Business

Buy stock from

suppliers For Resale Sell stock to
customers

1. Buy Goods 2. Sell Goods

SUPPLIER CUSTOMER
From To RR

1. Purchases 1. Sales
1. Cash Transaction: 1. Cash Sales
Purchase with cash/
cheque 2. Sales on Credit

2. Credit Transaction:
Purchase on credit

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Accrual Accounting Assumption
Most business financial reports are prepared on the accrual basis of accounting.
Under this basis, the effects and other events are recognised when they occur and NOT when
cash or its cash or its cash equivalent is received or paid.
Income and expenses are recognised when they take place – INCOME when it is earned (the
point of sale or provision of service) and EXPENSES when it is incurred (used or consumed)
– NOT necessarily when the payments are made or received.

1. Cash Transaction 2. Credit Transaction

 IMMEDIATE PAYMENT  PAYMENT POSTPONED
1. Pay on the spot with either 1. ‘I owe you’
 Cash 2. Have to record the event as long as it
 Cheque has occurred, regardless
OR  Cash Paid or Received
2. Received Cash or Cheque on the spot

1. Cash Purchase 2. Purchases on credit

Business purchase inventory from Purchase inventory on credit from
supplier, paid by cash or cheque ABC Ltd (supplier)

Under Periodic Inventory System, Under Periodic Inventory System,

Dr Purchases Dr Purchase
Cr Cash OR Bank Cr Trade PAYable, ABC Ltd

*The business owes ABC Ltd.

Therefore, we need to PAY in the
future.
ABC Ltd is the business’s trade
payable.
1. Cash Sales 2. Sales on Credit
Sold inventory and received cash OR Sold inventory on credit to TYX Ltd
Cheque (customer)
Dr Cash or Bank Dr Trade RECEIVable
Cr Sales Cr Sales

*TYX Ltd owes the business $, the

business bound to RECEIVE the
settlement.
ABC Ltd is the business’s trade
receivable.

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 1. Credit Transaction

Accounts PAYABLE Accounts RECEIVABLE

 ‘Creditors’  ‘Debtors’
 An account payable is:  An account receivable is:
A party that a business owes $ to due to A party who owes the business $ due to
a purchase on credit. a sales on credit.
 LIABILITY  ASSET
o Eg: Business OWES supplier o Customers OWING the business
(3rd party)  TRADE RECEIVABLES
 TRADE PAYABLE o Total amount in debt to the
o Total amount of debts incurred business arising from
from TRADING ACTIVITIES TRADING ACTIVITIES
(Buying inventory) (Selling inventory)
o Eg: Supplier o Eg: Customers

1. When business → (pays $) Trade Payable

Now, business does not owe the trade payable as it settles it’s debt using $ or cheque.

Therefore, $ ↓, Trade Payable ↓

Dr Trade Payable (Business X owe payables)

Cr Cash/ Bank (Business pays debts, $ ↓)

2. When business (receives $) ← Trade Receivable

Now, trade receivable does not owe the business as it settles it’s debt using $ or cheque.

Therefore, $ ↑, Trade Receivable ↓

Dr Cash/ Bank (Business receives $)

Cr Trade Receivable (Receivables X owe business anymore)

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