all Flashcards
What is accounts receivable?
Accounts receivable is money owed to a company by debtors. It is a short term asset, representing the debt the business “owns”. They are short term, meaning they are due to be received in less than 12 months, making them a current asset.
What is a long-term asset?
A long-term or non-current asset is receivable in more than 12 months.
What is accounts payable?
Accounts payable represents what a business owes to creditors. It is a current liability.
Which financial sheet is accounts receivable and payable on?
Accounts receivable and payable are on a company’s balance sheet.
When does accounts receivable increase?
Accounts receivable increases when goods or services are supplied to a customer on credit terms.
How do we record a credit sale?
Accounts receivable must be debited and the revenue/sales account credited when a sale occurs under credit.
What is accrual accounting?
In accrual accounting, revenue is recognized when a sale is made rather than when payment is received.
How do we record a debtor paying for a credit sale? What does this mean under accrual accounting?
When a payment is received from a debtor, the bank account is debited this amount. The accounts receivable account is then credited to decrease the balance.
This means in accrual accounting no revenue is recognized when payment is received, as it was already recognised when the sale was made.
What will we also typically make sure to show when we debit or credit the accounts receivable account? Why?
When we debit or credit the accounts receivable account we also typically show the name of the debtor involved, this is because within accounts receivable and payable ledgers ther are sub-ledgers for each and every debtor that purchases goods or services from the business. The total of these makes up the total accounts receivable account balance.
What is a sub-ledger? How are these useful for the general ledger?
A sub-ledger is a detailed record of transactions for an individual account. Typically it contains transaction details, summarized by date and the total is posted to the general ledger.
Any adjustments to the accounts receivable balance are made to the debtor involved, rather than directly to the accounts receivable balance.
What is a creditor? How do we record these transactions?
When goods or services are received from a supplier on credit the supplier is referred to as a creditor. The journal to record goods or services purchased on credit terms will result in a debit to the expense account which represents what has been received, and a credit to the accounts payable account.
How do we record payment on an accounts payable? What does this mean for expense recognition under accrual accounting?
Under accrual accounting, the expense is recognized when the invoice is received rather than waiting for payment to be made. When a payment is made to the creditor (often next month), the accounts payable account is debited to decrease it (reducing total amount owed), and the bank account is credited to decrease it as a result of payment made.
This means no expense is recognized when payment is made, as it has already been recognized when the expense was incurred. Whenever you debit or credit the accounts payable account we must show the name of the creditor.
How do we ensure the general ledger is correct using sub-ledgers?
We should balance the sub-ledger accounts to ensure the generla ledger is correct for both accounts payable or accounts receivable.
Why is accrual accounting often better than cash accounting?
Accrual accounting is preferred as it provides a more accurate picture of the trading activities of an organization over a period.
It measures the performance and position of a company by recognizing economic events regardless of when payment actually occurs. It attempts to recognize economic events by matching revenues to expenses (known as the matching principle) at the time in which the transactions occur rather than when payment is made. By doing this, the current cash flows can be combined with future expected cash flows to give a more accurate idea of a company’s current financial situation.
If we use cash accounting it may be more difficult to tell when our expenses and sales truly occured.
What is cash accounting?
Cash accounting only recognises transactions when there is an exchange of cash.
When does a cash transaction occur? What about credit?
Cash transactions occur when payment is made, potentially as a cash transaction, EFTPOS, or cheque payment, it is any time where cash flows and sale occur at the same time.
In contrast, a credit transaction will have no payment (or only partial) made at the time of sale.
Why can we use accrual accounting with regards to probability of cash?
The cash method is often not accurate because it is likely, if not certain, that once a sale has occurred on credit the money will be received at some point, so it is recorded as accounts receivable instead in accrual accounting.
What is a trading account?
A trading account is an agreement between supplier and customer. As part of this the person receiving goods or services undertakes payment according to the terms set out in the agreement. This term will vary (7, 14, or a number of days after the end of the invoice issuance month is common).
How does a trading account work with regards to statements and invoices?
With most trading accounts, a tax invoice is issued with each batch of goods and services. At the end of the month a statement is printed showing all invoices, payments received, credits, and adjustments for the statement period. A statement will normally have an opening and closing balance.
How do we deal with trade accounts in accrual accounting?
With accrual accounting, instead of debiting an expense account and crediting a cash account when goods are received and paid for, we must enter the initial transaction into the trade creditor journal(debit expense, credit trade account), normally from the invoice. When payments are made it is necessary to debit the trade creditor account (reducing the balance) and credit the cash account (reducing the bank account).
What does a creditors schedule contain?
Are sub-ledgers involved?
A creditors, or accounts payable schedule contains relevant information for accounts payable, such as: Supplier’s account number, supplier’s name, date of transaction, invoice number, details of transaction, the amount owed, the date of payment requirement, and the person within the organization who completed the transaction. The information will vary based on organization policy.
Many businesses use subsidiary ledgers (sub-ledgers) in addition to these schedules. Often when they have a large number of creditors and debtors, as otherwise the ledger can become unworkable. A sub-ledger is a detailed record of transactions for an individual account. Then at the end of each month/period, the closing balance of each sub-ledger would be copied to the schedule so that a full list of payments that need to be made are easily viewable and actable on.
What does a debtors schedule contain?
Are sub-ledgers involved?
A debtors schedule, or accounts receivable schedule contains relevant information for accounts receivable, such as: Customer’s account number, customer name, date of the transaction, invoice number, details of the transaction, the amount due, and the date by which payment is expected. What is included will vary by business.
A sub-ledger of debtors can be used, giving a full list of payments expected that are easily viewable. At the end of each month, the outstanding (closing) balance of each debtor sub-ledger would be copied to a debtor summary schedule so that a full list of payments yet to be received (accounts receivable) are easily viewed and acted upon.
