Unit 3.4 Chp 1-4

42 UNIT 3 FINANCIAL ACCOUNTING FOR A TRADING BUSINESS
Example
(continued)
Jan. 2 Purchased $12 000 worth of inventory on credit from KH Books
Jan. 3 Borrowed $20 000 from Sunbank
Jan. 4 Paid $15 000 for a van to use for business deliveries
Continuing with the ledger accounts used on the previous page, the transactions
would be recorded as follows:
Study tip
Although it is likely that
there will be more than
one line of inventory, all
transactions affecting
Inventory will be
recorded in the same
General Ledger account.
Study tip
In this example, one
ledger account has been
used for all Accounts
Payable but later in this
text individual accounts
will be used for each
Account Payable (and
Account Receivable).
Jan. 2 Purchased $12 000 worth of inventory on credit from KH Books
This transaction will increase Inventory (asset) and because it is an asset (left-hand
side of the Balance Sheet), this increase must be recorded on the debit side of the
Inventory account.
At the same time, because this is a credit purchase it will increase the amount owed
to Accounts Payable (liability – right-hand side of the Balance Sheet), so the increase
must be recorded on the credit side of the Accounts Payable account.
Jan. 3 Borrowed $20 000 from Sunbank
This transaction increases Bank (asset) via a debit to that account, and also increases
Loan – Sunbank (liability) via a corresponding credit to that account.
Jan. 4 Paid $15 000 for a van to use for business deliveries
Although Bank is an asset and would normally appear on the left side of the Balance
Sheet, this transaction actually involves a decrease to Bank. This decrease must
therefore be recorded on the credit side of the Bank account. The increase to assets
(in the form of the new van) would be recorded on the debit side of the Van account as
usual.
As a result of these transactions, the accounts in the General Ledger would then
appear as shown in Figure 3.3:
Figure 3.3 General Ledger accounts
General Ledger
Bank (A)
Date Cross-reference Amount $ Date Cross-reference Amount $
Jan. 1 Capital 40000 Jan. 4 Van 15000
3 Loan – Sunbank 20000
Capital (Oe)
Date Cross-reference Amount $ Date Cross-reference Amount $
Jan. 1 Bank 40000
Inventory (A)
Date Cross-reference Amount $ Date Cross-reference Amount $
Jan. 2 Accounts Payable 12000
Accounts Payable (L)
Date Cross-reference Amount $ Date Cross-reference Amount $
Jan. 2 Inventory 12000
Loan – Sunbank (L)
Date Cross-reference Amount $ Date Cross-reference Amount $
Jan. 3 Bank 20000
Van (A)
Date Cross-reference Amount $ Date Cross-reference Amount $
Jan. 4 Bank 15000
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