Ask Me Help Desk - Setting up my business

Setting up my business

I have software but need to make sure I understand some of the basics. Sorry if I sound stupid.

If we sell $2,000 worth of our inventory for $3,000, and our client pays cash, how do I post the transaction? I have got a cash account, inventory , receivable, sales, and cost of sales but am not sure how to post the transaction.

Also, if we sell inventory that the client receives, but will not pay for until the next month, how do I post this transaction?

Also, what steps do I follow in every business transaction to make sure that I don't make a mistake? Post the entry, journalize anything that may not be covered by the posting, prepare a Balance Sheet, and then a Trial Balance? Or am I missing something?

Also, if we sell something, post it, and then find I made a mistake in the cost of the item we sold, which accounts would I have to make a journal entry to?

Thanks ahead of time.

I want to make sure I am 'getting' this correctly.

Martin

Quote:

Originally Posted by randikeck

If we sell $2,000 worth of our inventory for $3,000, and our client pays cash, how do I post the transaction? I have got a cash account, inventory , receivable, sales, and cost of sales but am not sure how to post the transaction.

You would…
Dr. Cash 3,000
Cr. Sales 3,000

Why? Because you are receiving cash of $3,000 and are making a sale of $3,000

Now, there is the matter of expense as well….
So you would also…

Dr. Cost of Goods Sold 2,000
Cr. Inventory 2,000

The COGS would go on your income statement to lower your sales.
Therefore = 3,000 – 2,000 = 1,000 in profit from this sale.

NOTE: You only record the cost transaction (the 2,000 one) if you are using the perpetual inventory system. If you are using the periodic inventory system, you would just record all the costs at year end.

Quote:

Originally Posted by randikeck

Also, if we sell inventory that the client receives, but will not pay for until the next month, how do I post this transaction?

You would:
Dr. Accounts Receivable – Client’s Name
Cr. Sales

And if using the perpetual inventory..
Dr. COGS
Cr. Inventory

If no perpetual inventory, the COGS transaction you do not do until adjusting entries at year end.

Then, when the client pays you…
Dr. Cash
Cr. Accounts Receivable – Client’s Name

Quote:

Originally Posted by randikeck

Also, what steps do I follow in every business transaction to make sure that I don't make a mistake? Post the entry, journalize anything that may not be covered by the posting, prepare a Balance Sheet, and then a Trial Balance? Or am I missing something?

When ever you make a Journal Entry, make sure that all of your Debits EQUAL your Credits.

That will make sure that everything always balances.

Quote:

Originally Posted by randikeck

Also, if we sell something, post it, and then find I made a mistake in the cost of the item we sold, which accounts would I have to make a journal entry to?

I am going to give your example some numbers. You sold something for 200 with a cost of 100, but then realized it has a cost of 150

What you did was:
Dr. Cash 200
Cr. Sales 200

Dr. COGS 100
Cr. Inventory 100

What you should have done was:
Dr. Cash 200
Cr. Sales 200

Dr. COGS 150
Cr. Inventory 150

What you need to do to fix it….
Nothing for cash or sales since you did that correctly…

Dr. COGS 50
Cr. Inventory 50

Because you already posted 100, but should have posted 150, so need to post 50 more.

Thanks for your help. I was right about most of it but am so glad I verifited it! I would hate to start on the wrong foot.

You're welcome randikeck.