Typical Transaction 3
Example: Change Software Upgrading expense from 10,000 to 100,000
The entries for this transaction in the Accounting System can be seen here, in the AccountingLab and in the Accounting System, Operations 2, 3, 4, 6, 8 and 9, M1:
| Payment to a supplier of services (expense) | Decrease Asset (Cash at Bank) (-) |
|---|---|
| Decrease Retained Earnings (-) |
> Double entry: Debit entry, Retained Earnings balance decreases from -32,450 to -122,550. Credit entry, Cash at Bank balance diminishes from -758,550 to 668,550
> Values in red show Balance sheet values before and after changes
| Balance Sheet | ||
|---|---|---|
| Original | After Changes | |
| Assets | ||
| Current Assets | 767,850 | 677,850 |
| Bank | 758,550 | 668,550 |
| Debtors and Prepayments | 9,300 | 9,300 |
| Other Current Assets (Stock) | 0 | 0 |
| Fixed Assets | 44,000 | 44,000 |
| TOTAL ASSETS | 811,850 | 721,850 |
| Liabilities | ||
| Current Liabilities | 44,300 | 44,300 |
| Creditors | 44,000 | 44,000 |
| Accruals | 300 | 300 |
| Long Term Liabilities | 0 | 0 |
| Long Term Loan | 0 | 0 |
| Equity | 767,550 | 677,550 |
| Shareholders’ Equity | 800,000 | 800,000 |
| Income Statement | -32,450 | -122,450 |
| TOTAL Liabilities + Equity + Retained Earnings | 811,850 | 721,850 |
An analysis of financial ratios can be seen here.
Current ratio calculations are as follows:
| Software Upgrading Expense | Current Assets | Total Assets | Current Liabilities | Current Ratio | Profit (loss) | Equity | Total Liabilities + Equity + Retained Earnings | |
|---|---|---|---|---|---|---|---|---|
| Balance Sheet Original | 10,000 | 767,850 | 811,850 | 44,300 | 767,850 / 44,300 = 17.3 | (32,450) | 767,850 | 811,850 |
| Balance Sheet New | 100,000 | 677,850 | 721,850 | 44,300 | 677,850 / 44,300 = 15.3 | (122,450) | 677,850 | 721,850 |
The increase of expense in Software Upgrading changes the current ratio as cash at bank decreases from 758,550 down to 658,850, but creditors nor accruals change, thus, current liabilities do not change. The current ratio decreases, from 17.3 to 15.3 due to the decrease in cash at bank.
The current ratios in the example, 17.3 and 15.3 are far above the normal ratios of trading firms. An absolute minimum current ratio would be above 1.0, meaning that there would just enough current assets to cover current liabilities.
The reader is referred to the discussion on Current ratios per TT1 and TT2.
– Total assets decrease from 811,850 in the initial B/S down to 721,850, due a decrease of Cash at Bank. The latter decreases from 758,550 in the initial B/S down to 668,550 in the new B/S.
– Losses increase in the period, initially -32,450 then after an increase in expense of 90,000 the loss becomes -122,450.
– Subsequently equity decreases from 767,850 to 677,850, due to an increase loss of 90,000.