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ACCOUNTING CH 4-7 Flashcards

1
Q

Define the term ‘Goods and Services Tax (GST)

A

Goods and Services Tax (GST) is a 10% tax levied by the federal government on most purchases of goods (excluding fresh food) and services.

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2
Q

Explain why GST on sales creates a GST liability.

A

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.

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3
Q

explain why GST on purchases leads to a reduction in any GST liability.

A

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.

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4
Q

4 Explain why most small businesses will end up with a GST liability at the end of the period.

A

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.

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5
Q

5 State two ways a small business could end up being owed a GST refund by the ATO.

A
  • the business makes a bulk order of stock that it has not sold
  • the business purchases an expensive non-current asset
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6
Q

3 Show how the GST will affect the calculation of:

  • total price when given selling price
  • selling price/GST when given total price
A
  • 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).
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7
Q

1 State the source document used to verify cash received.

A

A cash receipt is used to verify cash received.

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8
Q

4 List three different transactions for which a cash receipt may be issued.

A
  • cash sale
  • receipt from a debtor
  • capital contribution
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9
Q

5 Explain why there is no GST to account for when cash is received from a debtor

A

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.

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10
Q

1 Explain three reasons why cash payments should be made by cheque

A
  • 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
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11
Q

2 State the source document used to verify cash paid.

A

A cheque butt is used to verify cash paid.

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12
Q

4 Explain why GST paid decreases GST liability.

A

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.

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13
Q

1 State the source document used to verify a credit sale.

A

A sales invoice is used to verify a credit sale.

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14
Q

2 Explain what is meant by the terms 5/7, n/30.

A

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.

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15
Q

4 Explain why the GST charged on a credit sale increases Debtors Control.

A

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.

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16
Q

1 State the source document used to verify a credit purchase.

A

A purchase invoice is used to verify a credit purchase.

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17
Q

3 Explain the effect on Stock Control of the GST on a credit purchase

A

There is no effect because GST does not affect the cost price of the stock purchased but rather the amount owed to the creditor.

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18
Q

5 Explain what must occur if the GST Clearing account has a credit balance at the end of the period.

A

It must be reported as a current liability; the business will be required to make a payment to the ATO called a GST settlement.

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19
Q

6 Explain what must occur if the GST Clearing account has a debit balance at the end of the period.

A

It must be reported as a current asset; the business will be due a GST refund from the ATO.

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20
Q

1 List the four special journals, and state the types of transactions they record.

A

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)

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21
Q

2 Explain the function of a special journal

A

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.

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22
Q

3 Explain the function of the General Journal

A

The main purpose of the General Journal is to record infrequent, non-cash transactions that are unable to be recorded in the special journals.

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23
Q

1 Explain the role of the Purchases Journal.

A

The role of the Purchases Journal is to summarise all transactions involving the purchase of stock on credit during a month.

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24
Q

2 State which type of source document is used to verify all transactions recorded in the Purchases Journal.

A

A purchase invoice.

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25
Q

3 Explain the effect on the valuation of stock of GST (charged by suppliers) on credit purchases.

A

The GST charged by suppliers does not affect the valuation of stock but rather it reduces the GST liability owed to the ATO, and increases the debt owed to creditors.

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26
Q

4 Referring to the Purchases Journal, state one reason why the amount recorded in the Creditors Control column is greater than the value of stock purchased.

A

The amount recorded is greater due to the GST charged by the supplier, which increases the debt owed to the creditors.

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27
Q

6 Explain the effect on the GST Clearing account of GST charged by suppliers on credit purchases.

A

The GST charged by suppliers reduces any GST liability the business may have accrued. It is treated as if the GST has already been paid to the ATO. (If the GST Clearing account already had a debit balance, the GST charged by suppliers would increase the value of the asset.)

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28
Q

1 Explain the relationship between the Creditors Control account and the Creditors Ledger.

A

The General Ledger contains the Creditors Control account, which is a summary account that records a summary of all transactions that affect creditors as a whole; while the Creditors Ledger (a subsidiary ledger) contains a separate account for each individual creditor, showing each individual transaction affecting that creditor’s balance.

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29
Q

2 State two differences in the way the Purchases Journal is posted to the Creditors ledger (as compared to the General Ledger).

A
  • The purchases journal is posted to the General Ledger at the end of the month, using the column totals.
  • Individual transactions are posted to the Creditors Ledger accounts on the day they occur.
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30
Q

3 State the function of a Creditors Schedule.

A

A Creditors Schedule is a list of the name and balance of each individual account in the Creditors Ledger, added together to enable checking against the balance of the Creditors Control account.

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31
Q

4 Explain how the Creditors Schedule aids in the control of creditors.

A

The Creditors Schedule fulfils a control function by acting as a checking mechanism against the balance of the Creditors Control account.

