Chapter 4: Purchases on Credit Flashcards
The Purchasing Process, Accounting for Credit Purchases, Payables Reconciliation
Overview:
The purchasing process
- Purchase order ->
- delivery note
- goods received Note (GRN)
- purchase invoice
- credit note
-remittance advice
A purchase order is a document completed by
the customer and sent to the supplier highlighting items the customer wishes to order. It shows the customer’s commitment to buy the items at the agreed price.
Delivery Note
A delivery note is a document that accompanies the delivered goods. it shows
details and the amount of each item brought.
The supplier uses a delivery note to verify that the correct goods are being packed before sending. The delivery note is then SIGNED by the customer when delivered to confirm the PROOF OF DELIVERY.
Goods Received Note (GRN)
A goods received note (GRN) is an internal document completed by the customer to ensure that all items ordered have been received.
The goods received are compared to the delivery note and recorded in the GRN.
A PURCHASE INVOICE is an
invoice from a supplier from which the business brought goods or services on credit.
It is a purchase invoice when a business receives an invoice from a supplier for goods purchased. From the supplier’s point of view, it is a sales invoice.
The purchase invoices detail the items brought, such as:
the purchased amount
the units brought
the length of the credit items (eg. 30 days)
the purchase invoice unique number code
The customer compares the received invoice to the purchase order, the delivery note, and the goods received note to confirm that the correct number of items and PRICE have been included in the purchase invoice
iNPUT SALES TAX
Input tax is
a tax charged on purchases 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. Therefore, the input sales tax amount is categorised as a current asset at the point of purchase.
Trade and Settlement Discounts
A credit purchase from a supplier can include trade and settlement discounts similar to credit sales.
Trade discounts are given by sellers, usually as an incentive to order in bulk. Trade discounts are a part of the net price.
Settlement discounts are given for prompt payments.
The business will decide whether to take up the prompt payment discount or make payments according to the credit terms.
Settlement discounts received (customer perspective) are accounted for as income (Discounts Received ledger accounts).
a CREDIT NOTE
is a document issued to customers from the seller due to faulty goods delivered or incorrect invoices sent. The credit note will REDUCE THE VALUE OF AN INVOICE previously issued.
REMITTANCE ADVICE is a document
sent by the customer to the supplier to show that payment has been made.
At the end of the period, the outstanding balances for each supplier account are paid with cash, cheque, or bank transfer. Remittance advice is generated and sent to the supplier upon successful payment as supporting documentation.
INTRODUCTION TO CREDIT PURCHASES ACCOUNTING
A financial document accompanies each credit purchase transation
Credit purchases are recorded in a PURCHASE INVOICE
Any purchase return is recorded in a CREDIT NOTE
A REMITTANCE ADVICE evidences payment to a supplier
These credit purchase transactions are then reflected in a business’s accounting system by transferring information from the financial documents into the relevant Credit Purchases ledger accounts using double entries
Relevant Credit Purchases Account
A business uses double-entry bookkeeping to record credit purchase transactions in the general ledger.
Credit purchase transactions are recorded to relevant ledger accounts below (5)
- Trade payables account (liability)
- purchase account (expenses)
- purchase return account (income)
- sales tax account (asset)
- bank account (asset)
- trade payables account (liability)
payables are amounts owed to a seller for credit purchases. in credit purchases, a business purchases goods or services for payments made in the future. At the point of purchase, the business owes the seller an amount known as Trade Payables.
- purchase amount (expenses)
A business purchases by buying goods or services from a supplier. The amount charged for the purchase is recorded in the Purchase Account.
- purchase return account (income)
Purchase returns are goods returned to the supplier due to faulty delivery or product. When a business returns goods, the amount returned is recorded in this Purchase Return account.
- Sales tax account (asset)
Tax authorities charge sales taxes on the sale of goods or services. The business is charged a sales tax for the purchases.
The sales tax can be reclaimed from the tax authorities. At the point of purchase, the tax authority owes the business the sales tax amount. Therefore, the amount is recorded in the Sales Tax asset account.
The Sales Tax account will have debit balances due to input sales tax (Purchases) and credit balances due to output sales tax (Sales). At the end of the period, these two entries are net off, and the business identifies whether the account is an asset (debit) or liability (credit) position.
