DOUBLE ENTRY FOR BEGINNERS - PART 3

 

DOUBLE ENTRY FOR BEGINNERS

 

SALES SCENARIOS- PART 3

 

Financial Accounts are built on the double entry principle which states that:

 

FOR EVERY DEBIT ENTRY, THERE MUST BE A CORRESPONDING CREDIT ENTRY;

 

So, in posting any transaction into your accounts, you always need to identify which account needs to be debited and which account needs to be credited.

 

A common acronym used to learn the double entry is DEAD/ CLIC

 

DEAD                                                                    CLIC

Debit: Expenses, Assets, Drawings                  Credit: Liabilities, Income, Capital

 

DEBIT TRANSACTIONS                                      CREDIT TRANSACTIONS

 

If any of these are increasing,                             If any of these are increasing,

you will need to debit the account                     you will need to credit the account

and vice versa, if it is decreasing                       and vice versa, if it is decreasing

 

 

Let’s test ourselves:

 

Please go through the sales scenarios Part 1 and Part 2 teachings and now test yourself; what will be the double entry posting for each of these, where VAT is charged at 20%:

 

1. If you sell £340 net worth of products to a customer and payment was made immediately into the bank account.

 

 

2. If you sell £90 net worth of products and payment was not made immediately.

 

 

3. If you sell £245 net worth of products and payment was made in 30days.

 

 

4. If you sell £370 net worth of products and payment was not made immediately.

 

 

5. If you sell £150 net worth of products and payment was made immediately in cash.

 

 

Answers:

 

Dr- Bank (asset)                                           £408

Cr- VAT (liability)                                          £68

Cr- Sales (income)                                       £340

 

 

Dr- Debtors (asset)                                       £108

Cr- VAT (liability)                                          £18

Cr- Sales (income)                                       £90

 

 

Dr- Debtors (asset)                                       £294

Cr- VAT (liability)                                          £49

Cr- Sales (income)                                       £245

 

 

Dr- Debtors (asset)                                       £444

Cr- VAT (liability)                                          £74

Cr- Sales (income)                                       £370

 

 

Dr- Cash (asset)                                           £180

Cr- VAT (liability)                                          £30

Cr- Sales (income)                                       £150

 

DOUBLE ENTRY FOR BEGINNERS - PART 2

 DOUBLE ENTRY FOR BEGINNERS - PART 2 

SALES SCENARIOS- PART 2

 

Financial Accounts are built on the double entry principle which states that:

 

FOR EVERY DEBIT ENTRY, THERE MUST BE A CORRESPONDING CREDIT ENTRY;

 

So, in posting any transaction into your accounts, you always need to identify which account needs to be debited and which account needs to be credited.

 

A common acronym used to learn the double entry is DEAD/ CLIC

 

DEAD                                                                    CLIC

Debit: Expenses, Assets, Drawings                  Credit: Liabilities, Income, Capital

 

DEBIT TRANSACTIONS                                      CREDIT TRANSACTIONS

 

If any of these are increasing,                             If any of these are increasing,

you will need to debit the account                     you will need to credit the account

and vice versa, if it is decreasing                       and vice versa, if it is decreasing

 

 

Let’s introduce VAT to the previous scenarios:

 

VAT is tax on commodities and the VAT on sales is a liability to companies, because it is collected from customers and paid to the government and VAT on purchases is an asset because it can be claimed back by VAT registered businesses. This means that a VAT registered business must charge VAT on its sales and this is payable to the government and it can reduce this liability by any VAT it may have paid, i.e. VAT on purchases. VAT is currently charged at 20% standardly. (Please note that this statement has been kept to the simple basics).

 

 

1. If a customer buys products worth £230 net from you and doesn’t pay immediately, i.e. credit sale. In such situation, a sale has taken place, you will have to pay VAT on the sale and a debtor has been established since the customer owes you the full amount. Invariably, sales have increased, as you have sold products; VAT liability has increased, as you owe the government; and debtors (asset) has also increased.

 

 

Net amount                                                   £230.00

VAT amount (20% x £230)                            £46.00

Gross amount (total amount owed)              £276.00

 

 

 

                                                Accounts affected

 

                            Sales                      VAT                  Debtors

 

Double entry posting will then be:

 

Dr- Debtors (asset)                                       £276

Cr- VAT (liability)                                           £46

Cr- Sales (income)                                        £230

 

 

In this case, you have sold products worth £230, and you will charge 20% for VAT, which amounts to £46. The customer doesn’t have a choice but to pay the full amount of £276 and then you have to pay the government the £46 of VAT, so, £230 will be your income and not £276. Hence, the VAT on sales is a liability which is payable to the government if the business is VAT registered. VAT is always accounted for in the Balance Sheet as an asset or a liability and not in the Profit & Loss account.

