Chapter 5: Accounts Payable Part 2 Flashcards

1
Q

What is a settlement discount?

A

A reduction in the amount paid by a credit customer in return for early repayment

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2
Q

What is discount revenue?

A

Revenue in the form of a decrease in liabilities which results in an increase in owner’s equity, earned when accounts payable are paid early and a settlement discount is given by the supplier

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3
Q

What is the equation for calculating discount revenue?

A

Discount Revenue = Discount Rate x Amount Owing

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4
Q

What is the effect on the accounting equation for a discount revenue?

A

Decrease in assets (bank)
Decrease in liabilities (account payable)
Increase in owners equity (discount revenue)

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5
Q

Why does a settlement discount not reduce the cost of sales expense?

A

This expense is incurred at the point of sale, however the settlement discount does increase revenue and profit when cash is paid

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6
Q

What are the benefits of discount revenue?

A

Less cash is paid to accounts payable which allows cash to be retained for other payments
Net profit is increased

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7
Q

What are the costs of discount revenue?

A

Cash is paid to accounts payable faster which means there may be less time to generate cash from sales
cash is unavailable to make other payments

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8
Q

What is a statement of account?

A

A summary of the transactions a business has had with a particular account payable or receivable, over a certain period of time, usually a month

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9
Q

What type of transactions does a statement of account contain?

A

Transactions which have already occurred and been recorded

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10
Q

Regarding qualitative characteristics and source documents, discuss a statement of account?

A

It is not a source document that must be recorded, but it does allow for the checking of each transaction and the final balance, which supports verifiability and provides faithful representation

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11
Q

How do sales and payments affect the balance?

A

Sales increase the balance (debit)

Payments decrease the balance (credit)

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12
Q

What does a statement of account include?

A

Issuer of the statement, business receiving the statement, transactions from the seller’s point of view, sales as debits and receipts as credits

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13
Q

When does a business receive a statement of account?

A

Each month, from every supplier

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14
Q

What occurs if discrepancies are detected between statement of accounts and the general ledger?

A

They should be communicated to the supplier or corrected in the records of the business

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15
Q

What does accounts payable turnover measure?

A

The average number of days it takes for a business to pay its accounts payable, which indicates the effectiveness of management

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16
Q

What does accounts payable turnover calculate?

A

The average number of days an accounts payable is paid in

17
Q

How is accounts payable turnover calculated?

A

Average Accounts Payable/ Net Credit Purchase x 365

18
Q

How is average accounts payable calculated?

A

Balance at the start + Balance at the end / 2

19
Q

How is next credit purchase calculated?

A

Credit purchases + GST - Purchase Returns + GST