Double entry accounting AKA Debit and Credit - The epic conclusion

I know, I know, I set you up from the beginning. Here you thought I was talking about beer pong but BAM - Accounting. 

Don't think of Debit as an increase think of it as left. Don't think about Credit as decrease think about it as right. In this situation you would credit A/R for the amount of the payment and debit cash for the same amount.

Dr. Cash          XXXX
          Cr. A/R          XXXX

(for those that want to see the journal entry)-DR. and CR. are common abbreviations for Debit/Credit



The problem from my last post is the same way. We know how much is in each cup, we just want to know how much went through the cup called "purchases". So how much was in the revenue cup?  -For those too lazy

If Ajax company has revenue of $50,000 and achieved a 25% gross profit in 20x2 what was the inventory purchases for the year ending 20x2?
20x1 Ending inventory is $23,000
20x2 Ending inventory is $30,000

So $50,000 in revenue. What does gross profit tell us? Cost of goods sold (COGS)! Now for this problem we will pretend that the only thing in COGS is sold inventory and that is the only thing in gross profit, reality is different. But wait, the problem asks for Purchases but we have COGS. Well it's time to bust out your cups again! If COGS is sold inventory what filled that cup? How about inventory, yes, good thats correct. So 20x1 Inventory poured into 20x2 COGS and when it was done pouring it became 20x2 Ending inventory.
-Don't forget we poured inventory from the right side of the table (credit) into COGS on the right side of the table (Debit)

But wait 20x1 is 23,000 and 20x2 is 30,000. Well that is our answer. Purchases pours into inventory while inventory is pouring into COGS. With 20x2 ending at 7,000 more means that more was poured from purchases into inventory than was poured from inventory into COGS. This means that purchases is higher than COGS.

So what was COGS? $37,500 = 50,000 *(1-.25). Because 25% profit means we have 100%-25% of expenses or 75% expenses. Now because inventory was higher, meaning more was purchased through the year than was sold, we add the difference or $7,000. This brings the total purchases for the year to $44,500.

Recently I took a governmental accounting exam. To be brief, governmental accounting is totally different. I was really, really lost, nothing matched up. The night before the exam I literally spent 3-4 hours going through all the different statements matching up debits and credits and following everything out. I was able to get to a point where I understood where all the number came from and went to and as a result I got a pretty good grade on the test (top 10% in the class). Understanding how double entry accounting works helped me and it will help you.