Accounting Entries
The concept of accounting is explained with an example given below: We will take a "Coffee Shop" as a company and see how to book accounting entries for the business.
Bob (The Coffee Shop owner) invests USD 25000 to start the business.
1. Investment
Bob invested USD 25000 in the company, hoping to get some profit. In other words, the company is liable to pay USD 25000 to Bob in the future. So, the account "Bob" is a liability account and it is credited. The company's cash balance will be increased due to the investment. "Cash" is an asset to the company and it will be debited.
The company needs equipment (stove, coffee pot, cups, etc.) and raw materials (coffee, sugar, milk, etc.) immediately. He decides to buy them from the nearest general store, "Super Bazaar" whose owner is a friend, so that he gets some credit. Equipment cost him USD 2800 and raw materials USD 2200. He pays USD 2000 out of the total cost which is USD 5000. This can be recorded in iVendNext using a Payment Entry.
2. Assets
Equipment are "Fixed Assets" (because they have a long life) and raw materials are "Current Assets" (since they are used for day-to-day business), of the company. So, "Equipments" and "Stock in Hand" accounts have been debited to increase the value. He pays 2000, so the "Cash" account will be reduced by that amount, hence credited and he is liable to pay USD 3000 to "Super Bazaar" later, so Super Bazaar will be credited by USD 3000.
Bob (who takes care of all entries) decides to book sales at the end of every day, so that he can analyze daily sales. At the end of the very first day, the Coffee Shop sells 325 cups of coffee, which gives net sales of USD 1625. The owner happily books his first day sales.
3. Income
Income has been booked in the "Sales of Coffee" account which has been credited to increase the value and the same amount will be debited to "Cash" account. Lets say, to make 325 cups of coffee, it costs USD 800, so "Stock in Hand" will be reduced (Cr) by USD 800 and expenses will be booked in the "Cost of goods sold" account by the same amount.
At the end of the month, the company paid the rent amount of the stall (USD 5000) and salary of one employee (USD 8000), who joined from the very first day.
4. Booking Profit
As months progressed, the company purchased more raw materials for the business. After a month he books profit to balance the "Balance Sheet" and "Profit and Loss Statements" statements. Profit belongs to Bob and not the company hence its a liability for the company (it has to pay it to Bob). When the Balance Sheet is not balanced i.e. Debit is not equal to Credit, the profit has not yet been booked. To book profit, the profit and loss accounts have to be reset. The profit/loss is transferred to the Liability account and the profit/loss statement starts fresh. This is done using a Period Closing Voucher.
Explanation: Company's net sales and expenses are USD 40000 and USD 20000 respectively. So, the company made a profit of USD 20000. To make the profit booking entry, "Profit or Loss" account has been debited and "Capital Account" has been credited. The company's net cash balance is USD 44000 and there are some raw materials available worth USD 1000.