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Flavio,
If you were just buying musical instruments with no intention of
earning income with them or in the future, you would simply record the
purchase transaction as
Asset :Bank account credit xxx
Expenses: Musical Instruments debit xxx
and any subsequent sale is
Asset:bank debit yyy
Income:Musical Instrument Sales credit yyy
and you may or may not be required to pay tax on that income depending
on your jurisdictions tax rules (in most cases probably not if below
some legislated threshold for business activity), and that would be the
end of it. In most jurisdictions you will also likely be below the
threshold where any such activities are treated on a cash accounting
basis, i.e. they are recorded at the point where the money changes
hands.
When you purchase instruments where the intention is to either resell
them or otherwise use them to generate income usually on some form of
fairly regular basis, then when they are purchased, they are an asset
to your enterprise, whether that is simply personal or a business, so
the purchase becomes an asset rather than an expense. For business
usually where turnover is above a specified threshold set by taxation
legislation, you will be required to record transactions on an accrual
timing basis and for purchases, this is generally at the time when the
agreement to make a specific purchase is entered into, not when the
actual; cash changes hands. Similarly on sales, when you agree to sell
an item, the receipt of income is recorded at the time you agree to do
so not necessarily when you actually receive the funds.
There is another accounting principle which requires that the recording
of expense of items sold should be matched in timing to the recording
of the income. recording purchases as an asset class inventory meets
the first requirement and recording it as an expense against the Cost
of Goods Sold at the timing of the sale meets the second. The Cost of
Goods Sold title just arises because most businesses will sell many
different types of items. If the expense were recorded at the time of
purchase, then the calculation of profit is thrown out of whack and
if you do that your taxation authorities tend to start accusing you of
trying to avoid tax.
Such Inventory and CoGS accounts can have subaccounts for specific
items or classes of items where knowing that information is material
to the management of the business. There are also sales taxes, VAT,
GST type taxes to deal with as well in some jurisdictions.
On Mon, 2024-09-23 at 17:26 +0200, Boniforti Flavio wrote:
> Hi David.
> Thanks for correcting me.
> I have a few more questions:
>
> As of today, I've got "Assets:Current Assets:Music Equipment CHF" and
> "Assets:Current Assets:Music Equipment EUR" which I consider my
> inventory accounts. There I entered the price of a musical instrument
> which I bought.
> I also do have the account "Income:Music Equipment Sales CHF" and
> "Income:Music Equipment Sales EUR".
>
> I'm not understanding the use of the "Expenses:Cost of goods sold"
> account - can you explain?
>
> Thanks,
> Flavio.
>
> https://www.instagram.com/boniforti_music
> https://soundcloud.com/boniforti_music
> https://bonny-j.bandcamp.com
>
>
> Am Fr., 20. Sept. 2024 um 00:58 Uhr schrieb David Cousens
> <davidcousen...@gmail.com>:
> > 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
> > > <davidcousen...@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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