In the previous article we met some simple accounting transactions. With cash transactions covered, we can now record the effects of each transaction in T-accounts.
Illustration: Record the following transactions for ABD department store in the ledger accounts.
- 1/1/2020: Started business with $300,000 cash and $500,000 at bank.
- 5/1/2020: Bought goods for $55,000 in cash from Cindy.
- 17/1/2020: Made cash sales of $75,000.
- 25/1/2020: Paid rent of $30,000 in cash.
- 27/1/2020: Bought a motor vehicle by cheque from Hilary for $120,000.
- 30/1/2020: Paid salaries of $50,000 by cheque.
1. 1/1/2020
Started business with $300,000 cash and $500,000 at bank.
This is the initial investment we discussed last time: both assets and capital increase together. Here is the T-account representation:
2. 5/1/2020
Bought goods for $55,000 in cash from Cindy.
The second transaction uses the company's cash in hand. Buying goods reduces our assets, and the money paid becomes an expense — Purchases. Note that in cash transactions we do not need to record the third party's name, because the transaction is already final.
3. 17/1/2020
Made cash sales of $75,000.
In the third transaction, we collect cash from selling goods. The money earned accumulates as revenue — Sales — while our asset, cash in hand, increases.
4. 25/1/2020
Paid rent of $30,000 in cash.
The fourth transaction works like buying goods with cash: our assets decrease, and the money paid becomes an expense — Rent expense.
5. 27/1/2020
Bought a motor vehicle by cheque from Hilary for $120,000.
We also use cash in hand or cash at bank to acquire other assets the business needs. Remember: buying assets for operations does not count as Purchases — Purchases is reserved for items bought for resale at a profit.
6. 30/1/2020
Paid salaries of $50,000 by cheque.
In the final transaction, our assets decrease and the money paid becomes an expense — Salary expense.
That was a relatively simple introductory exercise. Once students are more comfortable with cash transactions, we will move on to credit transactions. Keep an eye on our blog!
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