 

 

 

2. If a customer buys products worth £230 net from you and pays immediately, i.e. cash sale. In such situation, a sale has taken place, you will have to pay VAT on the sale and cash has increased since the customer has paid you money. Invariably, sales have increased, as you have sold products; VAT liability has increased, as you owe HMRC; and cash (asset) has also increased.

                                   

 

                                                Accounts affected

 

                            Sales                      VAT                      Cash

                       

 

Double entry posting will then be:

 

Dr- Cash (asset)                                           £276

Cr- VAT (liability)                                           £46

Cr- Sales (income)                                        £230

 

 

In every business, there are always financial transactions which lead to financial documents which need to be posted into the accounts.

 

 

When a sale is generated, there should always be the question as to what type of income was generated and was this paid immediately or not. The sales should be credited with the net amount, the VAT should be credited with the VAT amount and the debtors should be debited if payment hasn’t been made or the cash/ bank will be debited if payment has been made immediately.

 

 

For credit sales, when payment is later made, the double entry posting will be;

Dr- Cash/ Bank

Cr- Debtors

 

 

In this case, debtors account (which is an asset under DEAD) is reducing, so it is credited and cash (which is also an asset under DEAD) is increasing, so it is debited.

DOUBLE ENTRY FOR BEGINNERS - PART 1

 DOUBLE ENTRY FOR BEGINNERS - PART 1

SALES SCENARIOS- PART 1

 

Financial Accounts are built on the double entry principle which states that:

 

FOR EVERY DEBIT ENTRY, THERE MUST BE A CORRESPONDING CREDIT ENTRY;

 

So, in posting any transaction into your accounts, you always need to identify which account needs to be debited and which account needs to be credited.

 

A common acronym used to learn the double entry is DEAD/ CLIC

 

DEAD                                                                    CLIC

Debit: Expenses, Assets, Drawings                  Credit: Liabilities, Income, Capital

 

DEBIT TRANSACTIONS                                      CREDIT TRANSACTIONS

 

If any of these are increasing,                             If any of these are increasing,

you will need to debit the account                     you will need to credit the account

and vice versa, if it is decreasing                       and vice versa, if it is decreasing

 

 Let’s imagine some scenarios:

 1. If a customer buys products worth £230 from you and doesn’t pay immediately, i.e. credit sale. In such situation, a sale has taken place and a debtor has been established since the customer owes you. Invariably, sales have increased, as you have sold products and debtors (asset) has also increased.

 

 

                                                Accounts affected

 

                                        Sales                         Debtors

 

 

Double entry posting will be:

 

Dr- Debtors (assets)             £230

Cr- Sales (income)               £230

 

2. If a customer buys products worth £230 from you and pays immediately, i.e. cash sale. In such situation, a sale has taken place and cash has increased since the customer has paid you money. Invariably, sales have increased, as you have sold products and cash (asset) has also increased.

 

 

Accounts affected

                                        Sales                            Cash

 

 

Double entry posting will be:

 

Dr- Cash (asset)                               £230

Cr- Sales (income)                           £230

Johnny Depp - Profit Margin & Mark Up

 

PROFIT MARGIN & PROFIT MARK UP

 

Johnny Depp married Amber Heard in February 2015, and she filed for divorce in May 2016, which was finalized in January 2017 and Depp paid a settlement of $7m.

 

In 2019, Depp sued Heard for $50m!!!

 

What level of profit margin is this???? LOVE GONE DEAD!!!

 

Profit margin

This is gross profit expressed as a percentage of the selling price. It is a percentage profit charged on the sales. So sales represents 100%; where profit margin is 20%; sales will represent 100% and cost will represent 80%.

 

 

                        Gross profit    x 100

                        Selling price

 

 

Profit mark-up

This is gross profit expressed as a percentage of the cost of goods which is added to the cost price to arrive at the selling price. So sales will represent more than 100%; where profit mark-up is 20%, sales will represent 120% and cost will represent 100%.

 

 

                        Gross profit    x 100

                         Cost price

 

 

The mark-up is a fraction of the cost price, while margin is a fraction of the selling price. Using profit margin, the selling price/ sales will always be represented at 100%, but with mark-up the selling price/ sales is represented at above 100% by the mark-up %.

 

 

COST + PROFIT = SALES

 

Where a business makes 20% margin, it can be expressed as below;

 

PROFIT MARGIN = 80% COST + 20% PROFIT = 100% SALES

 

 

Where a business makes 20% mark-up, it can be expressed as below;

 

PROFIT MARK-UP = 100% COST + 20% PROFIT = 120% SALES

 

 

 

So, for Johnny Depp’s position;

 

Cost price = $7m

Sales price = $50m

Profit = $(50-7)m = $43m

 

With profit margin, it will mean that the sales price is 100% and the profit margin is 43/50x100= 86%

 

With profit mark-up, it will mean that the cost is 100% and the profit mark-up is 43/7x100= 614%

 

 

The above two calculations show profit being expressed as a percentage of sales (profit margin) and cost (profit mark-up).