Comment by thetwentyone
2 years ago
The -5 doesn't belong in your ledger, it belongs in the ledger of the person who bought the lemonade. As other commenters have pointed out, the "double entry" refers to multiple entries within your own ledger, it has nothing to do with someone else's ledger.
> The -5 doesn't belong in your ledger, it belongs in the ledger of the person who bought the lemonade.
This is just prescriptive (do it because I say so). It doesn't explain anything.
> As other commenters have pointed out, the "double entry" refers to multiple entries within your own ledger, it has nothing to do with someone else's ledger.
I didn't introduce the other guy's ledger, but since you did:
I lost lemonade (which is somehow an addition to my assets). So the "-5" which belongs in the buyer's lemonade - is the negative sign there to indicate that he gained an asset?
Inventory is an asset, so if you want to account for inventory in this example, you would record two debits and two credits:
- $5 debit to cash (asset => debit means +5)
- $5 credit to revenue (equity => credit means + 5)
- $X debit to cost of goods sold (liability => debit means - X)
- $X credit to inventory (asset => credits mean - X)
Where X is the cost of the materials that went into the lemonade. So if X < 5, you made a profit. In terms of the equation, this comes out to:
So it all adds up to 0, but you make a (gross) profit or loss depending on the value of X.
You wouldn't account for the customer's side of things because the customer is not on your books.