Chapter 4 Exercise Review Flashcards
Explain why cash sale or credit sale creates a GST liability for the business
The GST is collected from the customers on behalf of the ATO, so the business has a present obligation which is expected to result in an outflow of economic benefits when the GST is paid
Referring to one qualitative characteristic, explain the role of source documents in the accounting equation
Reliability, Source documents provide verifiable evidence that ensures that information in the reports are free from bias and errors
Explain the effect on the net profit of a business for a receipt from debtor
This transaction has no effect on profit as it is not a revenue, there is no overall increase in assets, as bank increases and debtors decrease by the same amount
Two reasons why cash payments should not be made using cash from the cash register
- The payment is not verifiable by a source document
- The payment is not traceable
Reasons why documents would not satisfy the requirements of a tax invoice
Source documents that include GST must contain:
· The words “tax invoice” stated clearly
· The name of the seller
· The Australian Business Number (ABN) of the seller
· The date of transaction
· A description of the goods/services provided
· The price of the transactions, including GST
· The amount of GST
The value at which stock would be reported in the balance sheet (from source document)
The GST is not included as the economic benefit is not received when when the stock is sold
What is meant by “6/7, n/30”
The debtor is entitled to a 6% settlement discount if the amount owing is paid in the next 7 days, the net amount must be paid in 30 days
(Received a statement of account) How will this document be used by Celtic Sensations to improve reliability of reports
Celtic Sensations should check the statement of account against their records to verify how much is owed to the other business and ensure the amount reported in the balance sheet is free from bias and error
Role of a Memo
Memos verify and provide the details of an internal transaction or adjustment
Transactions verified by memos
- Non-cash capital contributions
- Stock losses / gains
- Opening / closing balances
- Balance day adjustments
Explain why order forms are not part of the accounting equation
There is no exchange of goods/services or cash, hence, there is nothing to record
Explain why there are no prices on an order form
the order form is issued by the purchaser but the prices are set by the supplier
Why does a purchase of stock lead to a reduction of the GST liability
GST purchases leads to a reduction of GST liability because the GST on the business purchases will be forwarded to the ATO by the firms suppliers, so it is treated as the business has paid the ATO directly
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.
