Goods given as charity are products given away by a business for charitable purposes.
The goods are donated to the charity free of charge and therefore do not have a sales value and as such cannot be recorded in the accounting records under the heading of sales.
The goods given to charity do however have a cost which needs to be removed from the cost of sales account and recorded as an expense such as charity expense or charitable donations.
Goods Given as Charity Example
A business donates products to a charity free of charge. The goods have no sale value but have cost the business 500 to purchase. In order to reflect the goods given as charity the business records the following bookkeeping journal entry to transfer the cost of the goods from the purchases account to a charitable expense account.
Journal Entry for Goods given as Charity Explained
The debit entry represents the cost of the goods given as charity by the business. The amount is recorded under the heading of charity expenses.
In this example it is assumed that the business operates a periodic inventory system so the credit entry reduces the purchases expense which in turn removes the cost of the goods given as charity from the cost of sales account.
It should be noted that in a perpetual inventory system the credit entry would be direct to the inventory account.
The Accounting Equation
The accounting equation, Assets = Liabilities + Equity means that the total assets of the business are always equal to the total liabilities plus the equity of the business. This is true at any time and applies to each transaction.
The accounting equation for the goods given as charity transaction is shown in the following table.
|None||=||None||+||Purchases – Expense|
|0||=||0||+||500 – 500|
In this example purchases has decreased by 500 which increases the net income, retained earnings and equity, and charity expenses have increased by 500 which decreases the net income, retained earnings and equity. The net effect on equity of the two entries zero.
The transaction is simply a reallocation of the cost of the products given as charity from cost of sales (purchases) to charity expenses.
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This goods given as charity journal entry is one of many bookkeeping entries used in accounting, discover another at the links below.