Simple Accounting concept question (1 Viewer)

[Accuracy]

Hey guys,
I know this is probably a silly question but I really am having difficulty with accounting.

How can we tell if something is an expense so we can work out if there is an impact on net profit?
I know that if you sell inventory, it is revenue because you increase assets (cash) right?... so how come for example, why is the purchase of a phone with cash NOT an expense? Isn't there a decrease in assets (cash) so it is an expense?

I am 100% sure that my way of thinking is completely wrong so could someone please correct my statements and explain why?

Thanks

 

[Smile12345]

Hey guys,
I know this is probably a silly question but I really am having difficulty with accounting.

How can we tell if something is an expense so we can work out if there is an impact on net profit?
I know that if you sell inventory, it is revenue because you increase assets (cash) right?... so how come for example, why is the purchase of a phone with cash NOT an expense? Isn't there a decrease in assets (cash) so it is an expense?

I am 100% sure that my way of thinking is completely wrong so could someone please correct my statements and explain why?

Thanks

Do you have a textbook that you could refer to?

With any transaction, there are two entries ... Do you understand the double entry accounting concept??

http://accounting-simplified.com/double-entry-accounting.html

So when purchasing a phone, the bank decreases by the purchase value, and the Phone of (Office Equipment) goes up as the value of the assets has increased... So the debit would be the telephone (or Office Equipment) and the Bank would be the credit entry.

This make sense??

 

[Smile12345]

While there is a decrease in the bank (which is an asset), there's an increase in the Phone/ Office Equipment (which is also an asset), therefore the asset value staying the same but the value of the Bank and the Office Equipment changing....

 

[Accuracy]

While there is a decrease in the bank (which is an asset), there's an increase in the Phone/ Office Equipment (which is also an asset), therefore the asset value staying the same but the value of the Bank and the Office Equipment changing....

Then what about the sales of a phone? would that not be revenue? because while asset increases (cash), asset decreases( phone)?

and what about the purchase of inventory? does that affect net profit? why or why not?

 

[seremify007]

Then what about the sales of a phone? would that not be revenue? because while asset increases (cash), asset decreases( phone)?

and what about the purchase of inventory? does that affect net profit? why or why not?

Remember, everything has to be taken into context. If the entity is in the business of selling mobile phones, then the mobile phone would be treated as inventory, and the sale of the phone would be against Cost of Goods Sold (i.e. Dr COGS, Cr Inventory). The revenue/cash coming in the door is a separate thing which is Dr Cash, Cr Revenue.

If the entity is selling it's plant/equipment (i.e. the tools/assets which it uses to generate revenue/run the business), then it would be Dr Cash, Cr Plant, and the net amount left over would be gain/loss on disposal of equipment. (This doesn't take into account reversing depreciation).

Also note, the purchase of inventory is a balance sheet transaction only- i.e. you are trading one asset type (cash) for another (inventory). This is Dr Inventory, Cr Cash. There is no P&L impact. The P&L impact comes from when you sell it- again, remember that the revenue and cash coming in the door is one journal/transaction, and the cost of goods sold and removal of the item from your balance sheet/inventory is another. The difference in amounts between these two journals/transactions would be your profit (or loss).

 

[obliviousninja]

Hey guys,
I know this is probably a silly question but I really am having difficulty with accounting.

How can we tell if something is an expense so we can work out if there is an impact on net profit?
I know that if you sell inventory, it is revenue because you increase assets (cash) right?... so how come for example, why is the purchase of a phone with cash NOT an expense? Isn't there a decrease in assets (cash) so it is an expense?

I am 100% sure that my way of thinking is completely wrong so could someone please correct my statements and explain why?

Thanks

Dr Cash
Cr Sales Rev

Dr COGs
Cr Inventory

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