Double Entry System for the

Asset Stock (Chapter 7)

▪ Inventory or stock are
goods or products that
the business intends to
resale.
Remember this is a sole
trader considering a
merchandising business.
▪ Inventory moves in four manners:
✓ Increase of Inventory
a. Purchase of goods or Purchase of additional goods
(Account used is Purchases Account)

b. Return to the business of goods previously sold to the debtor.

(Reasons for return: wrong type, wrong requirements, or faulty.)
(Account used is Sales Return Account)

✓ Decrease of Inventory
c. Sales of goods.
(Account used is Sales Account)

d. Goods previously bought but now return to the creditor.

(Reasons for return: wrong type, wrong requirements, or faulty.)
(Account used is Purchases Return Account)
▪ Purchase of Stock on Credit
▪ Increase Inventory (Record in Purchases Account)

▪ Increase a Liability (Record in Creditor’s Account)

▪ Purchase of Stock on Cash/Cheque

▪ Increase Inventory (Record in Purchases Account)

▪ Decrease an Asset (Record in Cash or Bank Account)

▪ Return of Stock Purchased
▪ Decrease Inventory (Record in Purchases Return Account)

▪ Decrease a Liability (Record in Creditor’s Account)

▪ Sale of Stock on Credit
▪ Decrease Inventory (Record in Sales Account)

▪ Increase an Asset (Record in Debtor’s Account)

▪ Sale of Stock on Cash/Cheque

▪ Decrease Inventory (Record in Sales Account)

▪ Increase an Asset (Record in Cash or Bank Account)

▪ Return of Stock Sold
▪ Increase Inventory (Record in Sales Return Account)

▪ Decrease an Asset (Record in Debtor’s Account)

▪ Asset
▪ Liabilities
▪ Capital
▪ Sales
▪ Purchases
▪ Sales Return/ Return Inwards
▪ Purchases Return/ Return Outwards
▪ When the owner may want to take cash or
assets out of the business for his or her private
use this is known as drawing.
▪ Each amount taken as drawing will be debited
to the drawing account and deducted from the
capital account.
Chapter 8
 The effects of profit or loss on
capital
▪ Capital Formula
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
▪ Capital is the investments made in the business by
the owner. However, at the end of a fiscal year the
business determines if a profit or loss was made.
▪ A Profit will increase Capital
𝑂𝑙𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 + 𝑃𝑟𝑜𝑓𝑖𝑡𝑠 = 𝑁𝑒𝑤 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
▪ A Loss will decrease Capital
𝑂𝑙𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 − 𝐿𝑜𝑠𝑠 = 𝑁𝑒𝑤 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
▪To make a profit goods are sold at more
than the cost price, while the opposite
effect will mean a loss.

𝑆𝑎𝑙𝑒𝑠 𝑃𝑟𝑖𝑐𝑒 − 𝐶𝑜𝑠𝑡 𝑃𝑟𝑖𝑐𝑒 = 𝑃𝑟𝑜𝑓𝑖𝑡 𝑜𝑟 𝐿𝑜𝑠𝑠

▪Revenue means the value of goods and
services that have been supplied to
customers.

𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = 𝑃𝑟𝑜𝑓𝑖𝑡 𝑜𝑟 𝐿𝑜𝑠𝑠

1.Sales account
2.Rent receivable account
3.Commission receivable account
4.Bank interest received account
▪It is incurred in the cost price also known
as the cost of goods.
▪Each expense is recorded in a separate
account to provide further structure.

𝐶𝑜𝑠𝑡 𝑃𝑟𝑖𝑐𝑒 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠

Classification Sides Effects
Assets Debit Increase
Credit Decrease
Liabilities Debit Decrease
Credit Increase
Capital Debit Decrease
Credit Increase
Expenses Debit Increase
Credit Decrease
Revenues Debit Decrease
Credit Increase