Like Humans, Businesses do need balance! Part - II

Please read these articles in this order.

Basics of accounting

Understanding Accounting equation

Connecting transactions and accounts part-I

This article is part II of connecting transactions and accounts part II. I said I will complicate transactions. So let us do.

The last transaction and balancing are from the last article-Sale in Cash.

We will sell Tea for loyal customers in credit for 15 days. This means I will get money after 15 days.

So the question is how much sales? Rs.5000.How much milk is used? Rs.2000.How much tea powder is used? Rs.1000.

At last Profit = 5000 - 2000 - 1000 = 2000.

Then, I approach an interior designer to decorate my shop. The designer agreed to charge Rs.40000.Of that 40000,10000 should be in advance and the remaining will be 30000 The look is everything. The designer comes and prepares a plan and executes it. Now the tea shop is in a new look. This transaction will reduce Capital.

The project is finished and I try to negotiate with the designer for a discount. The designer finally agrees 5% discount on the final value.

Therefore 5% of 40000 = Rs.2000.This discount is increases Capital and decreases a/c receivable. Since we don't have enough cash in hand, we will issue a cheque.

Suddenly you get an offer from another milk supplier, If you pay ready cash Rs.20000, you will get milk worth Rs.25000.I found it a lucrative deal and then I realized I don't have cash in hand to pay. So I took 10000 from my cash balance and I borrowed 10000 from my friend at a rate of 2 %.

This is truly a complicated transaction. I get extra 5000 milk. So this will increase the capital. I took a loan and hence liability increases by 10000. Let us leave the interest part and balance.

We will pay the loan with interest. This will decrease the capital. I issue a bank cheque. So interest would be 2% of 10000 = 200.

I think I have covered basic scenarios and balanced them. If you have any queries feel free to contact me.

Recent Posts

See All

Disclaimer: This article is me speaking to me through this blog! Short Intro: If you want to innovate in a particular field, you need to understand how things work in the first place. Innovation is a