Accounting for Managers: Interpreting accounting information for decision-making

RECORDING FINANCIAL TRANSACTIONS 29

Table 3.2 Summarizing business transactions in a ledger

Account

transaction

Asset

equipment

Asset

inventory

Asset

debtor

Asset

bank

Liability:

creditors

Income:

sales

Expenses

Buy equipment for

cash £25,000

+25,000 −25,000

Purchase stock on

credit £15,000

+15,000 +15,000

Pay wages £3,000 −3,000 +3,000

Sell stock on credit

£9,000

+9,000 +9,000

The goods that were

sold for £9,000 cost

£4,000 to buy

−4,000 +4,000

Pay advertising

£1,000

−1,000 +1,000

Receive £4,000 from

debtor

−4,000 +4,000

Pay £9,000 to creditor −9,000 −9,000

Total of transactions

for this period

+25,000 +11,000 +5,000 −34,000 +6,000 +9,000 +8,000

Table 3.3 Summarizing business transactions with opening balances in a ledger

Account Capital Asset
equipment

Asset

inventory

Asset

debtor

Asset

bank

Liability:

creditors

Income:

sales

Expenses

Investment by
owner

+50,000 +50,000

Total of
transactions for
this period

+25,000 +11,000 +5,000 −34,000 +6,000 +9,000 +8,000

Totals of each
account at end
of period

+50,000 +25,000 +11,000 +5,000 +16,000 +6,000 +9,000 +8,000

Extracting financial information from the accounting system

To produce financial reports we need to separate the accounts for income and
expenses from those for assets and liabilities. In this example, we would produce
a Profit and Loss account based on the income and expenses:

Income 9,000

Less expenses:

Cost of goods sold 4,000

Wages 3,000

Advertising 1,000 8,000

Profit 1,000