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Businesses and Types of Accounting Chapter 1 Chapter 3Basis of Accounting and Credit Transactions Topics Covered 3.1 Credit Transactions Double Entry 3.2 Quick Summary of This Chapter 3.1 Credit Transactions Double Entry How to account for credit transactions? Take Johnson example in the last chapter. Transaction 1: Johnson purchases goods on credit for $5,000. The accounting treatment: Dr Purchases $5,000 (to increase the “purchased goods” at cost) Cr Trade payables $5,000 (to increase the amount owed or liability to the supplier) Transaction 2: Johnson sells goods for $6,000 to customers on credit. The accounting treatment: Dr Trade receivables $6,000 (to increase the asset receivable here by $6,000) Cr Sales revenue $6,000 (to increase sales revenue by $6,000) Transaction 3: Johnson settles $1,000 liability owed to the credit supplier. The accounting treatment: Dr Trade payables $1,000 (to decrease the money owed to the supplier) Cr Cash $1,000 (to decrease the cash asset value) Transaction 4: Johnson receives $5,000 cash from the credit customer. The accounting treatment: Dr Cash $5,000 (to increase the asset by $5,000) Cr Trade receivables $5,000 (to reduce the asset by $5,000) Transaction 5: Johnson returned goods costing $200 to a supplier. The accounting treatment: Dr Trade payables $200 (to decrease the liability owed to the supplier) Cr Purchases $200 (to return the goods to the supplier, hence, to reduce purchases costs) Transaction 6: Johnson receives goods returned by a customer. The transaction value is $100. The accounting treatment: Dr Sales revenue $100 (to decrease the sales revenue of $100) Cr Trade receivables $100 (to decrease the asset of $100) 3.2 Quick Summary of This Chapter In an increase in trade receivables asset because of a credit sale, we debit it. In an increase in trade payables liability because of a credit purchase, we credit it. For goods returned from a credit customer, we debit sales revenue and credit the trade r