What would be the double entry if i buy inventory for $8000 cash and sell it for $10000 cash

CFA Level I
#1

Buy inventory for $8000 cash and sell it for $10000 cash

#2

Assuming a perpetual system:

  1. DR Inventory 8,000

CR Cash 8,000

(Alternatively you would credit payables here)

  1. DR Cash 10,000

CR Sales 10,000

(Or debit receivables if you’re not settling for cash)

  1. DR Cost of Sales 8,000

CR Inventory 8,000

2 & 3 will occur simultaneously on the date of the sale.

If you’ve got a periodic system, you’ll pass the inventory through the purchases account instead and settle inventory at the end of the accounting period, instead of when the sale occurs.

#3

Alternatively, if you preferred to only use the basic accounting equation,

Assets = Liabilities + Equity

  1. When you buy inventory for $8,000 cash,

Assets ( -8,000 Cash +8,000 Inventory) = Liabilities (no change) + Equity (no change)

=> No Net Change in Assets; Liabilities and Equity remain unchanged; equation in balance

  1. When you sell the same inventory for $10,000 cash,

Assets ( +10,000 Cash -8,000 Inventory) = Liabilities (no change)

  • Equity ( -8,000 Cost of Goods Sold(Expense) + 10,000 Revenue )

=> Assets increase by 2,000 = Liabilities (no change) + Equity ( increases by 2,000 ) => eqn in balance

#4

Three things come to mind:

  1. Journal entries are nowhere to be found on the CFA exam. However, if it helps you to understand the material, go for it.

  2. RGK is right.

  3. Iampossible is extremely hard to understand, and his explanation does not help to show you how this transaction affects the P&L statement.

#5

I’ve found that understanding journal entries and T-accounts can help considerably in candidates’ understanding of FRA.

#6

Good feedback - thanks Green.

How the transaction affects the P&L :

Assets = Liabilities + Equity

Revenues and Expenses (Profit and Loss accounting elements) impact ‘Ending Retained Earnings’,

which is a component of Equity.

Ending Retained Earnings = Beginning Retained Earnings + Revenue - Expenses - Dividends Declared

So when I note : " Equity ( -8,000 Cost of Goods Sold(Expense) + 10,000 Revenue )" what I intend to say is

  1. Revenue = +10,000 , Expense (COGS) = 8,000; since Revenue increases Ending Retained Earnings, and ultimately Equity I use “+ 10,000”. Similarly, since Expense (COGS) decreases Ending Retained Earnings, and ultimately Equity I use , "-8,000"