Expanded Accounting Equation: Goods Sold, Sales Return and Discount

 

Goods Sold, Sales Returned, Discount Allowed in Expanded Accounting Equation 

Goods sales

Here, sales mean sales of business goods.

The sales amount include only sale of goods NOT the sales of fixed assets.

Sales include both the cash and credit sales made during a period.

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

Credit sales affect debtor (customer, bills receivable or account receivable).

While cash received from debtor, there may be discount allowed.

Discount allowed is deducted from capital.

Full settlement or settled means, there is a discount.

 

Discount allowed

After selling goods on credit, we are to receive amount from debtor or customer.

While receiving cash from customer, he can request some discount.

If we agree to allow discount, it is expenses for us.

Discount allowed is deducted with capital in accounting equation.

Discount allowed is debited in journal entry or record on debit side of profit and loss account.

 

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 is allowed.

At the time of cash received, cash discount is allowed.

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

Discount allowed is debited but discount received is credited.

 

Sales returns (return inward, returned from customer, returned from debtor)  

Sales include both the cash and credit sales made during the accounting period.

Sometimes credit sold goods comes back; it is known sales return.

There are many reasons for sales return like damaged of goods, excess supply, not as order etc.

Sales returns or return inward is added in stock but deducted from debtor in accounting equation.

 

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

PROBLEM: 5

DK Paint House has following extracted data of October:

(a) Business started with cash Rs 60,000, stock Rs 80,000 and furniture Rs 12,300.

(b) Business goods sold worth Rs 40,000 in cash.

(c) Goods sold to Manisha Rs 3,700.

(d) Goods sold to AK Traders for Rs 12,700 and immediately received cash Rs 5,500.

(e) Cash received from Manisha Rs 3,500 in full settlement.

(f) Goods sold costing Rs 17,000 for Rs 20,000.

(g) Excess goods returned by AK Traders Rs 1,300.

Required: Expanded accounting equation

[Answer: Assets = Rs 155,100; Capital = Rs 155,100]

SOLUTION:

Explanation:      

(a) Cash, goods (stock) and furniture are assets; they increase assets. 

(b) Goods (stock) sold increased cash but decreases stock. 

(c) Goods sold to Manisha is credit transaction; it decreases stock but increases debtor or B/R.

(d) Goods sold to AK Traders 12,700 decreases stock; cash received 5,500 increases cash; remaining 7,200 increases debtor or B/R. 

(e) Cash received from Manisha 3,500 in full settlement means there is discount 200. Here, 3,500 increases asset; 200 increases capital and 3,700 decreases assets.

(f) Goods sold costing 17,000 for 20,000 means there is profit. Here 20,000 increases assets; 17,000 decreases assets (stock); 3,000 profit increases capital.

 

                                                                                                 Accounting Equation

Particulars		Assets							=	Owner’s equity		+	Liabilities
		Cash	+	Stock	+	Furniture	+	Debtor		Capital ±
a	Business started	60,000	+	80,000	+	12,300	+	0	=	152,300		+	0
	First equation	60,000	+	80,000	+	12,300	+	0	=	152,300		+	0
b	Business goods sold in cash	40,000		(40,000)		0		0		0			0
	New equation	100,000	+	40,000	+	12,300	+	0	=	152,300		+	0
c	Goods sold on credit	0		(3,700)		0		3,700		0			0
	New equation	100,000	+	36,300	+	12,300	+	3,700	=	152,300		+	0
d	Goods sold in cash/credit	5,500		(12,700)		0		7,200		0			0
	New equation	105,500	+	23,600	+	12,300	+	10,900	=	152,300		+	0
e	Cash received, discount allowed	3,500		0		0		(3,700)		(200)	dis		0
	New equation	109,000	+	23,600	+	12,300	+	7,200	=	152,100		+	0
f	Goods sold costing 17,000 for 20,000	20,000		(17,000)		0		0		+3,000	profit		0
	New equation	129,000	+	6,600	+	12,300	+	7,200	=	155,100		+	0
g	Sales returned	0		1,300		0		(1,300)		0			0
	Final equation	129,000	+	7,900	+	12,300	+	5,900	=	155,100		+	0

 

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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
Trial Balance and Adjusted Trial Balance	http://tiny.cc/c59jkz
Bank Reconciliation Statement (BRS)	http://tiny.cc/q59jkz
Depreciation	http://tiny.cc/ugakkz
Click on link for YouTube videos chapter wise:
Financial Accounting and Analysis (All videos)	http://tiny.cc/jlersz
Accounting Process	http://tiny.cc/mlersz
Accounting for Long Lived Assets	http://tiny.cc/plersz
Analysis of Financial Statement	http://tiny.cc/slersz

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Alternatively,

Accounting Equation

Particulars		Assets		=	Capital		+	Liabilities
a	Business started with cash and stock	60,000 80,000 12,300	cash stock furniture	=	152,300		+	0
	First equation	152,300		=	152,300		+	0
b	Business goods sold in cash	40,000 (40,000)	cash stock		0			0
	New equation	152,300		=	152,300		+	0
c	Goods sold to Manisha	3,700 (3,700)	debtor stock		0		+	0
	New equation	152,300		=	152,300		+	0
d	Goods sold in cash and credit	5,500 7,200 (12,700)	cash debtor stock		0		+	0
	New equation	152,300		=	152,300		+	0
e	Cash received and discount allowed	3,500 (3,700)	cash debtor		(200)	discount
	New equation	152,100		=	152,100		+	0
f	Goods sold costing 17,000 for 20,000	20,000 (17,000)	cash stock		3,000	profit
	New equation	155,100		=	155,100		+	0
g	Goods returned by AK Traders	1,300 (1,300)	stock debtor		0			0
	Final equation	155,100		=	155,100		+	0

 

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PROBLEM AND ANSWERS

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

PROBLEM: 5A

DK Paint House has following extracted data:

Nov 1, Opening balance: cash Rs 129,000; stock Rs 7,900; furniture Rs 12,300; debtors Rs 5,900; and capital Rs 155,100.

Nov 5, Goods purchased of Rs 85,300 and paid partially Rs 32,000.

Nov 8, Goods sold in cash for Rs 5,400 on return basis.

Nov 10, Goods sold costing 25,800 at 60% profit on account.

Nov 25, Returned inward (sold in cash) Rs 400.

Nov 29, Customer settled his account (sold on Nov 10) after 5% discount.

Required: Accounting equation in expanded form

[Answer:  Assets = 141,216; 62,400; 12,300; 5,900; Owner’s equity = 168,516;

Liabilities = 53,300; * Discount = 41,280@5% = 2,064]

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