Part C The use of double
entry and accounting systems
5: Ledger accounts and double entry
77
3.5 Example continued
You should now be aware that, when business transactions are accounted for it should be possible to
restate the assets and liabilities of the business after the transactions have taken place.
The next market day is on 10 July and Liza purchases more flowers and plants for cash, at a cost of $740.
She is not feeling well, because of a heavy cold, and so she decides to accept help for the day from her
cousin Ethel. Ethel is to be paid a wage of $40 at the end of the day.
Trading on 10 July was again very brisk, and Liza and Ethel sold all their goods for $1,100 cash. Liza paid
Ethel her wage of $40 and drew out $200 for herself.
Required
(a)
State the accounting equation before trading began on 10 July.
(b)
State the accounting equation at the end of 10 July, after paying Ethel:
(i)
but before drawings are made.
(ii)
after drawings have been made.
You are reminded that the accounting equation for the business at the end of transactions for 3 July is
given in Paragraph 3.4.
Solution
(a)
After the purchase of the goods for $740.
Assets__=___Capital__+___Liabilities'>Assets
=
Capital
+
Liabilities
$
Stall
1,800
Goods
740
Cash (770 – 740)
30
2,570
=
$ 2,570
+
$0
(b)
(i)
On 10 July, all the goods are sold for $1,100 cash, and Ethel is paid $40. The profit for the
day is $320.
$
$
Sales
1,100
Less
cost of goods sold
740
Ethel's wage
40
780
Profit
320
Assets
=
Capital
+
Liabilities
$
$
Stall
1,800
At beginning of 10 July
2,570
Goods
0
Profits earned on 10 July
320
Cash
(30+ 1,100 – 40)
1,090
2,890
2,890
+
$0
(ii)
After Liza has withdrawn $200 in cash, retained profits will be only $(320 – 200) = $120.
Assets
=
Capital
+
Liabilities
$
$
Stall
1,800
At beginning of 10 July
2,570
Goods
0
Retained profits
120
Cash
for 10 July
(1,090
200)
890
2,690
2,690
+
$0
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78
5: Ledger accounts and double entry Part C The use of double entry and accounting systems
It is very important you should understand the principles described so far. Do not read on until you are
confident that you understand the solution to this example.
3.6 Payables and receivables
Trade accounts payable are liabilities. Trade accounts receivable are assets.
3.6.1 Trade accounts payable and trade accounts receivable
A
payable is a person to whom a business owes money.
A
trade payable is a person to whom a business owes money for debts incurred in the course of trading
operations. In the accounts of a business, debts still outstanding which arise from the purchase of
materials, components or goods for resale are called
trade accounts payable, sometimes abbreviated to
'accounts payable' or 'payables'.
A business does not always pay immediately for goods or services it buys. It is a common business
practice to make purchases on credit, with a promise to pay within 30 days, or two months or three
months, of the date of the invoice for the goods. For example, A buys goods costing $2,000 on credit from
B, B sends A an invoice for $2,000, dated 1 March, with credit terms that payment must be made within
30 days. If A then delays payment until 31 March, B will be a payable of A between 1 and 31 March for
$2,000. From A's point of view, the amount owed to B is a
trade account payable.
A trade account payable is a
liability of a business.
Just as a business might buy goods on credit, so too might it sell goods to customers on credit. A
customer who buys goods without paying cash for them straight away is a
receivable.
For example, suppose that C sells goods on credit to D for $6,000 on terms that the debt must be settled
within two months of the invoice date 1 October. If D does not pay the $6,000 until 30 November, D will
be a receivable of C for $6,000 from 1 October until 30 November. In the accounts of the business,
amounts owed by receivables are called
trade accounts receivable, sometimes abbreviated to 'accounts
receivable' or 'receivables'.
A trade account receivable is an
asset of a business. When the debt is finally paid, the trade account
receivable 'disappears' as an asset, to be replaced by 'cash at bank and in hand'.
3.6.2 Example continued
The example of Liza Doolittle's market stall is continued, by looking at the consequences of the following
transactions in the week to 17 July 20X6. (See Paragraph
3.5
for the situation as at the end of 10 July.)
(a)
Liza Doolittle realises that she is going to need more money in the business and so she makes the
following arrangements.
(i)
She invests immediately a further $250 of her own capital.
(ii)
She persuades her Uncle Henry to lend her $500 immediately. Uncle Henry tells her that she
can repay the loan whenever she likes, but in the meantime, she must pay him interest of $5
each week at the end of the market day. They agree that it will probably be quite a long time
before the loan is eventually repaid.
(b)
She decides to buy a second hand van to pick up flowers and plants from her supplier and bring
them to her stall in the market. She finds a car dealer, Laurie Loader, who agrees to sell her a van
on credit for $700. Liza agrees to pay for the van after 30 days' trial use.
(c)
During the week, Liza's Uncle George telephones her to ask whether she would sell him some
garden gnomes and furniture for his garden. Liza tells him that she will look for a supplier. After
some investigations, she buys what Uncle George has asked for, paying $300 in cash to the
Tutorial note
Key term
Key term
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