Basic Bookkeeping - Lesson 3 Flashcards
Why are subsidiary books used?
If a business has a great number of transactions every day it may not be practical to enter each of these transactions individually in the Sales account and in the Cash account or Debtor’s account.
It is therefore normal to record transactions of the same type in a subsidiary book and then transfer the totals periodically from this book to the relevant accounts in the ledger.
What is the process of transferring figures from the subsidiary book to the ledger known as?
Posting. When the figures have been entered in the ledger we say they have been posted from the subsidiary book.
Name the eight normal subsidiary books used by a business.
The Purchases Day Book
The Sales Day Book
The Purchases Returns Book
The Sales Returns Book
The Cash Book
The Petty Cash Book
The Wages Book
The Journal
How are the subsidiary books used?
Individual transactions of the same type are recorded in the relevant subsidiary book and periodic totals (usually monthly) are posted to the appropriate accounts in the ledger.
Do entries in subsidiary books act as part of the double-entry process? What is their function?
No. The function of subsidiary books is to provide, in the first instance, the material from which ledger accounts are later posted.
Which is the only subsidiary book that forms part of the double-entry process?
The Cash Book acts as both a subsidiary book and a ledger account.
What is an invoice?
An invoice is a document containing particulars of a sales transaction.
It may contain such details as the name and address of the seller, the invoice number, the date the transaction took place, the seller’s VAT registration number, a description of the goods, quantity ordered, price per unit, total amount due and any conditions attached to the amount due.
When could a ‘discount for early payment’ be claimed and what is it?
If payment is made before the date by which payment is due as stated on the invoice.
It is a reduction on the amount due.
What is another name for an invoice and why?
A Debit Note because it causes a debit entry to the Purchases account in the books of the business which is buying the goods.
What is VAT?
Value Added Tax is a tax which applied throughout Europe and in several other countries too.
It is a tax on the VALUE of goods and services sold.
How is VAT collected?
VAT is collected by businesses on behalf of the Government.
Unless very small, a business must register with the Government and be issued with its own VAT registration number.
What is INPUT tax?
When a business buys goods, VAT will be included in the price the business pays.
It is described as INPUT tax because it is a tax paid by the business in connection with the goods it buys in.
What is OUTPUT tax?
The VAT that a business adds to the price of goods or services it sells.
What is the basic idea of VAT?
That it is ultimately paid by the consumer not the trader.
VAT is a tax paid on the ‘value’ of goods sold. To what does the word ‘value’ refer?
It is a tax on the value the business has added to the goods. i.e. the difference between what the business has paid for the goods and what it sells them for.
How does the business work out how much tax it owes to the Government on the value it has added to the goods?
Before sending to the Government the tax it has received from its customers, the business deducts the tax it has already paid to its suppliers.
In other words, the business has to deduct the total Input tax paid during the quarter from the total output tax received during the quarter.
How often are VAT payments made to the Government by businesses?
Quarterly.
What would an invoice be to the purchaser?
A purchase invoice which would form the basis for a double-entry in his ledger.
What would an invoice be to the seller?
A sales invoice which would form the basis for a double entry in her ledger.
Where a discount is offered for prompt payment how is VAT treated?
VAT is charged on the assumption that payment will be made in time to claim the discount, whether it is or not.
The Government has agreed that VAT should be charged on the discounted amount rather than the full amount whether payment is made within the qualifying time or not.
On the invoice, the VAT charges will be calculated on the full price less the discounted percentage but the price of the goods (before VAT) will be listed at full price.
How is VAT accounted for in the ledger?
The bookkeeping aspects of VAT will be recorded in a subsidiary book at the time the purchase or sale takes place, on the basis of the information detailed on the invoice.
A VAT account will then need to be opened in the ledger. The VAT payments must be kept quite separate in the ledger.
With VAT in mind, what would the entries be in the ledger for a purchases invoice?
Debit the Purchases account with the value before VAT.
Debit the VAT account with the Input tax.
Credit the supplier’s account with the value of both, as this is the amount that must be paid.
With VAT in mind, what would the ledger entries be for a sales invoice?
Credit the Sales account with the value before VAT.
Credit the VAT account with Output tax.
Debit the customer’s account with the value of both, which is the amount the customer must pay.
What is the effect of a credit note?
A credit note reverses the effect of a purchase invoice.
When goods are returned a credit note is issued to credit the buyer with the relevant amount.
Who would issue a credit note?
A credit note is always issued by the seller.
