Accounting Entries

Accounting concept is described with the help of an example below: Let us consider a “Tea Stall” as a company and observe how the accounting entries are to be booked for the business.

1. Investment

Mama (owner of the tea stall) puts in £25,000 as initial investment to begin the business.

Mama has put £25,000 into the company and expects to receive some profit. That is, the company owes Mama £25,000 in the future. So, account “Mama” is an account of liability, and it is credited. The cash balance of the company will be increased as there is an investment. “Cash” is an asset to the company, and it will be debited.

2. Assets

The business requires equipment (teapot, stove, cups, etc.) and raw materials (tea, sugar, milk, etc.) urgently. He purchases them from the local general store, “Super Bazaar”, whose proprietor is a acquaintance of his, so that he is extended some credit.

Equipment price: £2,800

Raw materials: £2,200

Total = £5,000

paid £2,000, balance of £3,000 on credit.

Equipment are Fixed Assets (as they possess a long life), and raw materials are Current Assets (as they are utilized for the daily business) of the company. Therefore, “Equipment” and “Stock in Hand” accounts have been debited to raise the value. He pays £2,000, so Cash account will decrease by that amount, thus credited, and he owes £3,000 to “Super Bazaar” in future, so Super Bazaar will be credited by £3,000.

3. Income

Mama (being the one who does all the entries) wants to book sales at the end of each day so that he may analyze daily sales. By the end of the very first day, tea stall sells 325 cups of tea and thus records net sales of £1,625. The proprietor happily puts his first day’s sales to book. Income has been posted in the Sales of Tea account, to which it has been credited to raise the value, and the same will be posted to the Cash account.

Suppose, to produce 325 cups of tea, the cost is £800, so Stock in Hand will decrease (Cr) by £800, and the expense will be posted in the “Cost of Goods Sold” account by £800.

4. Booking Expenses

At month-end, the rent for the stall (£5,000) and the salary of one employee (£8,000), who joined from day one, were paid by the company.

Rent Expense is debited (to bring expense up) Salary Expense is debited (to bring expense up)
Cash is credited (payment made)

5. Booking Profit

As the month goes on, the company acquires more raw materials for business. At the end of a month he accounts for profit to settle the balance sheet and profit and loss accounts.
Profit is Mama’s and not company’s; so it’s a company’s liability (it has to pay it to Mama).
If the balance sheet is not in balance, i.e., debit does not equal credit, then profit has not yet been booked. In order to book profit, profit and loss accounts must be cleared. The profit/loss is transferred to the Liability (Capital) account and the P&L statement renews.
The net sales and expenses of the company are £40,000 and £20,000, respectively. Thus, the company earned a profit of £20,000. To record the profit booking entry, the “Profit or Loss” account has been debited and the “Capital Account” has been credited.
The net cash balance of the company is £44,000, and there are some raw materials available with a value of £1,000.

Accounting Entries