Lesson #10 - Jack And The Beanstalk - A Double Entry Story

Once upon a time, there was a young boy named Jack who lived with his mother in the countryside. They owned a cow which was their only source of income.

Mooooo!!!

1. Revenue from sale of goods
The cow's milk was sold in the market for cash. Jack sold $50 worth of milk a day.

Note: To record this transaction, just run through the 5 Questions introduced in the previous "Double Entry Accounting" post.

The 5 Questions:
1. What items are involved?
2. Which team are they on?
3. Are the teams Debit or Credit in nature?
4. Do the items increase or decrease?
5. Do we Debit or Credit the item?

2. Purchase of fixed asset

Timmmberrrrr!!!

With the money, Jack bought a new axe for chopping firewood. The axe is a Fixed Asset and it cost him $20. It was expected to last him for 4 years.

3. Depreciation of fixed asset
One year passed and as Jack used his axe, the axe had depreciated by 1/4th of it's value. So depreciation expense for the first year was $5.
 

4. Exchange of assets

Aren't they pretty? Please can I keep them?

One day, his cow stopped producing milk. Jack's mother told Jack to go to the market to sell his cow. Instead, Jack exchanged his cow for some "magic beans". His cow was worth $80 to him.

Note: No cash was involved as it was considered a "barter" trade or exchange of goods!

5. Write-off of assets
Jack's mother was furious as he had wasted the cow on some "useless" beans. She threw the beans out of the window. The beans were written-off or "expensed".

Overnight, a gigantic beanstalk grew. Jack climbed the beanstalk until he reached a castle in the sky.

The air up here is a bit thin, isn't it?

There, he meets a Giant.

Helloooo!!!

6. Borrowing money
He borrowed $200 from the Giant, which he needs to repay 3 months later

7. Purchase of stock

Quack!

Jack saw the Giant's golden goose (which laid golden eggs). Using the cash borrowed, he bought 10 golden eggs at $3 each to sell the market. The eggs were considered as Jack's stock or inventory.

8. Sale of stock

Oh, I can't decide! Sunny side up or scambled?

He sold 8 golden eggs in the market for cash. Each egg was sold for $5.

Note: There are 2 entries here! One affects REVENUE, the other one affects EXPENSES.

Entry 1 - REVENUE

 

Entry 2 - EXPENSES

The 8 eggs that Jack sold had a cost of $3 each. This was an Expense to Jack. His "Cost of goods sold" was $24.

You may notice that the total PROFIT made on the sale was $16. This is calculated as the difference between the REVENUE of $40 and EXPENSES of $24.

9. Paying worker's wages

So, we are selling flowers right?

As selling eggs was too much for Jack to handle alone, he employed a worker to assist him. He paid the worker $10.

 

10. Repayment of borrowings

He used the cash from the sale of the golden eggs to pay back a portion of the borrowings to the Giant. Jack generated $40 from the sale of the 8 eggs at $5 each.

 

One day whilst the Giant was asleep, Jack steals the golden goose and the Giant's harp.

While trying to make a quick getaway, Jack drops the harp and awakens the Giant. Jack runs and climbs down the beanstalk, golden goose in hand.

The Giant chases but before he reaches the ground, Jack uses his axe to cut down the beanstalk, causing the Giant to fall to his death.

Hmmm...Not a bad view from up here...

Jack and his mother became rich selling golden eggs in the market…

...and they lived Happily Ever After!

Summary:

Sooooo...what does it all mean? Is Jack better-off or worse-off?

Question: How much Cash does Jack have left in his pocket?

Answer: $190

Workings: 

Bear in mind that Cash is an ASSET. When ASSETS increase, we DEBIT, when ASSETS decrease we CREDIT.

Question: How much is Jack's axe worth after he's used it for one year?

Answer: $15

Workings:
Bear in mind that the axe is an ASSET. When ASSETS increase, we DEBIT, when ASSETS decrease we CREDIT.

Question: How much sales did Jack make?

Answer: $90 

Workings:

Bear in mind that Sales is REVENUE. When REVENUE increases, we CREDIT, when REVENUE decreases we DEBIT.

Question: How much stock did Jack still have left?
Answer: $26

Workings:

Bear in mind that Stock is an ASSET. When ASSETS increase, we DEBIT, when ASSETS decrease we CREDIT.

Question: How much did Jack still owe the Giant?

Answer: $160

Workings:

Bear in mind that Borrowings is a LIABILITY. When LIABILITIES increase, we CREDIT, when LIABILITIES decrease we DEBIT.

Did that make sense? Yes?

Good!

Are you starting to see how Accounting helps Jack keep track of the value of his Accounting "Elements" i.e. ASSETS, LIABILITIES, REVENUES?

DOUBLE GOOD!!!

Here's Better Than Ezra with "Good"...

Enjoy!!!