Typical Transaction 10
Example: Book the Purchase of Current Assets Change Values from 30,000 to 60,000
The entries for this transaction in the Accounting System can be seen here, in the AccountingLab and in the Accounting System, Operation O14, Q1:
| Recognition of Current Asset Acquisition (Promotional Materials) | Increase in Current Assets (+) |
|---|---|
| Increase in Creditors (+) |
> Double entry: Debit entry, Stock balance increases from 0 to 60,000. Credit entry, Creditors balance increases from 44,000 to 104,000
> Values in red show Balance Sheet values before and after changes
| Balance Sheet | ||
|---|---|---|
| Original | After Changes | |
| Assets | ||
| Current Assets | 767,850 | 827,850 |
| Bank | 758,550 | 758,550 |
| Debtors and Prepayments | 9,300 | 9,300 |
| Other Current Assets (Stock) | 0 | 60,000 |
| Fixed Assets | 44,000 | 44,000 |
| TOTAL ASSETS | 811,850 | 871,850 |
| Liabilities | ||
| Current Liabilities | 44,300 | 104,300 |
| Creditors | 44,000 | 104,000 |
| Accruals | 300 | 300 |
| Long Term Liabilities | 0 | 0 |
| Long Term Loan | 0 | 0 |
| Equity | 767,550 | 767,550 |
| Shareholders’ Equity | 800,000 | 8000,000 |
| Income Statement | -32,450 | -32,450 |
| TOTAL Liabilities + Equity + Retained Earnings | 811,850 | 871,850 |
Analysis
Current ratio calculations are as follows:
| Current Assets | Stock | Creditors | Current Ratio | ||
|---|---|---|---|---|---|
| Balance Sheet Original | 767,850 | 0 | 44,000 | 44,300 | 767,850 / 44,300 = 17.3 |
| Balance Sheet New | 827,850 | 60,000 | 104,000 | 104,300 | 827,850/ 104,000 = 8.0 |
When adjusting for accruals from 300 to 200 in this example, the following changes in the Balance sheets (B/S) and the Income Statement occur:
When booking stock (inventory), 60,000, as in this example, the following changes in the Balance sheets (B/S) and the Income Statement occur:
– Current Assets change significantly, by 60,000, from 767,850 in the original B/S to 827,850 in the new B/S.
– Current Liabilities increase by 60,000 from 44,300 in the original B/S to 104,300 in the new B/S.
– Current Ratio decrease, from 17.3 to 8.0, due to an increased creditor’s obligation. Still a very high current ratio, much greater than 1.0, but it reflects the sensitivity of this ratio to increased current liabilities, particularly creditors. It indicates that whenever the current ratio decreases management must make provisions for cash availability when the time to pay for this purchase arrives.
– There is no change in the Income statement as this a booking transaction with no implication in revenue or expense. Thus, Equity does not change either.