Transaction: Bought stock amounting to $1,000 on credit from Beta Supplies Limited.
Illustration of Transaction: Increase stock (asset) by $10,000; increase trade creditors (liability) by $10,000.
Increase one asset and decrease another Asset
Transaction: Bought stock amounting to $500 paying immediately by cash.
Illustration of Transaction: Increase stock (asset) by $500; decrease cash (asset) by $500.
Decrease an Asset and decrease Owners Equity
Transaction: Paid rent expense of $200 by cash.
Illustration of Transaction: Decrease cash (asset) by $200; decrease retained profits (owners equity) by $200.
Decrease an Asset and decrease a Liability
Transaction: Paid the debt due to Beta Supplies Limited of $1,000 by cash.
Illustration of Transaction: Decrease cash (asset) by $1,000; decrease trade creditor (liability) by $1,000.
Increase an Asset and increase Owners Equity
Transaction: Received commission of $350 by cash.
Illustration of Transaction: Increase cash (asset) by $350; increase retained profits (owners equity) by $350.
The purchase of the building is considered as an asset because it will lead to future economic benefits that the firm will attain. Such feature leads to the classification of a fixed asset. Whenever a lender provides loan finance, he provides such liability not only on grounds of security but also on the capability of the company to pay back such loan commitment together with interests. In this respect, it is important that the operations of the company, which are performed by the employees are managed properly to lead a reasonable profit. Such profit partly stems from the ability to sell and deliver goods to customers.
If the building bought is not wholly financed by the loan, then an outflow of cash will also be required to complete such transaction. Therefore we will incur an increase in an assets (building), but a decrease in another asset (cash). However, this is done on the premise that the building will enable the firm to perform operations that will generate sufficient profits that will supersede such cash outflow.
In the car accident case a decrease in assets will definitely occur due to cash spend to repair the vehicle together with other relevant costs in case of injury. If such expenditure is covered by the insurance, then the entire cash outflow will be recouped. However, if it is our liability and there is not insurance coverage, then such expenditure would have to be deducted from the profits generated. In this respect to total retained profits added to the equity of the company would be lower.
Whenever we purchase goods on credit, the stock is increase, but the purchase liability is not yet settled with the promise to be met in the nearby future. This will allow a temporary cash advantage. However, when the credit limit expires such liability should be met. In such cases, it is advisable to sell the stock bought in such time frame and ensure that money from sale is received.
In this respect the firm will receive the money to pay back the liability but remaining cash in the form of profits will be kept. If this were not achieved, the short-term liability would be settled from the present cash balance the company is holding. This may eventually lead to liquidity problems.
Wood F.; Sangster A. (2002). Business Accounting 1
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