Question

Donny was offered by his friend to buy powerbanks at a discounted price. He
decided to accept the offer and bought 500 units of powerbank. He used all of
his savings and also took a personal loan from a local bank to finance the
transaction. Within four months, he managed to sell all of the powerbanks by
advertising it through social media and gained substantial profit from the sales.
He has never engaged in any similar transactions before and he has no intention
to repeat the transactions in the future.

Answer 1

Journal Entries

1.On Purchase of Powerbanks

Purchases A/c ................Dr.

To Cash A/c /Supplier A/c

2.On receipt of Loan

Since the loan was obtained from a Local Bank it shall be treated as Unsecured Loan

Therefor;

Bank A/c .......................Dr

To Unsecured Loan.A/c

This loan shall be treted as Current liabilities as it cabe repaid within a short span of time.

3.On Selling of Power banks

Cash/Sundry Debtors A/c...............Dr

To Sales A/c.

4.Since all units are sold out there will not be closing inventory. Hence diiference between sales and purchases will be Gross Profit.

5.Since advertisements are made , the cost will be treated as indirect Expenses and shall be charged to Profit & Loss A/c.

Journal Entry Will be

On incuring advertisement cost

Advertisement Expenses A/c................................Dr

To Bank A/c/Cash A/c

On Closing the Advertisement A/c

Profit & Loss A/c .............................Dr

To Advertisement A/c.

6.Net Profit = Gross Profit +Indirect Incomes - Indirect Expenses.

7.Net profit shall be transfered to Capital A/c.

8. Since the business is not intented as a going concern all the accounts shall be closed at the end of the fourth month.