- bank account (asset)
Businesses make payments to the seller for outstanding balances within the credit terms and record them in the Bank account.
Credit purchase transactions and their associated double entries
CREDIT PURCHASES
Information on credit purchases is taken from the financial document: Purchase invoice
A credit purchase arises when a business purchases goods or services from suppliers for future payment. At the point of purchase, the business owes money to the seller. The amount owed is classified as Trade Payables.
In a typical credit purchase, two ledger accounts are affected.
Purchases Account
Trade Payables Account
The amount to be entered into these accounts is the net amount (price after trade discount)
for credit purchases incorporating SALES TAX, the amount attributable to sales tax is recorded in the
sales tax account
Purchase returns
Information on purchase returns is taken from the financial document:
credit notes
Purchase returns are goods returned to the seller by the business due to an error, such as delivering damaged or incorrect items. The seller issues credit notes to reduce the value of the previously issued purchase invoice.
A purchase return transaction will impact two ledger accounts. The Sales Tax account is also affected if the returned items are subject to sales tax.
Trade Payables account
Purchase Return account
Sales Tax (if any)
Payments to Suppliers
Information on business payments to suppliers is taken from the financial document:
REMITTANCE ADVICE
At the end of the credit term, the business should pay the supplier for the purchased items. Since the business does not owe the supplier for the payable balance, debiting the account removes the amount in the Trade Payables account.
Payments to suppliers will be recorded into two ledger accounts.
Trade Payables account
Bank account
SETTLEMENT DISCOUNTS or prompt payment discounts received are treated as Discount Received and shown as Other Income in the Statement of Profit or Loss. Settlement discounts are not considered until the business takes advantage of the discount by making the payment within the allotted period.
SEE SCREENSHOTS for the doublt entry to record payment to credit suppliers (Trade Payables) with settlement discounts
Preparing Remittance Advice
Remittance advice is a document slip showing evidence of a supplier’s payment. It highlights the amount paid and the invoice to which the payment relates (see examples)
invoices are added together, and credit notes are deducted from the total amount owed
Computerised Accounting System
The purchase system is integrated with the business’s accounting system. As purchase transactions occur, the general ledger accounts and the individual supplier account is updated automatically.
For example, when a business receives and keys a purchase invoice from XYZ Ltd into its accounting system, the general ledger accounts (Trade Payables and Purchases) and the individual supplier account (XYZ Ltd.) are updated simultaneously.
Since the same transaction information is used to update the Trade Payables ledger account and the individual supplier account, there is no longer any need to perform reconciliations between their balances.
[see diagram]
Individual Supplier Account
The individual supplier account provides information about each of the business suppliers, such as:
- Amount owed to each supplier
-Purchase invoices paid to each supplier
- Invoices are still outstanding to each supplier
Supplier Statement Account is a financial document RECEIVED FROM A SUPPLIER to a business at the end of each month detailing all transactions between the two parties.
The transactions include purchases, any purchase returns and payments made to the supplier. The main objective of a supplier statement account is to remind the business of the amount owed to the supplier at month’s end.
A supplier account statement contains the following:
BALANCE BROUGHT DOWN (b/d) – This is the balance owing to the supplier at the start of the period (previous month’s closing)
INVOICE RECEIVED during the month – Details include invoice number, invoice date, and invoice amount issued
CREDIT NOTE received during the month – Details include credit note number, credit note date and amount issued
PAYMENTS made – Details to include are payment amount and payment date
NET TOTAL – This refers to the balance owed to the supplier at the end of the month
The document received is a supplier statement account. From the supplier’s perspective, the same document is referred to as their customer statement account.
Individual Supplier Account Reconciliation
A business performs trade payables reconciliations every month end by comparing the balances between the:
Individual supplier account and
Supplier statement account received
Reconciliation between these two balances is performed to verify internal information (supplier account) and an external source (supplier statement).
In essence, the supplier account and the supplier statement balance should match as they both show amounts owed from a business to the supplier. However, these balances may differ due to TIMING DIFFERENCEs or ENTRY ERRORS.
Differences may arise due to TIMING DIFFERENCES such as:
Supplier recorded invoices or credit notes that a business has not received
Payments were made to the supplier after the supplier statement was generated
Payments made but not yet received by the supplier
