Chapter 4: Preparing financial statements – other considerations

Question 1

1.1 Returns

Answer 1

It is normal for customers to return unwanted goods to a business, equally the business may have cause to return unwanted goods to their supplier. In the case of returns from customers the business will reduce the sales figure by the amount returned. In the case of purchase returns the business will reduce the purchases figure by the amount returned.
The double entries for transactions originally a credit transaction are as follows:

Sales returns: Dr Sales
Cr Trade receivables

Purchase returns: Dr Trade payable
Cr Purchases

The double entries for a cash transaction are as follows:

Sales returns: Dr Sales
Cr Cash

Purchase returns: Dr Cash
Cr Purchases

Question 2

2.1 Discounts

Answer 2

There are two types of discounts: trade (bulk buy) and early settlement (prompt payment).
The bulk buy is given as a reduction at the point of sale, it is accounted at sale or purchase at reduced price. Early settlement is accounted for sale and purchase based on expected settlement. If the settlement is not as expected, correction made at point of settlement. For sales, any difference between expected proceeds and those actually received are recognised as an adjustment to revenue and for purchase, any difference between expected payments and those actually made are recognised as an adjustment to purchases.

Question 3

3.1 Payroll

Answer 3

A large part of many business’s costs are payroll. NICs are a type of tax, paid by the employee and employer to enable the employee to quality for certain benefits such as the state pension.
- Total staff costs equal gross salaries plus employer’s NICs
- The net salary is paid to the employee
- All elements of tax are paid to the government tax authorities
- NICs are given as percentage terms in exam questions

Accounting for payroll:
The double entry to record payroll is:
Dr wages and salaries
Cr Cash
Cr Income tax