HR Jetpack

Accounts Payable

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Lesson:

Accounts Payable

Lesson Content

It is Day 5 of our Lemonade Stand business.

Let’s check the updated weather forecast. The weather is going to be great on Day 2, however there is a higher chance of rain on Day 3. We will check on the weather again tomorrow.

The weather looks good for Day 2, let’s make 40 cups of lemonade. If we sell less, we will have to discard the rest.

This means that we will transfer the cost of 40 cups of lemonade from inventory to Cost of Goods Sold, or $16.

Let’s find out our demand. How many cups did we sell on Day 3? Our demand was 30 cups and we sold 30 cups because we made enough.

At the end of the day your friends stopped by to buy some lemonade. They did not have any cash and promised to bring the money next day. They bought 5 cups of lemonade.

Our price was $1 per cup. We sold 35 cups of lemonade. We received 30 dollars in cash for 30 cups. And we sold 5 cups on credit. How does this impact our financials?

When we sell lemonade for cash, sales are increased and cash is increased. When we sell lemonade on credit, sales are increased and accounts receivable are increased. These are the two sides of this transaction. Sales of $35 include 30 cups at $1 each we sold for cash and 5 cups at $1 each we sold on credit. Since we used supplies from our inventory to make and sell lemonade, we need to reduce our inventory and reflect the cost of those supplies as cost of goods sold. We made 40 cups of lemonade, we will transfer the cost of the 40 cups of lemonade, even though we sold 35 cups. We have to discard 5 cups of lemonade.

To reduce our inventory by the cost of supplies we used to make lemonade we sold and reflect it as Cost of Goods Sold, one side of the transaction is, inventory is decreased, the other side of the transaction is, cost of goods sold is increased. These are the other two sides of this transaction. Each transaction can have more then one account on each side. Totals of each side have to equal.

Let’s see how this works with our numbers. Inventory is decreased by $16. Cost of Goods Sold is increased by $16.

This is our Income Statement and the Balance sheet. When we sell lemonade, $35 is recorded under sales reflecting increase in sales, $30 is recorded under cash reflecting increase in cash and $5 is reflected under Accounts Receivable reflecting increase in Accounts Receivable. Negative $16 are recorded under inventory reflecting decrease in inventory for the supplies we used to make the lemonade and $16 is recorded under Cost of Goods Sold reflecting the cost of supplies we used to make lemonade.

When our customers will stop by to pay for the lemonade they bought today, we will increase our cash and reduce Accounts Receivable.

Anna Samorukova

Instructor:

Anna Samorukova

Anna designs and delivers learning and change facilitation experiences that speak to the learner and inspire people and organization reach for potential and create an impact with. She applies engaging,...

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