Right, logically a sales return is reversing a sale but if you just did it that way you would lose the detail that you need to maintain as to what had occured.

So, what you would normally have is a seperate T account for returns (the following is simplified and assumes an invoiced sale with payment received into the bank before the sales return).

Think of what happened with the original sale :

Dr Customer
Cr Sales

Cr Customer
Dr Bank

Now when you process a sales return you would

Cr Bank
Dr Sales Returns

In the accounts the sales figure shown on the face of the P&L will not include sales returns as these will have been set off against sales (the P&L just shows one figure rather than three (Sales-sales return=balance) but that is what is actually happening.

Everything balances and the world is good.

If the Customer had not yet paid when the goods were returned then the entries would be

Sale

Dr Customer
Cr Sales

Sales Return

Cr Customer
Dr Sales Returns


As always you will find that different people do the above in slightly diffferent ways and call the accounts different things.

Some people would refer to the customer accounts as accounts receivable but I prefer to refer to them as customer accounts so you realise that its not one account but many (one for each customer).

I would not use the term expense for this or you will confuse yourself later.

HTH,

Shaun.

The Customer account Shaun is talking about would be a single account in the Debtors' ledger, which is a Current Asset, which is your asset you mentioned.

When a Customer buys goods you would debit the Customer account (asset) with the amount of the sale and credit the Sales account (income). Then when the Customer pays, you credit the Customer account (thereby reducing the asset) and debit the bank with the money (asset).

Hope this is what you meant!?

Rafal,

ok, first think of those three transactions in terms of T accounts.

The transactions that you have are :

1(Capital)

Cr Capital 1000

Dr Bank 1000

 

2 (Purchase Inventory)

Cr Bank 200

Dr Inventory 200

 

3 (Record the sale)

Cr Sales 150

Dr bank 150

 

So seeing those as balanced off T accounts that would be (the numbers 1, 2, 3 relate to the 3 transactions) :

Note how a Cost of Goods Sold T account is used to record stock movement at cost.

Ok, now think of that in terms of the financial statements.

First the P&L :

Note that the closing stock figure is the remaining inventory. So, sales in this period resulted in a profit of £50. The COGS figure as such is not used but rather is the balancing side of the transaction and what matters is what remains in inventory.

Now look at how that is reflected in the balance sheet :

Note that closing stock is transferred to being a current asset on the B/S giving total assets of £1050.

Capital + profit = £1050.

And the balance sheet does.

HTH,

Shaun.

Hi Rafal,

nope, its just regular Excel.

Nothing fancy. I just type in what I want to show. Copy and past into paint. Save it, attach it and insert it in the post... Actually, the one ever so slightly non standard bit is that I use custom formatting to show negative values in accountancy format (red in brackets) rather than the Excel standard of a minus sign.

Personally I consider Excel the most important software that I have on my machine and I will always have at least one scratch pad Excel sheet open on one of my screens as its so much easier than using a calculator or adding machine.

Rather than trying to go through all of the detail of debits and credits for Assets, Liabilities and Equity, if might be best to restart from the basics and work forward as putting solid foundations in place now will pay dividends later.

Try Business Accounts by David Cox : www.amazon.co.uk/Business-Accounts-Accounting-Finance-David/dp/1905777922/ref=sr_1_1

very good book that if you do it cover to cover then follow it up with the BPP revision text for AAT units 1-4 : http://www.amazon.co.uk/AAT-Units-Foundation-Revision-Companion/dp/0751732281/ref=sr_1_4?ie=UTF8&qid=1411507486&sr=8-4&keywords=bpp+units+1-4

That way you will quickly be on top of all of the bookkeeping side before moving onto accountancy. At the moment I feel that you are attempting to get through the bookkeeping as quickly as possible but this is really the part that you need to take your time on and understand inside out.

I do appreciate that you are attempting to do that but I think that maybe you are trying to do it too quickly. Take one step back, slow down and you will get to where you want to be twice as fast.

Actually, about now I'm sure that you are looking at the basics and wondering what the hell that you have taken on as this is probably nothing like you expected it to be. Thats another reason to slow down as doing it too fast and losing your way / getting stuck will also see you losing the incentive to carry on.

Try to enjoy what you are learning at this stage as it won't ever be this straight forwards again in your studies especially if you go ahead with ACCA as you said that you are planning to do.

There are other books that I could suggest to help get you started but if you buy too many at once they will go unread (I've got nine large floor to ceiling bookcases full of accountancy books and I hate to think how many of those have never actually been opened!).

kind regards,

Shaun.

-- Edited by Shamus on Tuesday 23rd of September 2014 10:25:43 PM