Applying the rule of debit and credit- Example 7

Example-7   Sold goods worth £4000 for cash

Step 1- Identify the two accounts involved in this transaction

1.   Asset Account (Goods are assets)

2.   Asset Account (cash)

      When goods are sold we credit “Sales Account” not “Goods Account”

Step 2- Understand the nature of the impact of the transaction on the two accounts [goods (Asset) and cash (Asset)]

     Sale of goods decrease the asset by £4000     

           

     Cash balance will increase by £4000 as a result of cash sales

Step 3- Decide which account is to be debited and which is to be credited.

            We know that;

When asset account (goods-termed as sales) decreases it is to be Credited and,

When Asset account (Cash) increases it is to be debited

So, entry is:

Debit Cash Account with £4000

Credit Sales Account with £4000