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Purchases and Sales - Credit vs Cash

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Purchase on creditPurchase on credit is a transaction that includes two stages. The first stage causes an increase in both assets and liabilities. The second stage causes a decrease in both assets and liabilities. Simply said, the business gets some current or non-current assets that it can immediately use, but it can pay the invoice amount later. Until the business pays the amount, it has an obligation to the supplier.Example: Let’s assume that a business acquires inventory on credit. The invoice amount that the business has to pay later is $ 11 000. This transaction affects two accounts: one asset account and one liability account. The inventory account increases by $11 000, and it has to be debited because it is an asset account. On the other hand, accounts Payable account increases, too, and it should be credited by $11 000 because it is a liability account.Example: One month later, the business pays the supplier 20% of the total amount of the purchase. This transaction affects one asset account and one liability account. The cash account is the affected asset account. It decreases, and therefore, it has to be credited by $ 2200. The affected liability account is called Accounts Payable. It decreases, too and should be debited by $ 2200.The accounting software automatically posts these two journal entries into the ledger. The record of $11 000 on the debit side of the Inventory account shows that the business increases its inventory, and $11 000 on the credit side of the Accounts Payable account means that the business has an obligation of $11000 to the supplier.The record of $2 200 on the credit side of the Cash account shows that money goes out, and $2 200 on the debit side of the Accounts Payable account means that the obligation to the supplier decreases by $ 2 200.Purchase on cashPurchase on cash is a transaction that affects two asset accounts. Therefore, one asset account has to be debited, and another asset account has to be credited. Example: Let’s say that a business purchases inventory for $11 000 cash.The cash purchase transaction affects two asset accounts – The inventory account and the Cash account. The journal entry that the business should make is the following:The inventory account increases by $11 000, and it should be debited. The cash account decreases, and it should be credited by $11 000.Let’s take a look at the Ledger.The record of $11 000 on the left side of the Inventory account shows an increase in inventory. And the amount of $11 000 on the left side of the Cash account shows a decrease in money. Sales on creditA sale on credit is a transaction that includes three stages. The first stage causes an increase in both assets and revenues. The second stage increases expenses and decreases assets. The third stage causes an increase in one asset and decrease in another asset. Simply said, the business gives some products to its customers, but it will receive the invoice amount later. Until the business receives the invoice amount, it has an expectation known as receivable.Example: A business sells goods for $27 000 on credit to its customers. The sale on credit affects one asset account and one revenue account. The affected asset account is called Accounts Receivable. It increases by $27 000, and the business makes a debit record on it.The revenue account is called Sales, and it increases by $27 000, too. The business makes a credit record on it.Example: The cost of goods sold is $11 000.The accounts that are affected are Inventory and the Cost of goods sold. The first account is an asset account, and the second account is an expense account. Cost of goods sold account increases by $11 000, and it has to be debited. Inventory decreases because the goods go out. The account has to be credited. Actually, no matter that the business has not yet received money, the owners’ equity increases with a difference between $27 000 Sales Revenues and $11 000 cost of goods sold that has been recognized as expenses.Example: In one month, the business receives a payment of 10% from the total price of the goods sold. The payment received affects two asset accounts: Cash account and Accounts Receivable account. Cash account increases by $2 700 and a debit record on the account has to be made. Accounts Receivable decreases by $2 700 and a credit record on the account has to be made.Let’s take a close look at the ledger.Accounts Receivable increases by $27 000, and a record on the account’s debit side is placed. This shows that the business expects money inflow. Sales revenue increases by $27 000, and a record on the credit side of the account is placed. This record shows that no matter that the business has not yet received money, the owners’ equity increases by $27 000.Costs of Goods Sold increases by $11 000 and a record on the account’s debit side is placed. This record shows that the business recognizes $11 000 in expenses when revenue is accumulated. As a result, the owners’ equity decreases by $11 000.The inventory account decreases by $11 000, and a record on the credit side of the account is placed. This record shows that inventory goes out. The cash account increases by $2 700, and a debit record is made. This record shows a money inflow.Accounts Receivable account decreases by $2 700 and a credit record is made. This credit record shows that the business has received part of the money the customer owes. Cash salesSale on cash is a transaction that affects two asset accounts. Therefore, one asset account has to be debited, and another asset account has to be credited.
Example: A business sells goods to its customers and immediately receives the whole amount of $9 000. The cash account increases by $9 000, and the business makes a debit record on it. Sales Revenues account increases by $9 000, too. The business makes a credit record on it.Example: The cost of goods sold is $1 800.The accounts that are affected here are: Inventory and the Cost of goods sold. The cost of goods sold increases by $1 800. Therefore it has to be debited. Inventory account decreases by the same amount, because the goods go out. Therefore, it has to be credited.Let’s see the Ledger.Cash account increases by $9 000 and a record on the account’s debit side is placed. This shows that the business expects money inflow. Sales revenues account increases by $9 000, and a record on the credit side of the account is placed. This record shows that the owners’ equity increases by $9 000.Costs of Goods Sold account increases by $1 800, and a record on the account’s debit side is placed. This record shows that the business recognizes $1 800 expenses when revenues are accumulated. The owners’ equity decreases by $1 800.The inventory account decreases by $1 800, and a record on the credit side of the account is placed. This record shows that inventory goes out.