Special Entries for Goods refer to entries made for transactions that fall outside the simple buy and sell exchange. Here, we’ll take a look at 6 such transactions and try to make journal entries for the same.
1. Goods withdrawn for personal use
Withdrawing goods for personal use is not an uncommon thing for businessmen. Why look outside for something when you have it in your godown?
Suppose, your family needs some clothes and you run a clothing business. You can simply take some boxes of clothes home and fulfil the needs at a lower cost.
With this, our stock ‘purchased’ decreases to the extent of cost price of the goods withdrawn and hence, Purchase item will be tagged credit.
Secondly, even the owners are not allowed freebies. The cost of the withdrawn goods will be adjusted from the owner’s capital i.e., the owner’s capital will reduce.
A reduction in capital that occurs on withdrawal of cash or goods for personal use is denoted using a special term called ‘Drawings’. Since it indicates a decrease in Owner’s Equity, Drawings item receives the debit tag.
2. Goods given away as charity or donation
Donation or Charity is the business’ expense for the society. Even if not for profit, it is still an expense and is treated as such i.e., it will be debited as and when it arises.
When you give away your goods as charity or donation, your stock of purchased goods decreases and hence, purchase item will be credited.
3. Goods distributed as free sample
Distributing samples is an effective method of advertising and promoting new products in the market.
A common example would be cloth manufacturers providing samples of new T-shirt designs to wholesalers.
Since the free samples were for advertising purposes, we can create an accounting item called ‘Advertisement Expense’ and tag it debit.
And, consistent with earlier cases, here too, our purchased stock decreases and thus, the Purchase item is credited.
4. Goods received as free samples
This is because, we didn’t have to bear any costs.
The samples were given to us free of cost so that we, as distributors, can get customer feedback.
If the samples are to the customer’s liking, they may very well open the doors of growth for both us and the producer.
But, this is also the point where we bring in the Money Measurement Concept i.e., only those transactions that can be measured in money terms should be recorded and non-monetary transactions should be ignored.
Since there was no formal attachment of a price tag, we cannot record this transaction of receiving free samples in our books of accounts.
5. Theft of goods
Suppose, we manufacture some sort of electronics say, mobile phones, earphones, etc. We had manufactured and prepared a stock for an upcoming sale. Just a night before, the mind of one worker is filled with some not-so-good intentions and he steals as much goods as he can and vanishes into the dark night.
In the morning, when the theft comes to light, while the security guard receives a verbal lashing from us, but our accountant has something else to do: he has to pass a journal entry.
One where he will debit the total cost price of goods stolen under the head of ‘Loss by Theft’ since expenses & losses are debited as and when they arise.
On the credit, we have the Purchase item, of course.
6. Goods destroyed by fire
I do not wish it upon anyone but say, your warehouse caught a fire due to some reason. It may be a short circuit or because it is located in an area suffering from riot / civil unrest and some madman just had to kick your bread and butter.
Since our discussion circles around accounting, let us put aside the emotional turmoil for a second and think of the accounting aspects of this event.
The loss of monetary value of goods from this fire is recorded by creating a specific accounting item called ‘Loss by Fire’. Expenses and losses are debited as and when they arise thus, Loss by Fire receives the debit tag.
And, of course, the Purchase A/c will be credited to record a decrease in the value of purchased stock.
In summary, the special entries for goods are entries where our purchased stock decreases not due to sale of goods but because of drawings, donation, sampling, unforeseen loss due to fire/loss, etc.
Accounting entries for such events are made by crediting the Purchase item and the reason for the decrease (i.e., donation, drawings, etc.) is tagged debit.
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