Accounting Entries
Accounting Entries: To illustrate the concept of accounting, let’s consider a “Tea Stall” as our company and examine how to record accounting entries for the business.
Mama, the owner of the tea stall, invests AED 25,000 to initiate the business.
1. Investment
Mama invested AED 25,000 in the company, anticipating future profits. Consequently, the company is obligated to repay AED 25,000 to Mama at a later date. Hence, the account “Mama” is categorized as a liability account and credited. The company’s cash balance increases as a result of the investment. “Cash” represents an asset for the company and is therefore debited.
In immediate need of equipment (such as a stove, teapot, cups, etc.) and raw materials (such as tea, sugar, milk, etc.), Mama opts to purchase them from the nearby general store, “Super Bazaar,” owned by a friend, thus obtaining some credit. The equipment costs him AED 2,800 and the raw materials AED 2,200. He makes an initial payment of AED 2,000 out of the total cost of AED 5,000. This transaction can be recorded in BizCentric using a Payment Entry.
2. Assets
Mama invested AED 25,000 in the company, expecting future returns. This establishes a liability for the company, as it is now obligated to repay AED 25,000 to Mama in the future. Consequently, the account “Mama” is categorized as a liability account and credited. The company’s cash balance increases due to the investment, representing an asset, and is therefore debited.
In urgent need of equipment (such as a stove, teapot, cups, etc.) and raw materials (such as tea, sugar, milk, etc.), Mama decides to purchase them from the nearby general store, “Super Bazaar,” owned by a friend. This allows him to obtain some credit. The equipment costs him AED 2,800, and the raw materials cost AED 2,200. He initially pays AED 2,000 out of the total expense of AED 5,000. This transaction can be recorded in BizCentric using a Payment Entry.
3. Income
Income has been recorded in the “Sales of Tea” account, resulting in a credit to increase its value, while an equal amount is debited to the “Cash” account. For instance, producing 325 cups of tea incurs a cost of AED 800. Consequently, the “Stock in Hand” account is reduced (credited) by AED 800, and an expense is recorded in the “Cost of Goods Sold” account for the same amount.
At the end of the month, the company paid the stall rent amounting to AED 5,000 and the salary of one employee, totaling AED 8,000, who had been employed since the first day.
4. Booking Profit
As the month progresses, the company continues to purchase additional raw materials for its operations. At the end of the month, the company adjusts its financial statements, specifically the “Balance Sheet” and “Profit and Loss Statements,” to account for any accrued profit. Since the profit belongs to Mama and not the company itself, it is considered a liability for the company, as it must be paid to Mama.
When the Balance Sheet is unbalanced, meaning the Debit does not equal the Credit, it indicates that the profit has not yet been booked. To rectify this, the profit and loss accounts must be reset, and the profit/loss is transferred to a Liability account, resetting the profit/loss statement. This process is facilitated using a Period Closing Voucher.
Explanation: The company’s net sales amount to AED 40,000, while its expenses total AED 20,000, resulting in a profit of AED 20,000. To record the profit booking entry, the “Profit or Loss” account is debited, and the “Capital Account” is credited. Additionally, the company’s net cash balance is AED 44,000, with available raw materials valued at AED 1,000.