Chapter 5: Accounts Payable Part 1 Flashcards
What do credit transactions involve?
An exchange of goods or services on one date, followed by the exchange of cash at a later date
What is a credit purchase?
A transaction that involves buying inventory on credit, with the exchange of inventory on one date, followed by the exchange of cash at a later date
What is an account payable?
A supplier from whom goods or services have been purchased on credit, and the amount is still owing for these purchases
What is a purchase invoice?
A source document used to verify a credit purchase
Why will invoice numbers on purchase invoices not be in sequence?
Purchase invoices are issued by the supplier, who will be supplying other customers in between
What are credit terms?
Information that details how many days a business has to pay for a credit transaction, and any applicable settlement discount
What is the affect of a credit purchase of inventory on the accounting equation?
Increases the assets (inventory) and liabilities (account payable less GST Clearing) by the same amount
How will purchasing inventory at low prices affect ethical considerations?
It will allow business to achieve higher sales volume and a better mark-up, but it could mean customers are dissatisfied and return items
What are the most common source documents to an account payable?
Cheque butts and EFT transfer
Why is there no GST to account for when a payment is made to an account payable?
GST was already recognised at the time that the credit purchase was recognised
How does a payment to settle an account payable affect the accounting equation?
It decreases assets (inventory) and decreases liabilities (account payable) by the same amount
What is a purchase return?
A return to a supplier of inventory bought on credit
What are some common reasons for returning inventory?
Faulty/damaged inventory, incorrect models, too many items or a the business changing its mind
What is a credit note?
The source document that verifies the return of inventory
How does GST on a purchase return affect GST liability?
It undoes the decrease in GST liability caused by a credit purchase
How does a purchase return affect the accounting equation?
It decreases assets (inventory) and decreases liabilities (account payable less GST clearing) by the same amount
What is an invoice?
The source document for a credit transaction
When does a credit sale occur?
When a business sells inventory on credit
What must a credit note identify?
The name of the business returning the inventory, the type/quantity of inventory returned and the reason for return
How does a purchase return affect the balance sheet?
It only changes the values of accounts payable, inventory and GST clearing
How does the accrual basis assumption support the recognition of accounts payable?
It states that elements are recored when they are earned or incurred at the point of sale, rather than when cash is received
What does the going concern assumption allow for?
Inventory to be recognised as an asset and account payable as a liability
