Financial_training_DAX2009(11)

1. Basic concepts

The circle will look as follows:

Figure 1.6 Company balances after sales

Note that the circle contains the total account amount, for the Assets, it is Debit – Credit, for the Liabilities and Owner’s Equity, it is Credit – Debit. For example, for the Sales account, it is

$15(Credit) – $0 (Debit) = $15, for the Cost of goods sold account, it is $0 (Credit) – $6.63 (Debit) = -$6.63.

You may note that Delivery Expense is also the Profit&Loss account.

Let’s check the accounting equation: $6 949 (Cash) + $1 200 (Vehicle) + $1 000 (Electric oven) + $497 (Cheese) + $9.97 (Pizza Basis) + $297.6 (Salami) + $38.8 (Olives) + $15 (Customer) = $0 (Liabilities) + $10 000 (Owes the owner) + $15 (Sales) – $6.63 (Cost of goods sold) – $1 (Delivery expense).

10 007.37 = 10 007.37

The company’s profit equals the total Profit&Loss amount. Taras’s Company earns $7.37. Note that the company’s circle increased by $7.37. The total Assets amount is 10 007.37, the total Liabilities amount is 10 007.37. If the circle increased, then the company’s Assets and the company’s Liabilities are increased. In other words, the company’s cost or value increases. But, remember that the Liabilities divided to Owner’s Equity and other Liabilities. It is very good if the Owner’s Equity increases and it is not very good if other Liabilities increase. In the first case, the company owes the money to the owner, in the second case, the company owes the money to other(s).

In this example, the Customer hasn’t paid for the pizza yet. When the Customer pays for the pizza, the following transaction should be recorded: