I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

PART C: THE USE OF DOUBLE-ENTRY AND ACCOUNTING SYSTEMS 

 

66

 

(b) 

(i) 

On 10 July, all the goods are sold for $1,100 cash, and Ethel is paid $40. The profit for 

the day is $320. 

 

  

  

$  

  

$     

Sales 

 

  

1,100 

Less cost of goods sold 

  

740 

 

Ethel's wage 

  

  40 

 

 

 

 780 

Profit 

 

  

 320 

 

Assets 

 

= Capital 

  +  Liabilities 

 

 

$    

   

 

$       

 

Stall 

 

1,800    At beginning of 10 July 

 

2,570  

 

Flowers and plants 

 

0    Profits earned on  

   10 July 

 

320 

 

 

Cash  

 

   

   

 

(30 + 1,100 – 40) 

 

1,090     

 

            

 

 

 

2,890     

 

2,890 

 

+ 

$0 

(ii) 

After Liza has withdrawn $200 in cash, retained profits will be only $(320 – 200) 

= $120. 

Assets 

 

= 

 

Capital 

 

 

+ 

 

Liabilities 

 

 

$       

 

 

$        

 

Stall 

 

1,800  

At beginning of 

   10 July 

 

2,570 

 

 

Flowers and plants 

 

0  

Retained profits  

 

   

 

Cash

 

 

   for 10 July 

120   

 

   (1,090  200) 

 

   890  

 

 

            

 

 

 

2,690  

 

 

2,690 

 

+ 

$0 

 

3.6 Payables and receivables 

Trade accounts payable are liabilities. Trade accounts receivable are assets.  

3.6.1 Trade accounts payable and trade accounts receivable 

A 

payable

 is a person or organisation to whom a business owes money. 

 

A trade payable is a person or organisation to whom a business owes money for debts incurred in the 

course of trading operations. In the accounts of a business, debts still outstanding which arise from the 

purchase of materials, components or goods for resale are called trade accounts payable, sometimes 

abbreviated to 'accounts payable' or 'payables'. In some businesses, you may see trade accounts payable 

referred to as trade creditors.  

A business does not always pay immediately for goods or services it buys. It is a common business 

practice to make purchases on credit, with a promise to pay, typically within 30 days of the date of the 

invoice for the goods. For example, A buys goods costing $2,000 on credit from B, B sends A an invoice 

for $2,000, dated 1 March, with credit terms that payment must be made within 30 days. If A then 

delays payment until 31 March, B will be a payable of A between 1 and 31 March for $2,000. From A's 

point of view, the amount owed to B is a trade account payable. 

A trade account payable is a liability of a business.  

 IMPORTANT 

It is very important that you understand the principles described so far. Do not read on until you are 

confident that you understand the solution to this example.

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CHAPTER 5  

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  LEDGER ACCOUNTS AND DOUBLE ENTRY 

 

67 

Just as a business might buy goods on credit, so too might it sell goods to customers on credit. A 

customer who buys goods without paying cash for them straightaway is a 

receivable

. 

 

For example, suppose that C sells goods on credit to D for $6,000 on terms that the debt must be 

settled within two months of the invoice date 1 October. If D does not pay the $6,000 until  

30 November, D will be a receivable of C for $6,000 from 1 October until 30 November. In the 

accounts of the business, amounts owed by receivables are called trade accounts receivable, sometimes 

abbreviated to 'accounts receivable' or 'receivables'. Some businesses refer to trade accounts receivable 

as trade debtors. 

A trade account receivable is an asset of a business. When the debt is finally paid, the trade account 

receivable 'disappears' as an asset, to be replaced by 'cash at bank and in hand' as an asset. 

3.6.2 Example continued 

The example of Liza Doolittle's market stall is continued by looking at the consequences of the following 

transactions in the week to 17 July 20X6. (See Section 3.5 for the situation as at the end of 10 July.) 

(a) 

Liza Doolittle realises that she is going to need more money in the business and so she makes 

the following arrangements. 

(i) 

She immediately invests a further $250 of her own capital. 

(ii) 

She persuades her Uncle Henry to lend her $500 immediately. Uncle Henry tells her that 

she can repay the loan whenever she likes but, in the meantime, she must pay him 

interest of $5 each week at the end of the market day. They agree that it will probably be 

quite a long time before the loan is eventually repaid. 

(b) 

She decides to buy a second-hand van to pick up flowers and plants from her supplier and bring 

them to her stall in the market. She finds a car dealer, Laurie Loader, who agrees to sell her a 

van on credit for $700. Liza agrees to pay for the van after 30 days' trial use. 

(c) 

During the week, Liza's Uncle George telephones her to ask whether she would sell him some 

garden gnomes and furniture for his garden. Liza tells him that she will look for a supplier. After 

some investigations, she buys what Uncle George has asked for, paying $300 in cash to the 

supplier. Uncle George accepts delivery of the goods and agrees to pay $350, but he asks if she 

can wait until the end of the month for payment. Liza agrees. 

(d) 

Liza buys flowers and plants costing $800. Of these purchases, $750 are paid in cash, with the 

remaining $50 on seven days' credit. Liza decides to use Ethel's services again as an assistant on 

market day, at an agreed wage of $40. 

(e) 

On 17 July, Liza succeeds in selling all her goods earning revenue of $1,250 (all in cash). She 

decides to withdraw $240 for her week's work. She also pays Ethel $40 in cash. She decides to 

make the interest payment to her Uncle Henry the next time she sees him. 

(f) 

We shall ignore any van expenses for the week, for the sake of relative simplicity. 

Required 

State the accounting equation: 

(i) 

After Liza and Uncle Henry have put more money into the business and after the purchase of  

the van 

(ii) 

After the sale of goods to Uncle George 

(iii) 

After the purchase of goods for the weekly market 

(iv) 

At the end of the day's market trading on 17 July, and after withdrawals have been appropriated 

out of profit 

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