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32
Q

1 Explain the role of the Sales Journal.

A

The Sales Journal summarises all transactions involving the sale of stock on credit during a month.

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33
Q

2 State which type of source document is used to verify all transactions recorded in the Sales Journal.

A

The sales invoice.

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34
Q

3 Explain the effect on revenue earned of GST charged to debtors on credit sales.

A

The GST charged does not affect the revenue earned; it increases the GST liability owed to the ATO, and increases the amount owed by debtors.

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35
Q

4 Referring to the Sales Journal, state one reason why the amount recorded in the Debtors Control column is greater than the sales revenue earned.

A

The amount recorded is greater due to the GST charged to debtors

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36
Q

6 Explain the effect on the GST Clearing account of GST charged to debtors on credit sales.

A

The GST charged to debtors increases any GST liability the business may have accrued. It is treated as though the business has already collected the GST and is therefore owed to the ATO. (If the GST Clearing account already had a debit balance, this GST charged to debtors would decrease the value of the asset.)

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37
Q

7 Explain the relationship between the Debtors Control account and the Debtors Ledger.

A

The General Ledger contains the Debtors control account, which is a summary account that records a summary of all transactions that affects debtors as a whole; while the Debtors Ledger (a subsidiary ledger) contains a separate account for each individual debtor, showing each individual transaction affecting that debtor’s balance.

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38
Q

8 State two differences in the way the Sales Journal is posted to the Debtors Ledger (as compared to the General Ledger).

A
  • The Sales Journal is posted to the General Ledger at the end of the month, using the column totals.
  • Individual transactions are posted to the Debtors Ledger accounts on the day they occur.
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39
Q

9 State the function of a Debtors Schedule.

A

A Debtors Schedule is a list of the name and balance of each individual account in the Debtors Ledger, added together to enable checking against the balance of the Debtors Control account.

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40
Q

10 Explain how the Debtors Schedule aids in the control of debtors.

A

The Debtors Schedule fulfils a control function by acting as a mechanism to check the accuracy of the posting. Only the balance of the Debtors Control account will be reported in the Balance Sheet.

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41
Q

1 Explain how the GST Clearing account may end up with a credit balance.

A

If GST on sales is more than GST on purchases (and other payments), the GST Clearing account may end up with a credit balance.

42
Q

2 Explain how the GST Clearing account should be reported in the Balance Sheet if it has a credit balance.

A

The GST Clearing account will be reported as a current liability: a present obligation the business must meet sometime in the next 12 months.

43
Q

3 Define the term ‘GST settlement’.

A

GST settlement is a cash payment made to the ATO to settle the liability that occurs when GST on its sales is greater than GST on purchases.`

44
Q

4 Explain how the GST Clearing account may end up with a debit balance.

A

If GST on purchases (and other payments) is more than GST on sales, the GST Clearing account may end up with a debit balance.

45
Q

5 Explain how the GST Clearing account should be reported in the Balance Sheet if it has a debit balance.

A

The GST Clearing account will be reported as a current asset: a resource controlled by the entity from which a future economic benefit is expected in the next 12 months.
 

46
Q

6 Define the term ‘GST refund’.

A

GST refund is a cash receipt from the ATO to refund the excess that occurs when GST on sales is less than GST on purchases.

47
Q

Explain the benefit of recording transactions in special journals.

A

Special journals 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.

48
Q

List four transactions that would be recorded in the Cash Payments Journal.

A

payments to creditors
payment of wages/electricity/other expenses
cash drawings
cash purchase of stock

49
Q

Explain what each payment has in common in terms of its effect on the General Ledger.

A

Each cash payment has the same effect on the ledger account for Bank; that is, a decrease (recorded on the credit side).

50
Q

Identify the source document used to verify the transactions recorded in the Cash Payments Journal.

A

A cheque butt is used to verify cash payments.

51
Q

Explain how the headings for the classification columns in the Cash Payments Journal are determined.

A

The headings are determined according to the frequency of the cash payment and will vary from one business to another.

52
Q

Explain why the name of each creditor is identified in the Details column.

A

The name is required so that the individual transactions can be posted to the individual creditors’ accounts in the creditors ledger.

53
Q

Explain the double-checking mechanism in the Cash Payments Journal.

A

Each column in the Cash Payments Journal is totalled. The total of the Bank column should equal the sum of the totals of the other columns.

54
Q

Explain how the Cash Payments Journal is posted to the General Ledger.

A

Each column in the journal is totalled and is posted at the end of the month. The entries in the Sundries column are posted to the individual accounts at the end of the month.

55
Q

Explain why the cross-reference used when the Cash Payments Journal is posted to the Bank account is not the name of a ledger account.

