Chapter 6 Flashcards
Recap of recording transactions: three stages
1) Source Documents (Invoice)
-source documents are received by and generated by the business
–e.g. sales and purchases invoices and bank statements
2) Prime entry
-Transaction details are entered in the books of prime entry
3) Nominal ledger
Totals from the daybooks are recorded in the nominal ledger using double entry. The accounts are closed off at each period end and a trial balance can be produced
Sales return: how to treat?
-this is effectively a negative sale
Use a sales returns daybook to record the return transaction
Double Entry
Dr Returns inwards (or sales if we issue the customer with a credit note)
Cr Receivables
Purchase return: how to treat?
if goods are returned to a supplier it is effectively a negative purchase
Use a purchase returns daybook to record the return transaction
Double entry
Dr Payables
Cr Return outwards (or purchases if a supplier issues a credit note)
What is a credit note?
A credit note, also known as a credit memo, is a legal document that a seller issues to a buyer to correct an invoice or to indicate that credit is being applied to their account
In case of a sales return, if there is an ongoing relationship with a supplier or customer it is normal to issue them with a credit note showing them the amount no longer owed
What is a debit note
Google: A debit note, also known as a debit memo, is a document that can be used to correct or adjust an invoice, or to notify a buyer of a debt obligation
FI: a formal request for a credit note to be raised
How are returns treated in financial statements
Returns figures are deducted from sales or purchases figures in the financial statements
For the following trial balance, what will sales be shown as? what will purchase be shown as?
Sales | | 30,000 Cr
Purchases | 20,000 Dr |
Returns | 5,000 Dr | 2,000 Cr
Sales will be shown as $25,000 and purchases will be shown as $18,000 in the accounts.
On the returns account, how do sales returns and purchase returns show?
A debit balance on a returns account will always be sales returns and a credit balance will always be purchases returns
What are the two types of returns?
sales return
purchase return
sales return: A sales return is when a customer sends a product back to the seller for a refund, replacement, or credi
A purchase return occurs is when the buyer of merchandise, inventory, fixed assets, or other items sends these goods back to the seller.
What are the different types of discount?
1) Trade discounts - buying or selling for less than retail price
2) Settlement discount
How to treat trade discounts (words)
Google: As trade discounts are deducted before any exchange takes place, it does not form part of the accounting transaction, and is not entered into the accounting records of the business.
FI: No entries are made for discounts allowed or discounts received
How to treat trade discounts (double entry)
For a sale:
Dr Cash or Receivables $ x
Cr Sales $ x
For a purchase
Dr Purchase £ x
Cr Cash or Payables $x
where x is the amount after the discount has been deducted
What is a settlement discount
A settlement discount is a reduction in the amount due if the debt is paid by a specified date
What is an example of a settlement discount
X sells goods for $1000 and offered the customer a 5% discount for payment by 31st October
How should you treat a settlement discount?
You must record the amount of sales revenue you expect to received
What are the different scenarios expected for a settlement discount?
1) customer not expected to pay before date
2) customer is expected to take up discount and pays promptly
3) customer is expected to take up the discount but pays late
4) customer is not expected to take up the discount but pays promptly
Settlement discount: customer not expected to pay before date
Ignore settlement discount completely
Dr Receivables $1000
Cr Sales $1000
Settlement discount: customer is expected to take up the discount and pays promptly
record the net amount of revenue after the discount has been deducted
for $1000 with 5% settlement discount
Double entry:
Dr Receivables $950
Cr Sales $950
Once customer pays the entry
Dr Cash $950
Cr Receivables $950
Settlement discount: customer is expected to take up the discount but pays late
record the net amount of revenue after the discount has been deducted
for $1000 with 5% settlement discount
Double entry:
Dr Receivables $950
Cr Sales $950
When customer pays
Dr Cash $1000
Cr Receivables $1000
AND a further entry
Dr Receivables $50
Cr Sales $50
Settlement discount: customer is not expected to take up the discount but pays promptly
for $1000 with 5% settlement discount
Dr Receivables $1000
Cr Sales $1000
When customer pays
Dr Cash $950
Cr Receivables $950
AND a further entry
Dr Sales $50
Cr Receivables $50
What are discounts received?
Recording the transaction from the point of view from the purchaser
How should discounts received be treated?
As the purchaser decides whether to take up a discount or not - they decide how much they pay
How should discounts received be treated? (direct entry)
X buys goods for $100 and takes up a 2% settlement discount
date of purchase:
Dr Purchases $100
Cr Payables £100
On payment
Dr Payables $98
Cr Cash $98
AND then clear payables account:
Dr Payables $2
Cr Discount Received $2
Discount received - income account in the statement of profit an loss
Why might you sometimes see a discounts column in the cash payment book?
This is used to record the amount of the settlement discount at the time cash is paid
