Typical Transaction 16
Example: Example: Book sale of two licences at a unit price of 20,000
The entries for this transaction in the Accounting System can be seen here, in the AccountingLab and in the Accounting System, Operation O36, Q2:
| Purchase of License for Resale | Increase in Inventory (+) |
|---|---|
| Increase in Creditors (+) |
> Double entry: Debit entry Stock balance augments from zero (0) to 40,000. Credit entry, Creditors balance increases from 44,000 to 84,400. It includes 44,000 for vehicles and 40,000 for the purchase of two licences for resale at 20,000 each.
> Values in red show Balance Sheet values before and after changes
| Balance Sheet | ||
|---|---|---|
| Original | After Changes | |
| Assets | ||
| Current Assets | 767,850 | 807,850 |
| Bank | 758,550 | 758,550 |
| Debtors and Prepayments | 9,300 | 9,300 |
| Other Current Assets (Stock) | 0 | 40,000 |
| Fixed Assets | 44,000 | 44,000 |
| TOTAL ASSETS | 811,850 | 851,850 |
| Liabilities | ||
| Current Liabilities | 44,300 | 84,300 |
| Creditors | 44,000 | 84,000 |
| Accruals | 300 | 300 |
| Long Term Liabilities | 0 | 0 |
| Long Term Loan | 0 | 0 |
| Equity | 767,550 | 767,550 |
| Shareholders’ Equity | 800,000 | 800,000 |
| Income Statement | -32,450 | -32,450 |
| TOTAL Liabilities + Equity + Retained Earnings | 774,450 | 851,850 |
An analysis of financial ratios can be seen here.
| Stock | Current Assets | Current Liabilities | Current Ratio | |
|---|---|---|---|---|
| Balance Sheet Original | 0 | 767,850 | 44,300 | 767,850 / 44,300 = 17.3 |
| Balance Sheet New | 40,000 | 807,850 | 84,300 | 807,850 / 84,300 = 9.6 |
1. When booking a Current Asset (Stock), as in the example, from zero to 40,000, there is a corresponding increase in Stock for the same amount.
2. Current Assets increases from 767,850 to 807,850.
3. Current Liabilities increases by the increase in Creditors, from 44,300 up to 84,300.
4. Current Ratio decreases from 17.3 down to 9.4. What are the implications for cash management? That attention must be paid to the reduction in liquidity so that cash must be planned to be available when the time to pay for the licences arrive.
5. There is no change in the Income Statement, thus Equity does not change.