1. Chapter 3 THE ASSET OF STOCK

2.

Explain the meaning of terms purchase and sales as used in accounting.

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.

Study Objectives 3.

Purchases in accounting means the purchase of goods which the business buys with the prime 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.

Special meaning of sales and purchases 4. Stock Movement

Good or services are sold above cost price

Goods or services are sold for less than their cost.

Profit LO 1Explain what an account is and how it helps in the recording process. Loss 5. Stock Movement

The purchase of additional goods.

The return in to the business of goods previously sold

Therefore we have to open 2 account:

Purchase Account

A Return Inwards Account

Increase in stock LO 1Explain what an account is and how it helps in the recording process. 6. Stock Movement

The sale of goods.

Good previously bought by the business now being returned to supplier.

Therefore we have to open 2 account:

A Sales Account

A Return Outwards Account

Decrease in stock LO 1Explain what an account is and how it helps in the recording process. 7. Purchase of stock on credit

On 1 August 20X8, goods costing RM165 are bought on credit from D Henry.

Therefore:

The asset of stock is increased.

There is an increase in a liability.

LO 2Define debits and credits and explain their use in recording business transactions. 8. Purchases of stock on credit $10,000 Aug 1 Purchases 165 Balance Transaction #1 LO 2Define debits and credits and explain their use in recording business transactions. Aug 1 Henry165 9. Purchases of stock for cash

On 2 August 20X8, goods costing RM310 are bought, cash being paid for them immediately at the time of purchases.

Therefore:

The movement of stock is that of a purchase.

The asset of cash is decreased.

LO 2Define debits and credits and explain their use in recording business transactions. 10. Purchases of stock for cash $10,000 Aug 2 Purchases 310 Balance Transaction #1 LO 2Define debits and credits and explain their use in recording business transactions. Aug 1 Cash310 11. Sales of stock on credit

On 3 August 20X8, goods were sold on credit for RM375 to J Lee.

Therefore:

An asset is increased.

The asset of stock is decreased.

LO 2Define debits and credits and explain their use in recording business transactions. 12. Sales of stock on credit $10,000 Aug 3 J Lee375 Balance Transaction #1 LO 2Define debits and credits and explain their use in recording business transactions. Aug 3 Sales375 13. Sales of stock for cash

On 4 August 20X8, goods are sold for RM55, cash being received immediately at the time of sale

Therefore:

The asset of cash is increased.

The asset of stock is reduced

LO 2Define debits and credits and explain their use in recording business transactions. 14. Sales of stock for cash $10,000 Aug 4 Cash55 Balance Transaction #1 LO 2Define debits and credits and explain their use in recording business transactions. Aug 4 Sales55 15. Return Inwards (Sales Return)

On 5 August 20X8, goods which had been previously sold to F Lowe for RM29 are now returned to the business. This could be for various reason such as:

We sent goods of the wrong size, wrong colour or the wrong model.

The goods may have been damaged in transit.

The goods of poor quality.

LO 2Define debits and credits and explain their use in recording business transactions. 16. Return Inwards (Sales Return)

Therefore:

The asset of stock is increased by the goods returned.

2. There is a decrease in an asset.

LO 2Define debits and credits and explain their use in recording business transactions. 17. Return Inwards (Sales Return) $10,000 Aug 5R Inward29 Balance Transaction #1 LO 2Define debits and credits and explain their use in recording business transactions. Aug 5 F Lowe29 18. Returns Outwards (Purchase Return)

On 6 August 20X8, goods previously bought for RM96 are returned by the business to K Howe.

The liability of the business to K Howe is decreased by the value of the goods returned.

The asset of stock is decreased by the goods sent out.

LO 2Define debits and credits and explain their use in recording business transactions. 19. Return Outwards (Purchase Return) $10,000 Aug 6K Howe96 Balance Transaction #1 LO 2Define debits and credits and explain their use in recording business transactions. Aug 6 R Outwards96 20. End Chapter 3