Chapter 3

THE ASSET OF STOCK

1. Explain the meaning of terms purchase
and sales as used in accounting.
2. Explain the differences in recording
purchases on credit as compared to
recording purchases that are paid for
immediately in cash.
3. Explain the differences in recording sales
on credit as compared to recording sales
that are paid for immediately in cash.


Study Objectives
1. Purchases in accounting means the
purchase of goods which the
business buys with the prime
intention of selling.
2. Sales means the sale of those goods
in which the business normally deals
and which were bought with the
prime intention of resale.


Special meaning of sales and purchases

Good or services are sold
above cost price


Goods or services are sold
for less than their cost.

Profit
LO 1 Explain what an account is and how it helps in the recording process.
Stock Movement
Loss
The purchase of additional goods.
The return in to the business of
goods previously sold

Therefore we have to open 2
account:
a. Purchase Account
b. A Return Inwards Account

Increase
in stock
LO 1 Explain what an account is and how it helps in the recording process.
Stock Movement
The sale of goods.
Good previously bought by the
business now being returned to
supplier.

Therefore we have to open 2
account:
a. A Sales Account
b. A Return Outwards Account

Decrease
in stock
LO 1 Explain what an account is and how it helps in the recording process.
Stock Movement
On 1 August 20X8, goods costing RM165
are bought on credit from D Henry.

Therefore:
a.The asset of stock is increased.
b.There is an increase in a liability.
Purchase of stock on credit
LO 2 Define debits and credits and explain their
use in recording business transactions.
D Henry
Debit / Dr. Credit / Cr.
$10,000
Aug 1 Purchases 165
Balance
Transaction #1
Purchases of stock on credit
LO 2 Define debits and credits and explain their
use in recording business transactions.
Purchases
Debit / Dr. Credit / Cr.
Aug 1 Henry 165
On 2 August 20X8, goods costing RM310
are bought, cash being paid for them
immediately at the time of purchases.

Therefore:
a.The movement of stock is that of a
purchase.
b.The asset of cash is decreased.
Purchases of stock for cash
LO 2 Define debits and credits and explain their
use in recording business transactions.
Cash
Debit / Dr. Credit / Cr.
$10,000
Aug 2 Purchases 310
Balance
Transaction #1
Purchases of stock for cash
LO 2 Define debits and credits and explain their
use in recording business transactions.
Purchases
Debit / Dr. Credit / Cr.
Aug 1 Cash 310
On 3 August 20X8, goods were sold on
credit for RM375 to J Lee.

Therefore:
a.An asset is increased.
b.The asset of stock is decreased.
Sales of stock on credit
LO 2 Define debits and credits and explain their
use in recording business transactions.
Sales
Debit / Dr. Credit / Cr.
$10,000
Aug 3 J Lee 375
Balance
Transaction #1
Sales of stock on credit
LO 2 Define debits and credits and explain their
use in recording business transactions.
J Lee
Debit / Dr. Credit / Cr.
Aug 3 Sales 375
On 4 August 20X8, goods are sold for
RM55, cash being received immediately at
the time of sale

Therefore:
a.The asset of cash is increased.
b.The asset of stock is reduced
Sales of stock for cash
LO 2 Define debits and credits and explain their
use in recording business transactions.
Sales
Debit / Dr. Credit / Cr.
$10,000
Aug 4 Cash 55
Balance
Transaction #1
Sales of stock for cash
LO 2 Define debits and credits and explain their
use in recording business transactions.
Cash
Debit / Dr. Credit / Cr.
Aug 4 Sales 55
On 5 August 20X8, goods which had been
previously sold to F Lowe for RM29 are
now returned to the business. This could
be for various reason such as:

We sent goods of the wrong size, wrong
colour or the wrong model.
The goods may have been damaged in
transit.
The goods of poor quality.
Return Inwards (Sales Return)
LO 2 Define debits and credits and explain their
use in recording business transactions.
Therefore:

1.The asset of stock is increased by
the goods returned.

2. There is a decrease in an asset.

Return Inwards (Sales Return)
LO 2 Define debits and credits and explain their
use in recording business transactions.
F Lowe
Debit / Dr. Credit / Cr.
$10,000
Aug 5 R Inward 29
Balance
Transaction #1
Return Inwards (Sales Return)
LO 2 Define debits and credits and explain their
use in recording business transactions.
Return Inwards
Debit / Dr. Credit / Cr.
Aug 5 F Lowe 29
On 6 August 20X8, goods previously
bought for RM96 are returned by the
business to K Howe.

1.The liability of the business to K Howe
is decreased by the value of the goods
returned.
2.The asset of stock is decreased by the
goods sent out.
Returns Outwards (Purchase Return)
LO 2 Define debits and credits and explain their
use in recording business transactions.
Returns Outwards
Debit / Dr. Credit / Cr.
$10,000
Aug 6 K Howe 96
Balance
Transaction #1
Return Outwards (Purchase Return)
LO 2 Define debits and credits and explain their
use in recording business transactions.
K Howe
Debit / Dr. Credit / Cr.
Aug 6 R Outwards 96

End Chapter 3