A

It is not the name of a ledger account because there is no single account linked to the total paid out of the Bank account; it has been paid for a number of different purposes. For this reason, the cross-reference must simply be ‘cash payments’ to indicate that there are a number of other accounts linked to this total payments figure.

56
Q

List four transactions that would be recorded in the Cash Receipts Journal.

A 
cash sales
receipts from debtors
GST refund
capital contribution
receipt of loan
proceeds from sale of NCA
57
Q

Explain what each cash receipt has in common in terms of its effect on the General Ledger.

A

Each cash receipt has the same effect on the ledger account for Bank; that is, an increase (recorded on the debit side).

58
Q

Identify the source document used to verify the transactions recorded in a Cash Receipts Journal.

A

A cash receipt is used to verify the transactions.

59
Q

Explain how the headings for the classification columns in the Cash Receipts Journal are determined.

A

The headings are determined according to the frequency of the cash receipt and will vary from one business to another.

60
Q

Explain why the name of each debtor is identified in the Details column.

A

The name is required so that the individual transactions can be posted to the individual debtors’ accounts in the Debtors Ledger.

61
Q

Explain why it is necessary to use a Cost of Sales column in the Cash Receipts Journal.

A

Each sale will involve two double entries: one at the selling price and one at the cost price. As each sale decreases stock and creates an expense (Cost of Sales) it is also necessary to show the cost price of each sale in the Cash Receipts Journal.

62
Q

Explain the double-checking mechanism in the Cash Receipts Journal

A

The total of the Bank column should equal the sum of the totals of the other (classification and Sundries) columns, except Cost of Sales because it does not involve an inflow of cash.

63
Q

Explain how the Cash Receipts Journal is posted to the General Ledger.

A

Each column in the journal is totalled and is posted at the end of the month. The entries in the Sundries column are posted to the individual accounts at the end of the month.

64
Q

Explain why the cross-reference used when the Cash Receipts Journal is posted to the Bank account is not the name of a ledger account.

A

It is not the name of a ledger account because there is no single account linked to the total received in the Bank account; it has been received for a number of different purposes. For this reason, the cross-reference must simply be ‘cash receipts’ to indicate that there are a number of other accounts linked to this total receipts figure.

65
Q

Identify two differences in the way the Cash Receipts Journal is posted to the Debtors Ledger (compared to the way it is posted to the General Ledger).

A

The Cash Receipts Journal is posted to the General Ledger at the end of the month, using the column totals. Individual transactions are posted to the Debtors Ledger on the day they occur.

66
Q

Explain how the cross-reference used in the individual debtor accounts is determined.

A

The cross-reference is the same used when posting the Cash Receipts Journal to the General Ledger account of Debtors Control (Bank).

67
Q

Explain the circumstances that would lead the GST Clearing account to have a credit balance.

A

GST on sales is greater than GST on purchases for the reporting period.

68
Q

Explain how a credit balance in the GST Clearing account would be reported in the Balance Sheet.

A

It would be reported as a current liability – a present obligation – the settlement of which will result in an outflow of resources embodying economic benefits in the next 12 months.

69
Q

Define the term ‘GST settlement’.

A

GST settlement is a cash payment made by a business to the ATO to settle the liability that occurs when GST on the business’s sales is greater than GST on its purchases.

70
Q

Explain why a GST settlement is not recorded in the GST column in the Cash Payments Journal.

A

The GST column in the Cash Payments Journal is only for GST paid to suppliers on purchases. A GST settlement is paid to the ATO only infrequently, to settle a GST debt.

71
Q

Explain the circumstances that would lead the GST Clearing account to have a debit balance.

A

GST on purchases is greater than GST on sales for the reporting period.

72
Q

Explain how a debit balance in the GST Clearing account would be reported in the Balance Sheet.

A

It would be reported as a current asset – a resource controlled by the entity from which a future economic benefit is expected to flow to the entity within the next 12 months.

73
Q

Define the term ‘GST refund’.

A

A GST refund is a cash receipt from the ATO to a business to refund the excess that occurs when GST on the business’s sales is less than GST on its purchases.

74
Q

Explain why a GST refund is not recorded in the GST column in the Cash Receipts Journal.

A

The GST column in the Cash Receipts Journal is only for GST received from customers for cash sales, whereas the GST refund is received from the ATO itself.

75
Q

Define the term ‘settlement discount’.

A

A settlement discount is a reduction in the amount repayable by a credit customer in return for early repayment.

76
Q

Explain what is meant by the notation ‘5/7, n/30’.

A

5/7 – 5% discount if the invoice is paid within 7 days

n/30 – the net amount must be paid within 30 days

77
Q

List the benefits of offering a settlement discount.

A

Cash is received faster from debtors.
The possibility of bad debts is reduced.
Greater sales may be encouraged.

78
Q

List the costs of offering a settlement discount.

A

Less cash is received from debtors.

