[GNC] How to treat a sale which involves more accounts?

[David Cousens]

Flavio,

> I would do the following when selling something for 120 which I
bought for 100:
> 1. increase the checking account by 120;
> 2. increase the "Income:Sales" account by 120;
> 3. increase the "Inventory:Music Equipment Sales" account by 120;
> 4. decrease the "Expenses:Cost of Goods Sold" account by 100.

These steps are not correct . Your inventory account records the value
(at cost) of the items you are holding so the entry on sale o an item
should equal the cost at purchaser  so you your transaction to record
it should be:

1 . increase (debit) the checking account by 120
2. increase (credit) the Income:Sales account by 120
3. decrease (credit) the Inventory:Music Equipment Sales account  by
100
4. increase (debit) the Expenses: Cost of Goods Sold account by 100


The Inventory:Music Equipment Sales account is what is known in
accounting terms as a contra account to the Music Equipment Purchases
 which is why it is credited to decrease the balance of Inventory
(rather than debit as is usual to increase the balance of an asset
account).  I have added the usual accounting column headings in
brackets. Of the two columns with entries in themthe Debit column is
always the first and the Credit column is always the second followed by
the Balance colum last.

Note that in any transaction  the sums of all the debit and all the
credit entries have to be equal, which was not the case for your
proposed entries.

Cheers
David


On Thu, 2024-09-19 at 21:52 +0200, Boniforti Flavio wrote:
> Hi David and David :-)
> Thanks for your replies.
> I'm not running any business at all. I am a musician who also
> collects (vintage) music instruments. As I also do play them, it
> happens a couple of times a year that I'm not interested anymore in
> keeping one or the other instrument. For this reason, I sell a couple
> of items a year and given the fact that the majority of my items are
> "vintage" ones, prices are always fluctuating. So I want to keep
> track of how much I've gained (or lost) when selling an item.
> Given the above, I think that if I would only use a single "Music
> equipment" account, I could not see how much I made (plus or minus)
> while selling some items - right? This is the reason which led me to
> think about setting up some accounts to "correctly" keep track of
> this all.
> 
> Using this:
> 1. Debit the Checking account for the total amount of the purchase
> paid by
> the customer;
> 2. Credit the Income:Sales account by the total amount of the
> purchase;
> 3. Credit the Inventory: MusicEquipment Sales account by the amount
> of the
> cost of the items sold;
> 4. Debit the Expenses:Cost of Goods Sold account by the amount of the
> cost of the items sold.
> 
> I would do the following when selling something for 120 which I
> bought for 100:
> 1. increase the checking account by 120;
> 2. increase the "Income:Sales" account by 120;
> 3. increase the "Inventory:Music Equipment Sales" account by 120;
> 4. decrease the "Expenses:Cost of Goods Sold" account by 100.
> 
> (of course previoulsy I'd had increased the "Inventory:Music
> Equipment Purchases" and decreased my "Assets:Checking Account" by
> 100).
> 
> Am I correct with the above?
> TIA,
> F.
> 
> 
> https://www.instagram.com/boniforti_music
> https://soundcloud.com/boniforti_music
> https://bonny-j.bandcamp.com
> 
> 
> Am Do., 19. Sept. 2024 um 03:52 Uhr schrieb David Cousens
> <davidcousens49 at gmail.com>:
> > Flavio,
> > 
> > Why would you need a Music equipment sold account in the first
> > place?
> > 
> > If your business is making music then:
> > 
> > when you buy equipment you credit your checking account and debit
> > the
> > Music Equipment asset account by the amount of the purchase;
> > when you sell the equipment you debit your checking account and
> > credit
> > the music equipment account.
> > 
> > In this case the equipment is not held for the purpose of selling
> > it at
> > a profit. You may however be subject to capital gains type taxes if
> >  they apply in your jurisdiction and the value of the equipment
> > sold
> > exceeds the thresholds for such taxes.
> > 
> > The situation may however be slightly different if your business is
> > actually retailing music equipment. In this case the Music
> > Equipment
> > account is essentially an Inventory account - still an asset
> > account.
> > 
> > You would normally in these circumstances set up an Inventory asset
> > account which is a placeholder with two sub accounts
> > Inventory:Music
> > Equipment Purchases and Inventory:Music Equipment Sales. Your
> > Income
> > top level account will also need a subaccount Income:Sales and your
> > Expenses top level acoount will need a sub account Expenses:Cost of
> > Goods Sold (GoGS)
> > 
> > The basic procedure is the same for purchases of equipment, credit
> > the
> > checking account and debit the Music Equipment Purchases sub
> > account. 
> >  
> > When you make a sale only the difference between the cost of the
> > equipment sold and the selling price is your income ( neglecting
> >  any
> > sales tax issues which may also apply) so the following will be the
> > basic procedure:
> > 
> > Debit the Checking account for the total amount of the purchase
> > paid by
> > the customer;
> > Credit the Income:Sales account by the total amount of the
> > purchase;
> > Credit the Inventory: MusicEquipment Sales account by the amount of
> > the
> > cost of the items sold;
> > Debit the Expenses:Cost of Goods Sold account by the amount of the
> > cosdt of the items sold.
> > 
> > Your profit on the transaction is recorde by the difference between
> > the
> > Income:Sales account and the Expenses:Cost of Goods Sold account
> > entries.
> > 
> > Dealing with any applicable taxes will add additional steps to the
> > accounting as will making allowances returns of purchases to
> > suppliersof faulty equipment and returns of equipment to you with
> > faults by customers. You should consult an accountant and consumer
> > legislation in your jurisdiction in how to deal with these.
> > 
> > David Cousens
> > 
> > On Wed, 2024-09-18 at 23:37 +0200, Boniforti Flavio wrote:
> > > Hi.
> > > Still very noob here, so bear with me please.
> > > 
> > > I've got the following accounts (among others):
> > > 
> > > Music equipment
> > > Music equipment sold
> > > Checking account
> > > 
> > > When I buy music equipment, I take the money from my checking
> > account
> > > and
> > > add it to the "music equipment" account.
> > > When I sell music equipment, how should I register it? I thought
> > that
> > > the
> > > account "music equipment" would decrease by the sold value, the
> > > checking
> > > account would increase by the same amount... but what happens
> > with
> > > the
> > > "Music equipment sold" account?
> > > Or am I wrong in separating "music equipment" from "music
> > equipment
> > > sold"?
> > > 
> > > Thanks,
> > > F.
> > > 
> > > https://www.instagram.com/boniforti_music
> > > https://soundcloud.com/boniforti_music
> > > https://bonny-j.bandcamp.com
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