TT10 Book/TT11 Cash Payment/ TT13 Adjustment Inventory Purchase

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:

Accounting Equation
Recognition of Current Asset Acquisition (Promotional Materials) Increase in Current Assets (+)
Increase in Creditors (+)
> Enter Creditors value 60,000 in field: “Change to”
> 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 Y1
Balance Sheet
Original After Changes
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
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
An analysis of financial ratios can be seen here.
Current ratio calculations are as follows:
Calculation of Current Ratio
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.