| | Examples Of Double Entry Accounting Here is the double entry accounting entries associated with a variety of business transactions: Buy merchandise. You buy $1,000 of goods with the intention of later selling them to a third party. The entry is a debit to the inventory (asset) account and a credit to the cash (asset) account. In this case, you are swapping one asset (cash) for another asset (inventory). Sell goods. You sell the goods to a buyer for $1,500. There are two entries in this situation. One is a debit to the accounts receivable account for $1,500 and a credit to the revenue account for $2,000. This means that you are recording revenue while also recording an asset (accounts receivable) which represents the amount that the customer now owes you. The second entry is a $1,000 debit to the cost of goods sold (expense) account and a credit in the same amount to the inventory (asset) account. This records the elimination of the inventory asset as we charge it to expense. When netted together, the cost of goods sold of $1,000 and the revenue of $1,500 result in a profit of $500. Pay employees. You pay employees $5,000. This is a debit to the wage (expense) account and a credit to the cash (asset) account. This means that you are consuming the cash asset by paying employees
. Buy a fixed asset. You pay a supplier $4,000 for a machine. The entry is a debit of $4,000 to the fixed assets (asset) account and a credit of $4,000 to the cash (asset) account. In this case, you are swapping one asset (cash) for another asset (inventory
). . Sell shares. You sell $8,000 of shares to investors. The entry is a debit of $8,000 to the cash (asset) account and a credit of $8,000 to the common stock (equity) account
. Pay a credit card statement. You pay a credit card statement in the amount of $6,000, and all of the purchases are for expenses. The entry is a total of $8,000 debited to several expense accounts and $8,000 credited to the cash (asset) account. Thus, you are consuming an asset by paying for various expenses. Thus, the key point with double entry accounting is that a single transaction always triggers a recordation in at least two accounts, as assets and liabilities gradually flow through a business and are converted into revenues, expenses, gains, and losses.
Alternatives to Double Entry Accounting A simpler version of accounting is single entry accounting, which is essentially a cash basis system that is run from a check book. Under this approach, assets and liabilities are not formally tracked, which means that no balance sheet can be constructed.
Double Entry Accounting
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