Slide 3.

Assets economic resources that

the company owns or controls from
past transactions/events that it
expects to help generate future
benefits.

Cash and cash equivalents

Accounts Receivable (Customer bought it on credit)
Inventories (Merchandise, Supplies, Parts)
Prepaid Expenses (taxes, utilities,
insurance)
Property
Plant
Equipment

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 3.2

Liabilities

economic obligations of
the organization to outsiders from
past transactions /events that it
expects to pay in the future

Accounts Payable (We bought it on credit)

Notes Payable
Long-term debt

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 3.3

Purchases

- Goods bought by the business

for the prime purpose of selling them again.

Sales

- Goods sold by the business, in which

it normally deals, which were bought with
the prime intention of resale

Return

inwards - Goods return by

customers (sales return).

Return

outwards - Goods return to

supplier (purchases return)

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 3.4

Expenses

net assets given up or

consumed when delivering goods or
services to customers

Income

(profit, earnings) revenues less

expenses during some reporting period

Drawings

Sometimes the owner will

want to take cash out of the business for
their private use, this known as drawings

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 3.5

Profit

= Selling Price Cost of Goods Sold

(Selling Price > Cost of Goods Sold)

Loss

= Selling Price Cost of Goods Sold

(Selling Price < Cost of Goods Sold)

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 3.6

Sample of expenses :
Rent
Stationery
Salaries
Motor expenses
Telephone
Sample of revenues :
Sales
Rental income

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Chapter 3
The Asset of Inventory

Learning objectives
After you have studied this chapter, you
should be able to:
Explain why it is inappropriate to use an
inventory account to record increases and
decreases in inventory
Describe the two causes of inventory
increasing
Describe the two causes of inventory
decreasing

Learning objectives (Continued)

Explain

the difference between a purchase

account and a return inwards account
Explain the difference between a sales
account and a return outwards account
Explain how to record increases and
decreases of inventory in the appropriate
accounts
Explain the meanings of the terms
purchases and sales as used in
accounting

Learning objectives (Continued)

Explain

the differences in recording

purchases on credit as compared to
recording purchases that are paid for
immediately in cash
Explain the differences in recording sales
on credit as compared to recording sales
that are paid for immediately in cash

Inventory
Normally, goods and services are sold above
cost price, the difference being profit. As
you know, when goods and services are
sold for less than their cost, the difference
is a loss.

An increase in inventory
An increase in inventory can be due to one
of two causes:
The

purchase of additional goods.

The return in to the business of goods
previously sold.

An increase in inventory
(Continued)
To distinguish the two aspects of the
increase of inventory, two accounts are
opened:
A

purchases account, in which purchases

of goods are entered.
A return inwards account, in which goods
being returned into the business are
entered.

A decrease in inventory
A decrease in inventory can be due to one
of two causes:
The

sale of goods.
Goods previously bought by the business
now being returned to the supplier.

A decrease in inventory
(Continued)
To distinguish the two aspects of the
decrease of inventory, two accounts are
opened:
A

sales account, in which sales of goods

are entered.
A return outwards account, in which goods
being returned out to a supplier are
entered.

Activity

Slide 3.17

ACCOUNTING ENTRIES

Debit Purchases
Debit Return Inwards
Debit Expenses
Credit Sales
Credit Return Outwards
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Purchase of inventory on credit

On 1 August 2012, goods costing 165 are
bought on credit from D. Henry.

Henry is a creditor

Purchase of inventory for cash

On 2 August 2012, goods costing 310 are
bought, cash being paid for them
immediately at the time of purchase.

Sales of inventory on credit

On 3 August 2012, goods were sold on
credit for 375 to J. Lee.
J Lee is a
DEBTOR

Sales of inventory for cash

On 4 August 2012, goods are sold for 55,
cash being received immediately at the
time of sale.

Returns inwards
On 5 August 2012, goods which had been
previously sold to F. Lower for 29 are
now returned to the business.

Returns outwards
On 6 August 2012, goods previously bought
for 96 are returned by the business to
K. Howe.

Slide 3.24

Example 2
Mobile Ltd deals in the manufacture and sale of mobile
phones. The companys annual turnover from the sale
of mobile is $ 50 million.
Mobile Ltd recently sold a piece of land for $10 million
At the year end how much is the total sales for Mobile
Ltd..

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 3.25

TRY THIS!!!!
Open T account for every transaction
2010
Jan 1
Jan 10
Jan 15
Jan 20
Jan 22
Jan 31
Jan 31

Cash sales RM200

Purchased goods to the value of RM1000 for cash
Sold goods to Fenton RM750
Sold goods to Meena RM2000
Meena returned damage goods for RM1000
Purchase goods RM300 from Ahmed
Returned goods to Ahmed to the value of RM150

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Special meaning of sales and

purchases
Both

sales and purchases have a special

meaning in accounting.
Purchases means the purchase of those
goods which the business buys with the
sole intention of selling.
Sales means the sale of those goods in
which the business normally deals and
which were bought with the prime
intention of resale.

Learning outcomes
You should have now learnt:
That it is not appropriate to use an
inventory account to record increases and
decreases in inventory because inventory
is normally sold at a price greater than its
cost
That inventory increases either because
some inventory has been purchases or
because the inventory that was sold has
been returned by the buyer

Learning outcomes (Continued)

That

inventory decreases either because

some inventory has been sold or because
inventory previously purchased has been
returned to the supplier
That a purchase account is used to record
purchases of inventory (as debit entries in
the account) and that a return inwards
account is used to record inventory
returned by customers (as debit entries in
the account)

Learning outcomes (Continued)

That

a sales account is used to record

sales of inventory (as credit entries in the
account) and that a return outwards
account is used to record inventory
returned to suppliers (as credit entries in
the account)
How to record increases and decreases of
inventory in the appropriate accounts

Learning outcomes (Continued)

That

in accounting, the term

purchases refers to purchases of
inventory. Acquisitions of any other
assets, such as vans, equipment and
buildings, are never described as
purchases
That in accounting, the term sales
refers to sales of inventory. Disposals
of any other assets, such as vans,
equipment and buildings, are never
described as sales
That purchases for cash are never

Learning outcomes (Continued)

That

purchases on credit are always

entered in the suppliers (creditors)
account
That sales for cash are never entered in
the customers account
That sales on credit are always entered in
the customers (debtors) account