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CGCPA
CGCPA, CPA
Category: Finance
Satisfied Customers: 3820
Experience:  40+ years experience in taxes and financial planning
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I am trying to set up accounts place that buys and sells

Customer Question

Hi Doug,
I am trying to set up accounts for a place that buys and sells gold & sundries. I have a petty cash account already set up. So they sell me goods and I pay them. I'm trying to figure out how to go from there. I know petty cash goes down and my expenses go up but this is where I'm getting jumbled up. I also need to increase my inventory and when I sell the scrap gold my inventory has to go down and my petty cash will go up. What accounts should be set up?
Submitted: 1 year ago.
Category: Finance
Expert:  CGCPA replied 1 year ago.

A basic chart of accounts to help you along :

ASSETS

Cash on hand (also called petty cash)

Cash in bank

Accounts receivable

Inventory

Fixed assets

Accumulated depreciation

LIABILITIES

Accounts payable

Taxes payable

Loans payable

EQUITY

Initial investment

Capital contributed/withdrawn

Profit/Loss

INCOME

Sales

Interest Income

Other income

COST OF GOODS SOLD

Opening Inventory

Purchases

Ending Inventory

EXPENSES

Rent
Utilities

Telephone

Postage and shipping

Interest expense

Office supplies

Depreciation

If you need assistance understanding any of these or have any further needs, please feel free to ask.

Customer: replied 1 year ago.
Thank you for the chart. Where I am getting confused is I'm buying gold and jewelry, I pay the customer (credit - petty cash) and I (debit - inventory?). Isn't buying the gold and jewelry an expense so it's (Cost of Goods Sold)? Then when I sell it, the transaction is (debit - petty cash) and credit? I know I'm missing something but I can't figure it out and the chart doesn't help me with that. By the way I am using QuickBooks 2015, I don't know it that matters or not. Louise
Expert:  CGCPA replied 1 year ago.

If you pay the customer cash, your entry will be to debit purchases and credit petty cash. It becomes part of cost of goods sold at year end. If you look at the chart of accounts the flow is like this at year end. The opening inventory is the amount you begin with at your cost. To this you add the purchases. Then you deduct the year end inventory, all at your cost. The net of these is cost of goods sold.

When any item is sold the entry is to debit cash and credit sales.

Using software can sometimes lead to confusion. That is why I start many clients with a handwritten set up books. The software can be brought in later. Software can provide a source of unfounded confidence that all is going well.

Customer: replied 1 year ago.
I've never used this service before so I'm not entirely sure how it works. Like I said earlier, I keep missing something in the flow. So, I will try again. I have Inventory as an Asset account and Purchases under CGS. Isn't this the same thing? I have Cash on Hand and a Bank account. So I bought some items from someone and I've debited (Inventory or Purchases?) to make them go up and I've credited Cash on Hand to make it go down. Then I melted down the gold and sold it. This is where I'm getting messed up. I put the money in Cash on Hand (debited) now I have to reduce which account? I actually sold the material for more than I paid for it. When I debited Cash on Hand and Credited Sales it actually doubled the Cash on Hand! I'm lost. I understand the CGS gets balanced at the of the year? I had no opening inventory then I added my purchases at my cost but if I've melted down my inventory does that leave me with a zero? Is it possible for you to give me and example with actual numbers? I learn very quickly with visuals - I need to see how the numbers flow. I do appreciate your efforts to educate me. - Louise
Expert:  CGCPA replied 1 year ago.

Here is an example using the following information (hypothetical):

Opening cash on hand $500

Buy merchandise 275

Sell merchandise 450

Opening inventory 100

Ending inventory 115

Purchase Debit purchases 275

Credit cash (275)

Sell merchandise Debit cash 450

Credit sales (450)

Cash account summary:

Opening balance 500

expenditure (275)

sale proceeds 450

Ending cash 675

Cost of goods sold summary

Opening inventory 100

Purchases 275

Ending Inventory (115)

Cost of goods sold 260

Take your time. This is a difficult concept for many to truly understand. I have seen large company CEO's have difficulty with it. To gain the understanding you seek you need to slow down and let the concepts sink in. For example, Cost of goods sold is the actual cost of the merchandise actually sold and NOT the purchases amount. That is why the 3 numbers come into play.

Customer: replied 1 year ago.
Hello again,
I didn't go away I just had a lot of issues to deal with. Okay, please bear with me....
Assets = Liabilities + Equity
Cash on Hand - Asset
Buy Merchandise - Asset
Sales - Revenue
So my first entry would be to Buy Merchandise (Debit to increase) and Cash (Credit to decrease). When I sell the merchandise I Credit Sales (increase) and Credit Buy Merchandise (decrease) - Correct? It's the COGS that I am not getting.
You originally provided me with a basic chart of accounts. Under Assets you have Inventory (merchandise purchased?) and under COGS you have Purchases (the same as merchandise purchased?); in other words it should be in two different places. The COGS "formula" should then be (begin. inv. plus purchases minus ending inventory?) So, if I have no beginning inventory, I bought $275 in merchandise and then sold it all my COGS would be $275? But how and when does one do this? Do I do a journal entry to COGS accounts every time I buy or sell merchandise or is it done at the end of the month? Year? What kind of credit and debit journal entries do I make?
Expert:  CGCPA replied 1 year ago.

Let's start from a beginning point. Here is a basic chart to help as we go along:

What a debit does:

Increases an asset

Decreases a liability

Decreases revenue

Increases expense

Decreases equity

What a credit does:

Decreases an asset

Increases a liability

Increases revenue

Decreases expense

Increases equity

If we start from there we will always be speaking the same language.

Cost of goods sold is a formula and cannot be simply mix and match. The formula is:

Opening inventory (what I started with)

+ Purchases (what I bought during the cycle)

= What was available to sell

- Ending inventory (what was left at the end)

= Cost of goods sold.

Therefore, my first entry is to debit petty cash for the amount I have put into the business to begin with and credit equity since I won this.

My second entry is to credit petty cash for the funds expensed to buy merchandise and debit purchases for the same amount.

My third entry is to credit sales for the proceeds and debit petty cash.

So far, we have kept this simple. Now comes the part where you are having difficulties.

At year end, we debit the opening inventory account (in the cost of goods section) and credit inventory in the asset section. This transfers all beginning of period inventory to the cost of goods sold section of the P&L since it was available for sale. If the number is ***** no entry need be made.

We also debit inventory in the asset section and credit ending inventory in the cost of goods sold for the amount of inventory still on hand at period end. Then we just do a quick bit of adding and subtracting and we have a properly determined cost of goods sold in accordance with the formula.

You may have been reading the chart of accounts incorrectly. Read it as asset-inventory, rather than simply inventory and it will be easier. Once you are totally at home with this it does get simpler.