2.4. Transaction Examples

If you get confused as to whether to debit an account or credit it, this rule will help you decide what to do. Just think about what you want to happen to the account balance, i.e. increase it or decrease it.

To show you the capabilities of Equity Accounting and also illustrate manual bookkeeping, we will work through an example using both. We will start with the Manual Method.

2. Alex buys 50 boxes of paper bags from Bags Pty Ltd. A box costs him $10.00 with 20% up front and the balance due in 30 days.

50 boxes x $10 = $500 20% cash = $100 80% in 30 days = $400

3. Alex places an add in the local paper to sell his paper bags. He pays $100.00 for the add.

4. Alex finds that 5 boxes have been damaged. He informs Bags Pty Ltd and they agree to give him credit off the amount payable in 30 days if he returns the damaged stock.

5. Alex sells 25 boxes of bags for $25.00 a box, receiving 40% cash and the rest on 30 day terms.

Sales

25 X $20 = $625 40% Cash = $250 60% Credit = $375

Cost of Boxes

50 X $10 = $250

Recording the Sale

Recording the Cost

When written in the General Ledger, each account will look like the following.

From the account balances a trial balance can be written.

It can be seen that the trial balance allows us to see all the account balances. It also shows that the debit account total equals the credit account total, as it should.

With the trial balance information, the financial statements can be prepared.

Profit & Loss Statement

Note: A loss would be shown as a bracketed or negative amount.

Once the profit or loss is known, the balance sheet can be prepared.

The Balance Sheet

As you can see, Assets = Liabilities + Capital. The Profit/Loss account shown on the Balance Sheet is the total yearly profit from the Profit and Loss Statement.

Note: Alex would also have had to keep Creditor Records, Debtor Records and Stock Records, probably in the form of ledgers. We have not shown these in this example.

A lot of work, you might well say. That is why we pay our accountant to do it all, but with Equity Accounting this all becomes a piece of cake!

We will now go through this example using the Equity Accounting System.

Note: All of Alex's Creditor, Debtor & Stock details have been entered along with the transactions. This means he will also know his stock levels and stock sales history, his aged creditor & aged debtor status without him having to enter any more information.