware of such, but the books are assuming absolutely no prior knowledge and will take you on a journey which will start to get more and more complex and will eventually start to add in that stock element and therefore the double entry required for that part of the transaction. You will see a few odd things such as this as the training progresses, but it will all start to come to together eventually. Although having the above explanation from Shaun will make the eventual outcomes much clearer for you I'm sure. The books should take you through a set number of very simple examples, expecting you to enter transactions in several T accounts, with for now, the main focus most likely to be on the Bank account and Capital accounts, then as I say, getting ever more complex.
Best thing is to work through a whole chapter, try all the examples and then work through it all again. Things will then start to fall into place, but if not, of course post on here.
-- Edited by Cheshire on Saturday 2nd of January 2016 10:37:45 AM
__________________
Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
I can tell that you're a Kaplan user... Read, try, repeat, repeat with more complexity, embed as side point within other questions. Definitely a formulae that works for me
On the what comes first in your studies I think that it all depends on the publisher. My initial studies were EQL (now subsumed within BPP). I remember my initial studies which used doors and windows at the time rather than chairs as seems to be Rafals example and back then at least stock accounts were introduced before credit sales (that came in later with a jewellery store). lol. I wish I could remember things that I have done this morning as well as I remember my studies from years ago! (studies are so much nicer than real clients!)
Rafal should be starting to get those other books delivered about now so fingers crossed everything is going to start clicking into place for him. As you say though full chapter at a time and maybe even then don't expect clarity until studies are up to pushing your bookkeeping into a set of accounts stage. Getting on top of this is certainly more of a thousand peice jigsaw (with a lot of sky peices) than a Sudoku.
And talking of books the nice Amazon mans just (about five mins ago) delivered the Finance Act 2015 edition of Melville's Taxation so I'm a happy bod :D... All that I need to do now is somehow find the time to read it :(... Even I think that it's a bit sad that I get excited about reading a book on tax! lol.
All the best,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I agree sometimes that it takes a whole chapter of a course to see how the pieces fit together. It is like building something each step fits into the next to give you the whole picture but you can't do it all at once.
your post reminded me to go and order the Melville book - really useful recommend from you, its a great resource. A little New year treat to myself
Thanks Alison, glad that you like it. I do sometimes worry that some of my recommendations are personal taste that will not suit everyone's learning style.
I've tried several tax books but keep coming back to this one.
I certainly couldn't imagine myself getting so enthused about a Tolley's tax tome landing on the doorstep!
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
thanks Shaun for entries explanation and thanks to the rest of you guys for valuable insight
citation: Using your example, lets take the example of Acme Chair company. All that the company makes is chairs of one type. It costs them £5 to make one chair and they sell those chairs for £20.
One chair is made and sold from inventory on credit. The entries are :
Manufacture the chair
Dr Inventory £5
Cr Bank £5
I understand inventory entry. It reflects chair you produced. You also used material to produce this chair. This is expense for you. Why do you credit bank account and not materials account? Crediting bank doesn't reflect using materials ( expense). It reflects decrease in current asset. Well, you probably bought materials with money from the bank therefore you credit bank but where using materials (expense) is reflected?
-- Edited by rafapak on Saturday 2nd of January 2016 03:45:51 PM
-- Edited by rafapak on Saturday 2nd of January 2016 03:47:47 PM
-- Edited by rafapak on Saturday 2nd of January 2016 03:52:25 PM
-- Edited by rafapak on Saturday 2nd of January 2016 04:00:22 PM
You could have far more steps in there including direct manpower costs, materials, etc. All of which is paid for from the bank. The simplified case just misses out those steps and links inventory directly to bank.
In some ways what I have done here is not dissimilar to what your book is doing in that I've simplified out the scenario in order to convey a point. The difference is that I think that the book should not have left out the inventory account as I think that confuses people not being able to visualise the flow of events.
Maybe a better way to think of my example is that the business does not make the chairs itself but rather buys them in from another company for £5 and then sells them for £20. That keeps away the complexities of manufacturing whilst explaining the scenario at hand.
Its really good that you are thinking through all of the implications that need recording Rafal.
kindest regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I can tell that you're a Kaplan user... Read, try, repeat, repeat with more complexity, embed as side point within other questions. Definitely a formulae that works for me It is the best way for me to get such things it into my brain - I was never any good at just absorbing volumes of information just from reading and highlighting stuff. I even re-write parts of the theory side of anything I need to learn as it sinks in much quicker, but does lead to cramp from all that writing, lol.
