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
Refunds how to treat
we have paid cash to a customer - there is a credit entry to the cash account.
debit entry to debit receivables control account
Refunds how to treat - double entry
Dr Receivables
Cr Cash
Sales taxes: most countries have some kind of sales tax on supplies of goods and services. In the UK this is known as
VAT (value added tax)
Output and Input Tax
registered businesses
-CHARGE output tax on sales
-ARE CHARGED input tax on purchases
-can recover input tax against the output tax payable to the tax authorities
How is tax treated in the financial statements
Sales, purchases, current and non-current assets are shown net of tax in the financial statements
NET OF TAX (The amount after tax has been deducted)
Receivables and payables are shown gross of tax
GROSS OF TAX ( The amount before tax has been deducted.)
What is a sales tax (VAT) control account?
maintained to show the amount owed to or from the tax authorities.
This will be a current receivable or payable in the statement of Financial position
What are the three types of sales tax rates?
Standard rates
Zero rate
Exempt
Sales tax: what is the standard rate?
applied to most goods and services. In the UK the standard rate of VAT is 20%
Sales tax: what is the zero rate?
a zero rate of 0% may apply to some goos and services
e.g. non-luxury food, childens clothes, newspapers
Sales tax: what are exempt supplies
Exempt suppliers cannot charge sales tax or recover input tax.
In the UK exempt suppliers include health, burial and financial services transactions
Output tax: net vs gross
sales of A (standard rated): 10,000 net
sales of B (standard rated): 10,000 gross
total amount of output tax:
net 10,000 * 20% (0.2) =2,000
gross 10,000 *(20%/120%) =1,666
How is sales tax accounted for?
Using a control account
Amounts charged on sales are credited to the control account (payable to the tax authorities)
Amounts recovered on purchases are debited to the control account (recoverable from the tax authorities)
What are irrecoverable sales taxes?
When businesses are not allowed to recover input tac on supplies
e.g. company cars and business entertaining
What are the three types of payroll taxes
Gross pay and deductions
Employment costs
Wages and salary control accounts
What is gross pay and deeductions
Employees usually pay tax on their earnings. These taxes are direct taxes. An employer may make deductions from employees gross pay to arrive at net pay
What are the three main types of deductions?
1) Income tax
–UK = PAYE scheme
2) Social Security (SS) contributions. - NI contributions (employees NICs
3) Pension contributions/charitable donations
How are deductions typically treated?
-Deductions are typically calculated by the employer, collected on the employees’ behalf and then are paid over to the tax authorities or other relevant government body pensions or savings provider
What are employment costs?
When employers must also pay SS or NI contributions for each of their employees
Know as employers SS or NICS
What is the total cost of employment?
the employees gross salary plus the employers SS (plus any other benefits e.g. pension)
What are SS contributions taken from?
percentage of GROSS SALARY
Wages and salary control accounts
at any time, a business may have amounts payable to individuals, the tax auth ot other,
The employer will maintain control accounts to account for the amounts due
Ledger accounts for
sales net 10000 VAT 2000 Gross 12000
Purchases net 7000 VAT 1400 Gross 8400
Sales Cr 1000
Receivables Dr 1200
VAT Control (Sales (VAT)) Cr 200
Purchases Dr 7000
VAT Control (Purchases(VAT) Dr 1400)
Payables Cr 8400
