Accounts

Financial statements are a detailed presentation of BAE.  Each time a transaction takes place, the BAE changes.

It will be impractical to prepare a new set of financial statements for each new transaction. For that reason, transactions are entered accounts.  Similar transactions are entered in the same account. Accounts could be debited or credited.

Every transaction needs to be entered in at least two accounts, one debit and one credit. For each asset, liability, income or expenditure, a separate account is opened.

Whenever financial statements need to be prepared, the total of each account is needed. A list of account balances is known as a trial balance.

Accounts are known as ledger accounts or T-accounts with debits being entered on the left side and credits on the right side of the T.

Example:

The Sloestart Company purchased 500 model aeroplanes at an amount of R250 000, which was paid in cash. In the first month, they sold 20 models for cash @ R1 000 each. The influence on the basic accounting equation would be:

From the purchase transaction:

Decrease the short–term asset cash by R250 000, increase short-asset stock by R250 000

From the selling transaction:

• Decrease the short-term asset stock by R10 000, and increase the expense cost of sales by R10 000.
• Increase the short-term cash by R20 000, and increase income by R20 000.

Assume that all transactions in the above example for Sloestart Company had taken place on credit. Add these transactions to the BAE.

Click here to download a table, then write down the values for each of these transactions in the BAE format.