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Expanded Accounting Equation: Goods Purchased, Purchase Return, Discount

Arjun EP

Published on: September 16, 2020

Goods Purchased, Purchase Returned and Discount in Expanded Accounting Equation

Goods purchase

Goods purchase for resale is known purchase.

It includes all cash and credit purchases.

Purchase does not include purchase of assets (plant, machinery, furniture, equipment etc).

It also includes goods-in-trade or goods-in-transit.

Credit purchase affects creditor (supplier, bills payable or account payable).

Full settlement and discount

When goods are sold on credit, amount will be received after some days.

At the time of credit sales trade discount may be allowed.

At the time of cash received, cash discount may be allowed.

Trade discount is not recorded in journal entry but cash discount is recorded.

Discount allowed is debited but discount received is credited.

Discount received

After purchasing goods on credit, organization is to pay amount to creditor or supplier.

While paying cash to creditor, organization can request some discount.

If creditor agrees to allow discount, it is income for an organization.

Discount received is added with capital in accounting equation.

Purchase return (return outwards, return to supplier, return to creditor)

Sometimes suppliers or creditors do not supply goods according to order.

Sometimes goods may be defective or excess in quantity.

In such a condition, goods are returned to suppliers.

Generally, credit purchase goods are returned and recorded in purchase return account.

Purchase return is deducted from stock as well as deducted from creditor in accounting equation.

Keep in Mind (KIM)

In accounting equation: opening stock, purchase, sales and closing stock is known as stock.

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =

PROBLEM: 3

MK Traders, sole proprietor, has following extracted data in March 2020:

(2) Business commenced by opening bank account of Rs 130,000.

(5) Business goods purchased by cheque Rs 25,000.

(10) Goods purchased from Shaukat Rs 35,000.

(16) Goods purchased from Sanjay worth Rs 42,000; partial payment paid by cheque Rs 17,500.

(25) Cheque issued to Shaukat Rs 34,000 in full settlement.

(28) Defective goods return to Sanjay Rs 1,500.

Required: Expanded accounting equation

[Answer: Assets = 154,000; Capital = 131,000; Liabilities = 23,000]

SOLUTION:

Explanation:

(2) Bank balance is an asset; it increases assets.

(5) Goods (stock) is asset; it increases assets.

(10) Goods purchased from Shaukat is credit transaction; stock increases asset and creditor (Shaukat) increases liability.

(16) Goods purchased from Sanjay; stock 42,000 increases assets; partial payment 17,500 decreases asset. Remaining 24,500 increases liabilities.

(25) Full settlement means discount. Rs 34,000 decrease assets; 1,000 discount received increases capital.

(28) Defective goods returned decreases stock as well as creditor (Sanjay)

Accounting Equation

Particulars		Assets			=	Owner’s equity		+	Liabilities
		Bank	+	Stock	=	Capital ±			A/P
2	Business started	130,000	+	0	=	130,000		+	0
	First equation	130,000	+	0	=	130,000			0
5	Business goods purchased	(25,000)		25,000		0
	New equation	105,000	+	25,000	=	130,000		+	0
10	Goods purchased on account	0		35,000		0			35,000
	New equation	105,000	+	60,000	=	130,000		+	35,000
16	Goods purchased in cash/credit	(17,500)		42,000		0		+	24,500
	New equation	87,500	+	102,000	=	130,000		+	59,500
25	Cheque issued and discount received	(34,000)		0	=	+ 1,000	dis		35,000
	New equation	53,500	+	102,000	=	131,000		+	24,500
28	Purchase returned	0		(1,500)		0			(1,500)	return
	Final equation	53,500	+	100,500	=	131,000		+	23,000

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Click on link for YouTube videos topic wise :
Accounting Equation	http://tiny.cc/c89jkz
Basic Journal Entries in Nepali	http://tiny.cc/uaakkz
Basic Journal Entries	http://tiny.cc/8aakkz
Journal Entry and Ledger	http://tiny.cc/caakkz
Ledger Account	http://tiny.cc/haakkz
Subsidiary Book	http://tiny.cc/399jkz
Cash Book	http://tiny.cc/889jkz
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Bank Reconciliation Statement (BRS)	http://tiny.cc/q59jkz
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Alternatively,

Accounting Equation

Particulars		Assets		=	Capital		+	Liabilities
a	Business started with bank balance	130,000	bank	=	130,000		+	0
	First equation	130,000		=	130,000		+	0
b	Business goods purchased by cheque	25,000 (25,000)	stock bank		0			0
	New equation	130,000		=	130,000		+	0
c	Goods purchased on credit	35,000	stock	=	0		+	35,000	creditor
	New equation	165,000		=	130,000		+	35,000
d	Goods purchased in cash and credit	42,000 (17,500)	stock bank		0		+	24,500	creditor
	New equation	189,500		=	130,000		+	59,500
e	Cheque issued and discount received	(34,000)	bank		1,000	discount		(35,000)	creditor
	New equation	155,500		=	131,000		+	24,500
f	Goods returned to Sanjay	(1,500)	stock	=	0		+	(1,500)	return
	Final equation	154,000		=	131,000		+	23,000