Net profit is reduced.

79
Q

Define the term ‘discount revenue’.

A

Discount revenue is a revenue (in the form of a decrease in creditors) earned when creditors are paid early.

80
Q

Explain why discount revenue is classified as revenue.

A

It is classified as revenue as it is a reduction in an outflow of economic benefits (less cash paid to creditors), in the form of a reduction in liabilities (creditors) that increases owner’s equity.

81
Q

Where a discount is received on a payment to a creditor, state the amount that should be recorded in the following columns of the Cash Payments Journal:

A

Bank – the actual amount of cash paid to the creditor (amount owing less discount)
Creditors Control – the amount of cash paid to the creditor plus the amount of discount (the total reduction in creditors).

82
Q

Referring to Figure 6.12, state the effect of the transaction on 24 June 2015 on the accounting equation.

A

Assets decrease $315

liabilities
decrease $350

Owners equity
decrease $35

83
Q

Explain why there are two accounts cross-referenced in the Creditors Control account when discount revenue is received on a payment to a creditor

A

This is because the amount debited to the Creditors Control account consists of some cash and some discount revenue.

84
Q

Define the term ‘discount expense’.

A

Discount expense is an expense, in the form of a decrease in debtors, incurred when cash is received early from debtors.

85
Q

Explain why discount expense is classified as an expense.

A

Discount expense is a reduction in an inflow of economic benefits (less cash is received), in the form of a reduction in assets (debtors) that decreases owner’s equity.

86
Q

Where a discount is given on a receipt from a debtor, state the amount that should be recorded in the following columns of the Cash Receipts Journal:

A

Bank – the actual amount of cash received from the debtor (amount owed less discount)
Debtors Control – the amount of cash received from the debtor plus the amount of discount (the total reduction in debtors).

87
Q

State the effect discount revenue has on the accounting equation

A

assets decrease - bank increase, debtors cntl decrease

liabilities no effect

owners equity decrease - net profit.

88
Q

State one reason why the amount posted to the Debtors Control account from the Cash Receipts Journal is not the same as the cash received from debtors.

A

The amount posted to the Debtors Control account includes the discount expense (which is not included in the cash received from debtors).

89
Q

Explain why two accounts are cross-referenced in the Debtors Control account when a discount expense is incurred on a receipt from a debtor.

A

This is because the amount credited to the Debtors Control account consists of some cash and some discount expense.

90
Q

Explain the role of special journals in the accounting process.

A

Special journals 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.

91
Q

Explain the role of the General Journal.

A

The General Journal is used to record infrequent, non-cash transactions, which cannot be recorded in the special journals.

92
Q

List seven types of transactions that will be recorded in the General Journal.

A 
commencing entries
non-cash transactions with the owner
bad debts
correcting entries
use of stock for advertising purposes
closing entries
balance day adjustments
93
Q

Explain why there are no classification columns in the General Journal.

A

There are no classification columns because the General Journal is used to record a variety of transactions, unlike the special journals, which record similar and frequent transactions.

94
Q

In relation to the General Journal, define the term ‘narration’.

A

A brief description of a transaction recorded in the General Journal, including a reference to the relevant source document.

95
Q

Explain why narrations are necessary in the General Journal, but not in the special journals.

A

Transactions recorded in the special journals are all of a similar nature, thus a narration is not required. However, as the General Journal records a variety of transactions, it is necessary to provide a narration for each entry.

96
Q

Define the term ‘commencing entry’.

A

A General Journal entry to establish double-entry records by entering existing asset, liability and owner’s equity balances in the ledger accounts.

97
Q

State two reasons why a commencing entry may be necessary.

A

when the business is just starting and the owner is contributing starting capital
when the business has been operating for some time already, and the owner decides to switch from single-entry accounting to double-entry accounting

98
Q

Explain why drawings of stock must be recorded in the General Journal.

A

Drawings of stock is a non-cash transaction. Thus, it cannot be recorded in the Cash Payments Journal but rather must be recorded in the General Journal.

99
Q

Define the term ‘bad debt

A

A bad debt is an expense incurred when a debt is written off because it is deemed to be irrecoverable.

100
Q

Referring to one accounting principle, explain when a bad debt should be recognised.

A

According to the conservatism principle, a bad debt should be recognised as an expense when the loss is probable, so that assets (Debtors Control) are not overstated.

101
Q

Explain why in some situations errors may be corrected in the appropriate special journal, but in others a General Journal entry is required.

A

When errors are detected before the journals are posted to the ledger, they can be corrected in the special journals. However, if the journals have already been posted to the ledger, errors must be corrected using a General Journal entry.

102
Q

List three types of errors that may need to be corrected via the General Journal.

A

recording a transaction in the wrong ledger account
omitting a transaction
recording an incorrect amount

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