Chapter 3

THE ASSET OF STOCK

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

2. Explain the differences in recording purchases on credit as compared to recording purchases that are paid for immediately in cash.
3. Explain the differences in recording sales on credit as compared to recording sales that are paid for immediately in cash.

Special meaning of sales and purchases

1. Purchases in accounting means the purchase of goods which the business buys with the prime intention of selling. 2. Sales means the sale of those goods in which the business normally deals and which were bought with the prime intention of resale.

Stock Movement
Profit

Good or services are sold above cost price

Loss

Goods or services are sold for less than their cost.

LO 1 Explain what an account is and how it helps in the recording process.

Stock Movement
Increase in stock
The purchase of additional goods. The return in to the business of goods previously sold Therefore we have to open 2 account:
a. b.

Purchase Account A Return Inwards Account

LO 1 Explain what an account is and how it helps in the recording process.

Stock Movement
Decrease in stock
The sale of goods. Good previously bought by the business now being returned to supplier. Therefore we have to open 2 account:
a.
b.

A Sales Account
A Return Outwards Account

LO 1 Explain what an account is and how it helps in the recording process.

Purchase of stock on credit

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

Therefore: a.The asset of stock is increased. b.There is an increase in a liability.

LO 2 Define debits and credits and explain their use in recording business transactions.

Purchases of stock on credit

Purchases
Debit / Dr. Credit / Cr.

D Henry
Debit / Dr. Credit / Cr.

Aug Transaction 1 Henry 165 #1

$10,000

Aug 1 Purchases 165

Balance

LO 2 Define debits and credits and explain their use in recording business transactions.

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: a.The movement of stock is that of a purchase. b.The asset of cash is decreased.

LO 2 Define debits and credits and explain their use in recording business transactions.

Purchases of stock for cash

Purchases
Debit / Dr. Credit / Cr.

Cash
Debit / Dr. Credit / Cr.

Aug Transaction 1 Cash 310 #1

$10,000

Aug 2 Purchases 310

Balance

LO 2 Define debits and credits and explain their use in recording business transactions.

Sales of stock on credit

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

Therefore: a.An asset is increased. b.The asset of stock is decreased.

LO 2 Define debits and credits and explain their use in recording business transactions.

Sales of stock on credit

J Lee
Debit / Dr. Credit / Cr.

Sales
Debit / Dr. Credit / Cr.

Aug Transaction 3 Sales 375 #1

$10,000

Aug 3 J Lee 375

Balance

LO 2 Define debits and credits and explain their use in recording business transactions.

Sales of stock for cash

On 4 August 20X8, goods are sold for RM55, cash being received immediately at the time of sale Therefore: a.The asset of cash is increased. b.The asset of stock is reduced

LO 2 Define debits and credits and explain their use in recording business transactions.

Sales of stock for cash

Cash
Debit / Dr. Credit / Cr.

Sales
Debit / Dr. Credit / Cr.

Aug Transaction 4 Sales #1 55

$10,000

Aug 4 Cash

55

Balance

LO 2 Define debits and credits and explain their use in recording business transactions.

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 2 Define debits and credits and explain their use in recording business transactions.

Return Inwards (Sales Return)

Therefore:
1.The

asset of stock is increased by the goods returned. 2. There is a decrease in an asset.

LO 2 Define debits and credits and explain their use in recording business transactions.

Return Inwards (Sales Return)

Return Inwards
Debit / Dr. Credit / Cr.

F Lowe
Debit / Dr. Credit / Cr.

Aug Transaction 5 F Lowe 29 #1

$10,000

Aug 5 R Inward 29

Balance

LO 2 Define debits and credits and explain their use in recording business transactions.

Returns Outwards (Purchase Return)

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

liability of the business to K Howe is decreased by the value of the goods returned. 2.The asset of stock is decreased by the goods sent out.
LO 2 Define debits and credits and explain their use in recording business transactions.

Return Outwards (Purchase Return)

K Howe
Debit / Dr. Credit / Cr.

Returns Outwards
Debit / Dr. Credit / Cr.

Aug 6 R Outwards Transaction #1 96

$10,000

Aug 6 K Howe 96

Balance

LO 2 Define debits and credits and explain their use in recording business transactions.

End Chapter 3