Chapter 3: Sales on Credit Flashcards
What is a Sale Invoice?
a financial document sent from a business to the customer, highlighting details of the sale transaction.
It includes information about the sales transaction, such as the name and address of the buyer and seller, the items sold, and the price of the items.
If there is sales tax, its details are included in the sales invoice.
Sales Tax - need to be able to calculate in exam using %
A percentage of sales tax is charged on goods and services sold.Sales tax is charged at different percentages in different countries.
OUPUT TAX IS
a tax charged on sales to customers. It is collected by the seller and subsequently paid to the tax authorities.
INPUT tax is
a tax charged on the purchase from suppliers. The supplier collects and subsequently pays the sales tax to the tax authorities. Input tax can be reclaimed from the tax authorities for registered businesses.
Businesses complete a sales tax return form (VAT Return) every quarter as the tax authorities require.
If the output tax is more than the input tax (net output tax), the net amount will remain as a current liability until the money is paid to the tax regulatory body.
If the input tax is more than the output tax (net input tax), the net amount will appear as a
CURRENT ASSET until the money is refunded to the business.
Miscalculating sales tax may lead to the outcomes below:
Penalties charged by the authorities for mistakes that lead to inaccurate sales tax return submission.
If the tax charged to customers on behalf of the tax authorities is overstated, customers will complain, and the sale of the business may be affected.
If the tax charged to customers on behalf of the tax authorities is understated, the business may have to pay the difference to the authorities using its funds.
- may need to calculate the gross or net amount of sales tax.
Definition of NET PRICE and GROSS PRICE
The net price is the total price for the goods before sales tax is added.
The net price always represents 100% of the price. (amount before sales tax added)**
(For example, the price for goods is $200)
To this, we add the sales tax. Sales tax is given as a percentage.
(for example, sales tax is 20%)
The gross price is the invoice total of the net price and the sales tax. (amount after including sales tax**)
TRADE DISCOUNT =
reduces the cost of goods or services bought or sold. A trade discount reduces the total price of the goods (list price).
Businesses may choose to offer Trade Discounts to customers for two reasons:
1) They are valued customers who regularly buy goods from the business.
2) The discount offers customers an incentive to order in larger quantities.
Trade discounts are deducted from the price of the goods before the sales tax is calculated. The sales tax is recalculated based on the revised net amount
If the business offers its customers trade discounts, the sales tax percentage is calculated on the net amount after deducting the trade discount**
A SETTLEMENT DISCOUNT or prompt payment discount (should be able to calc)=
is a discount offered to customers or received from suppliers for prompt payment
encourage credit customers to pay sums owing to the business earlier than the standard credit agreement time (credit period).
Businesses will determine the percentage of discount and the period for prompt payment discount entitlement.
For example, a business can offer a 2% prompt payment discount if payment is made within seven days, although the standard credit period is 30 days.
what is a CREDIT NOTE?
is a financial document issued to customers from a business that reduces the value of an invoice previously issued, for example due to sales returns.
The credit note (negative invoice) is issued due to problems with goods delivered already invoiced. Examples of issues are:
Damaged or faulty goods
Wrong item delivered
Credit notes are numbered consecutively, like sale invoices
If a trade discount was offered, it needs to be considered in the credit note, or the refund will be overstated.
Settlement discount is not considered in a credit note because it is unlikely that the customer will pay for a faulty sales invoice.
Credit sale is recorded in a
sales invoice
any sales return is recorded in a
credit note
[a remittance advice is evidence of receipt from a customer]
noted in relevant credit sales ledger account using double entries
2.2 relevant credit sale accounts - credit sale transactions are recorded to 5 relevant ledger accounts below
Trade receivables account (asset)
Sales account (income)
Sales return account (expense)
Sales tax account (liability)
Bank account (asset)
Trade receivables account (asset)
Receivables are amounts owed to a business by credit customers. In credit sales, customers are provided goods or services (sales), and payment is made in the future. At the point of sale, the customer owes the business an amount known as trade receivables.