Accounting Fundamentals (BUS3701) Lecture 2
LECTURE 2
Lesson Title: The Asset of inventory
Lesson Intended Learning Outcomes
On completion of the lesson, students are expected to be able to:
1. explain the meaning of the terms “purchases” and “sales”.
2. recognize the accounting treatment for inventory movement
3. comprehend the nature of profit and loss and its effect on capital
Purchases and Sales
A business usually provides either goods or services to its customers. On
any date, the business will normally have goods not yet been sold, and these
unsold goods are known as the stock of goods.
As the stock of goods in business change constantly, four separate accounts
are opened for each type of dealing in the change of goods:
(i) Purchases Account (購貨) – in which purchases of goods are
entered.
(ii) Sales Account (銷貨) – in which sales of goods are entered.
(iii) Returns Inwards Account (Sales Returns Account) (銷貨退
回) – in which goods being returned in to the firm are entered.
(iv) Returns Outwards Account (Purchases Returns Account)
(購貨退出) – in which goods being returned out to a supplier are
entered.
No Inventory Account should be opened.
Since these four accounts are connected with STOCK (Assets), the double
entry rules are those used for assets (periodic inventory count).
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Accounting Fundamentals (BUS3701) Lecture 2
Transaction Accounts Inventory Movement
Purchase of goods Dr Purchases
Cr Trade Payable
Return of goods to a Dr Trade Payable
supplier Cr Returns outwards
Sales of goods Dr Trade Receivable
Cr Sales
Return of goods from a Dr Returns inwards
customer Cr Trade Receivable
Examples:
Purchase of Inventory by Cash:
1 Apr 20X2, goods costing $450 are bought by Cash
Dr Purchases $450
Cr Cash $450
Purchases
20X2 $ 20X2 $
1-Apr Cash 450
Cash
20X2 $ 20X2 $
1-Apr Purchases 450
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Accounting Fundamentals (BUS3701) Lecture 2
Purchase of Inventory on Credit:
15 Apr 20X2, goods costing $3,500 are bought on credit from D Ho.
Dr Purchases $3,500
Cr Trade Payable – D Ho $3,500
Purchases
20X2 $ 20X2 $
1-Apr Cash 450
15-Apr AP - D Ho 3,500
Trade Payable - D Ho
20X2 $ 20X2 $
15-Apr Purchases 3,500
Sale of Inventory for Cash
25 Apr 20X2, goods are sold for $1,400, cash received upon sale.
Dr Cash $1,400
Cr Sales $1,400
Cash
20X2 $ 20X2 $
25-Apr Sales 1,400 1-Apr Purchases 450
Sales
20X2 $ 20X2 $
25-Apr Cash 1,400
Sale of Inventory on Credit
28 Apr 20X2, goods are sold on credit for $6,500 to M Jim.
Dr Trade Receivable – M Jim $6,500
Cr Sales $6,500
Trade Receivable - M Jim
20X2 $ 20X2 $
28-Apr Sales 6,500
Sales
20X2 $ 20X2 $
25-Apr Cash 1,400
28-Apr AR - M Jim 6,500
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Accounting Fundamentals (BUS3701) Lecture 2
Returns inwards
29 April 20X2, goods which had been previously sold to M Jim for $600 are
now returned.
Dr Returns inwards $600
Cr Trade Receivable – M Jim $600
Returns inwards
2012 $ 2012 $
29-Apr AR - M Jim 600
Trade Receivable - M Jim
2012 $ 2012 $
28-Apr Sales 6,500 29-Apr Returns inwards 600
Returns Outwards
30 April 20X2, goods which had been previously bought for $100 are returned
by the firm to D Ho.
Dr Trade Payable (TP) – D Ho $100
Cr Returns Outwards $100
Returns Outwards
20X2 $ 20X2 $
30-Apr TP - D Ho 100
Trade Payable - D Ho
20X2 $ 20X2 $
30-Apr Returns outwards 100 15-Apr Purchases 3,500
P. 38 Worked Example 3.8
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Accounting Fundamentals (BUS3701) Lecture 2
THE EFFECT OF PROFIT AND LOSS ON CAPITAL
In accounting, besides recording changes in assets and liabilities, revenues
and expenses have to be compared to ascertain profit or loss.
Revenues (收入) refer to those money received during the year for the goods
and services that have been delivered to customers. e.g. rent received,
commission received.
Expenses (費用) refer to those money spent (cost incurred) during the year in
order to maintain the company's operation. e.g. rent, lighting and heating,
salary and wages, etc.
By profit is meant the excess of revenues over expenses for a particular period,
and loss is meant the excess of expenses over revenues.
The Effect of Profit and Loss on Capital
Example:
On 1 January the assets and liabilities of a firm are:
Assets : Fixtures $18,000, Inventory $6,000, Bank $3,500
Liabilities : Trade payables $2,500
Assets – Liabilities = Capital
In this case capital works out at:
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Accounting Fundamentals (BUS3701) Lecture 2
During January the whole of the $6,000 inventory is sold for $10,000 cash.
On 31 January the assets and liabilities have become:
Assets:
Liabilities:
The capital can be calculated:
Conclusion:
Profit increases capital and loss decreases capital:
i.e. Old Capital + Profit = New Capital
Old Capital – Loss = New Capital
The effect of Profit and Loss on Capital
Capital is affected by the performance (profit or loss) of the business.
Performance Result from Effect on Capital
Profit Revenues > Expenses
Loss Expenses > Revenues
Therefore, profit increases capital while loss decreases capital.
Tutorial Exercises
Frank Wood’s Business Accounting 1
Review questions: P. 42, 3.1, 3.2
P. 42, 3.4A
P. 44, 3.6A
Reading Reference: Frank Wood’s Business Accounting 1, Chapter 3
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