ACCOUNTING CH 4-7 Flashcards
Define the term ‘Goods and Services Tax (GST)
Goods and Services Tax (GST) is a 10% tax levied by the federal government on most purchases of goods (excluding fresh food) and services.
Explain why GST on sales creates a GST liability.
When a business charges its customers GST, it does so on behalf of the government. As a result, any GST on sales creates a liability – an amount of GST owed to the ATO.
explain why GST on purchases leads to a reduction in any GST liability.
If the business has been charged any GST by its suppliers, it is allowed to deduct this GST on purchases from its GST liability. The GST on its purchases will be forwarded to the ATO by the firm’s suppliers, so it is treated as if the business had actually paid the GST straight to the government.
4 Explain why most small businesses will end up with a GST liability at the end of the period.
As selling prices are usually higher than cost prices, in most cases the GST on sales will be greater than the GST on purchases, so the business will have a current liability in relation to the GST.
5 State two ways a small business could end up being owed a GST refund by the ATO.
- the business makes a bulk order of stock that it has not sold
- the business purchases an expensive non-current asset
3 Show how the GST will affect the calculation of:
- total price when given selling price
- selling price/GST when given total price
- total price when given selling price – GST is calculated as 10% of the selling price, and added to the selling price to determine the total price
- selling price/GST when given total price – work backwards from the total price to determine either the GST (1/11 of the total price) or the selling price (10/11 of the total price).
1 State the source document used to verify cash received.
A cash receipt is used to verify cash received.
4 List three different transactions for which a cash receipt may be issued.
- cash sale
- receipt from a debtor
- capital contribution
5 Explain why there is no GST to account for when cash is received from a debtor
There is no GST to account for because the GST is recognized and reported at the time a (credit) sale is made. To record GST at the point of a receipt from a debtor is to double-count the GST.
1 Explain three reasons why cash payments should be made by cheque
- security – paying by cheque avoids the risks of carrying large sums of cash, and the danger of theft this entails
- traceability – cheques must be deposited into a bank account, meaning it is possible to trace the eventual recipient of the funds
- verifiability – all payments made by cheque are recorded on the cheque butt, providing a source document to verify the transaction
2 State the source document used to verify cash paid.
A cheque butt is used to verify cash paid.
4 Explain why GST paid decreases GST liability.
Although the GST paid is to the supplier, they are obliged to forward the GST to the ATO so it is treated as if the business had actually paid the GST straight to the government. Thus the business is allowed to deduct this GST on purchases from its GST liability.
1 State the source document used to verify a credit sale.
A sales invoice is used to verify a credit sale.
2 Explain what is meant by the terms 5/7, n/30.
The debtor has 30 days to settle the debt, but if it is repaid within seven days, a 5% discount will be applied to the total amount owing.
4 Explain why the GST charged on a credit sale increases Debtors Control.
When stock is sold on credit, the customer (debtor) will owe both the amount of the sale (for the stock) plus the GST on the sale.
1 State the source document used to verify a credit purchase.
A purchase invoice is used to verify a credit purchase.
3 Explain the effect on Stock Control of the GST on a credit purchase
There is no effect because GST does not affect the cost price of the stock purchased but rather the amount owed to the creditor.
5 Explain what must occur if the GST Clearing account has a credit balance at the end of the period.
It must be reported as a current liability; the business will be required to make a payment to the ATO called a GST settlement.
6 Explain what must occur if the GST Clearing account has a debit balance at the end of the period.
It must be reported as a current asset; the business will be due a GST refund from the ATO.
1 List the four special journals, and state the types of transactions they record.
Purchases Journal (PJ) Credit purchases of stock (from creditors)
Sales Journal (SJ) Credit sales of stock (to debtors)
Cash Receipts Journal (CRJ) Cash received (from all sources)
Cash Payments Journal (CPJ) Cash paid (for all uses)
2 Explain the function of a special journal
The main purpose of the special journals is to summarise similar transactions so that totals can be posted to the General Ledger, in the process reducing the number of ledger entries required and improving the efficiency of the recording system.
3 Explain the function of the General Journal
The main purpose of the General Journal is to record infrequent, non-cash transactions that are unable to be recorded in the special journals.
1 Explain the role of the Purchases Journal.
The role of the Purchases Journal is to summarise all transactions involving the purchase of stock on credit during a month.
2 State which type of source document is used to verify all transactions recorded in the Purchases Journal.
A purchase invoice.