6. SALES, PURCHASES AND SALES TAXES Flashcards
What is the double entry for returns inwards?
Dr Returns inwards (OR Sales if giving credit note)
Cr Receivables
What is the double entry for returns outwards?
Dr Payables
Cr Returns outwards (OR Purchases if given credit note)
How do we account for trade discounts?
Deduct the discount amount before the initial recording of the transaction - no recording is made of the discount itself
What would represent a cash discount?
a. discount for payment made in cash
b. discount for payment made by cheque
c. discount for payment made before due date
d. discount for purchases made in bulk
c. cash discount is an early payment discount
(d. is a “trade discount”)
Where is discount allowed recognised?
a. Trading account
b. SOPL
c. Trial balance
d. SOFP
b. SOPL (discount allowed is a form of expense and so would be recognised on the SOPL)
Where is discount received recognised?
a. Trading account
b. SOPL
c. Trial balance
d. SOFP
b. SOPL (discount received is a form of income and so would be recognised on the SOPL)
What is the double entry for trade discount allowed to a customer?
No double entry is required as it is already deducted from the initial amount before the invoice was raised
Where is carriage inwards accounted for?
a. SOPL as an expense
b. SOFP
c. Trading account as part of cost of sales
d. Trial balance
c. in the trading account
(carriage inwards is the delivery costs paid to transport purchases so would appear along with purchases in the trading account as part of cost of sales)
Carriage outwards are disclosed in
a. SOFP
b. SOPL as an expense
c. Trading discount
d. Trail balance
b. SOPL as an expense
(carriage outwards = delivery cost paid to transport goods sold from entity’s facility to customer)
An entity received a settlement discount of £1500 from a supplier. The amount was debited to the discount received account. What was the effect of this upon gross profit?
a. Gross profit is understated by £1500
b. Gross profit is understated by £3000
c. Gross profit is overstated by £3000
d. Gross profit is unaffected
d. not affected!
(discount received is stated in the SOPL rather than the trading account therefore profit will be affected by £3000 BUT gross profit will not be affected.)
Which of these statements are correct?
a. Only cash discounts should be deducted from an invoice amount before the invoice can be accounted for
b. Only trade discount should be deducted from an invoice amount before the invoice can be accounted for
c. A trade discount should be deducted from an invoice amount after considering the cash discount before it can be accounted for
d. Both trade and cash discounts should be deducted from an invoice amount before it is accounted for
b. Only trade discounts are deducted in order to account for an invoice
(note, cash discounts are dealt wioth upon receipt of payment)
