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).
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.
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.
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 |
|
#######
Click on link for YouTube videos topic wise : |
|
Accounting Equation |
|
Basic Journal Entries in Nepali |
|
Basic Journal Entries |
|
Journal Entry and Ledger |
|
Ledger Account |
|
Subsidiary Book |
|
Cash Book |
|
Trial Balance and Adjusted Trial Balance |
|
Bank Reconciliation Statement (BRS) |
|
Depreciation |
|
Click on link for YouTube videos chapter wise: |
|
Financial Accounting and Analysis (All videos) |
|
Accounting Process |
|
Accounting for Long Lived Assets |
|
Analysis of Financial Statement |
#####
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 |
|
###########
PROBLEM AND ANSWERS |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =
PROBLEM: 3A
MK Traders, sole proprietor, has following extracted data in April:
Apr 1, Balance: bank Rs 53,500; stock Rs 100,500; capital Rs 131,000 and account payable Rs 23,000.
Apr 5, Payment made of account payable after 2% discount.
Apr 6, Goods purchased on account Rs 12,600.
Apr 10, Goods took per personal use worth Rs 7,850.
Apr 20, Damaged goods returned of Rs 600.
Apr 25, Goods given as charity for Corona Pandemic affected Rs 26,450.
Apr 30, Goods lost by fire worth Rs 9,300.
Required: Accounting equation in expanded form
[Answer: Assets = 30,960; 68,900; Owner’s equity = 87,860; Liabilities = 12,000]
***********
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