On the what comes first in your studies I think that it all depends on the publisher. My initial studies were EQL (now subsumed within BPP). I remember my initial studies which used doors and windows at the time rather than chairs as seems to be Rafals example and back then at least stock accounts were introduced before credit sales (that came in later with a jewellery store). lol. I wish I could remember things that I have done this morning that must be just an age thing!!!! I dont have that problem yet, but then I am soooo much younger than you, lolas well as I remember my studies from years ago! (studies are so much nicer than real clients!)
Rafal should be starting to get those other books delivered about now so fingers crossed everything is going to start clicking into place for him. As you say though full chapter at a time and maybe even then don't expect clarity until studies are up to pushing your bookkeeping into a set of accounts stage. Getting on top of this is certainly more of a thousand peice jigsaw (with a lot of sky peices) than a Sudoku.
And talking of books the nice Amazon mans just (about five mins ago) delivered the Finance Act 2015 edition of Melville's Taxation so I'm a happy bod :D... All that I need to do now is somehow find the time to read it :(... Even I think that it's a bit sad that I get excited about reading a book on tax! At least you recognise the affliction, even if you cannot do anything about it.Wish I had the time to read the piles of fiction I have on my Kindle - the closest I get is the fiction that some clients love to write! lol.
All the best, to you too.
Shaun.
Hi Rafal
I did start to type something to you this morning alongside your earlier question about T accounts. I lost the post I had written it when I opened another tab on my ipad to get the image below, but essentially what I was going to say was - practice, practice, practice as much as you can with every example you are given including writing out the t-accounts in full with all of the details you should include on them (ie date, descriptions etc) - this helps things go in so much quicker. I would also only write the words Debit/Credit for the first few, then leave them off entirely as this will further test the brain, to the point where it becomes second nature. I am not sure yet if you have come across any mnemonics or acronyms that help you to get this right - the one I used when I started as DeadClic. There are others of course, everyone has their favourite. Hope this helps. The more complex stuff will follow.
__________________
Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
I can tell that you're a Kaplan user... Read, try, repeat, repeat with more complexity, embed as side point within other questions. Definitely a formulae that works for me It is the best way for me to get such things it into my brain - I was never any good at just absorbing volumes of information just from reading and highlighting stuff. I even re-write parts of the theory side of anything I need to learn as it sinks in much quicker, but does lead to cramp from all that writing, lol.
On the what comes first in your studies I think that it all depends on the publisher. My initial studies were EQL (now subsumed within BPP). I remember my initial studies which used doors and windows at the time rather than chairs as seems to be Rafals example and back then at least stock accounts were introduced before credit sales (that came in later with a jewellery store). lol. I wish I could remember things that I have done this morning that must be just an age thing!!!! I dont have that problem yet, but then I am soooo much younger than you, lolas well as I remember my studies from years ago! (studies are so much nicer than real clients!)
Rafal should be starting to get those other books delivered about now so fingers crossed everything is going to start clicking into place for him. As you say though full chapter at a time and maybe even then don't expect clarity until studies are up to pushing your bookkeeping into a set of accounts stage. Getting on top of this is certainly more of a thousand peice jigsaw (with a lot of sky peices) than a Sudoku.
And talking of books the nice Amazon mans just (about five mins ago) delivered the Finance Act 2015 edition of Melville's Taxation so I'm a happy bod :D... All that I need to do now is somehow find the time to read it :(... Even I think that it's a bit sad that I get excited about reading a book on tax! At least you recognise the affliction, even if you cannot do anything about it.Wish I had the time to read the piles of fiction I have on my Kindle - the closest I get is the fiction that some clients love to write! lol.
All the best, to you too.
Shaun.
Hi Rafal
I did start to type something to you this morning alongside your earlier question about T accounts. I lost the post I had written it when I opened another tab on my ipad to get the image below, but essentially what I was going to say was - practice, practice, practice as much as you can with every example you are given including writing out the t-accounts in full with all of the details you should include on them (ie date, descriptions etc) - this helps things go in so much quicker. I would also only write the words Debit/Credit for the first few, then leave them off entirely as this will further test the brain, to the point where it becomes second nature. I am not sure yet if you have come across any mnemonics or acronyms that help you to get this right - the one I used when I started as DeadClic. There are others of course, everyone has their favourite. Hope this helps. The more complex stuff will follow.
