Credit Transactions

Question 1

Credit transactions

Answer 1

when goods are exchanged but the cash relating to the stock is not exchanged until some later date, meaning the customer owes a debt to the seller

Question 2

Invoice

Answer 2

a source document that veri es the details of a credit transaction

Question 3

Sales invoice and purchase invoice

Answer 3

Sales invoice
a source document that veri es a credit sale of stock
Purchase invoice
a source document that veri es a credit purchase of stock or other items

Question 4

Debtor

Answer 4

a customer who owes a debt to the business for goods or services sold to them on credit. Classified as a current asset.

Question 5

Creditor

Answer 5

a supplier who is owed a debt by the business for goods or services purchased from them on credit. Classified as a current liability.

Question 6

Terms

Answer 6

By de nition, a credit transaction means that the customer will not pay the cash on the day the sale is made. It is therefore important that the invoice given to the customer with the goods speci es exactly when payment must be made, and this is speci ed in the credit terms. In this example, the notation ‘2/7, n/30’ means that if the amount owing is paid in 7 days, a 2% discount will be given, but the net amount must be paid in 30 days.

Question 7

Special journals

Answer 7

Cash receipts - receipt no
Cash payment - CHq no
Sales journal - invoice
Purchases journal - invoice

Question 8

What accounts are affected

But stock 500 + GST on credit from a supplier A Potter Studio

Answer 8

Stock - current asset increased by 500
GST - current liability decreased by 50
Creditor - current liability increased by 550

A=l+oe
500=500+0

Question 9

Creditors formula

Answer 9

Creditors balance at start - balance sheet
+ credit purchase inc GST - purchases journal, total creditors
- payments to creditors - payments journal, creditors column
= creditors balance at the end

Question 10

Purchase journal

Answer 10

an accounting record which summarises all transactions involving the purchase of stock on credit

Question 11

3 benefits of using subsidiary records for creditors and debtors

Answer 11

Management of creditors/debtors
Detection of errors
Ease of reporting

Question 12

Credit purchase

Answer 12

a transaction that involves the acquisition of stock (or other goods) from a supplier who does not require payment until a later date

Question 13

Creditors record

Answer 13

a subsidiary accounting record which records each individual transaction with each individual creditor, and shows the balance owing to that creditor at any point in time

Question 14

Creditors schedule

Answer 14

a listing of the name and balance of each creditor’s record

Question 15

Credit sale

Answer 15

a transaction that involves the provision of goods
to a customer who is not required to pay until a later date

Question 16

Sales journal

Answer 16

an accounting record that summarises all transactions involving the sale of stock on credit during a reporting period

Question 17

Debtors record

Answer 17

a subsidiary accounting record which details each individual transaction with each individual debtor, and shows the balance owed by that debtor at any point in time

Question 18

Debtors schedule

Answer 18

a listing of the name and balance of each debtor’s record

Question 19

Subsidiary records benefit of management of creditors/debtors

Answer 19

The records of individual transactions with each individual debtor/creditor allow for better management by helping to ensure that invoices are sent, debts are collected from debtors and paid to creditors on time, and late paying debtors are followed up.

Question 20

Subsidiary record benefit of detection of errors

Answer 20

By checking the balance calculated using the formula against the Debtors/Creditors schedule errors can be detected, helping to ensure that the gures used in the Balance Sheet are Reliable, or free from bias.

Question 21

Subsidiary record benefit of ease of reporting

Answer 21

By preparing a schedule, only one gure needs to be reported in the Balance Sheet, with insigni cant details omitted. These details – like the names and balances of individual debtors/creditors – would not affect decision-making, so in reporting just the total, Relevance is upheld.

Question 22

Explain why the GST incurred on credit purchases does not affect the valuation of
stock.

Answer 22

GST is a tax imposed on the sale of goods and services. The $250 paid is for the 5 white ladies hats – this is the value of the stock. The $25 is separate as it is the GST charged by the Australian government, which is being collected by the supplier on the ATO’s behalf. It is not part of the cost of the stock and will in fact reduce Miller Time’s GST liability to the ATO.

Question 23

Purpose of purchases journal

Answer 23

The purpose of a Purchases Journal is to summarise all purchases of stock on credit during a particular reporting period. This aids in the process of turning raw data into understandable financial information so it can assist in decision-making.

Question 24

Explain why the source documents in the Purchases Journal do not run in sequence.

Answer 24

The source documents in the Purchases Journal won’t run in sequence because they are not issued by Sparks Electrical Supplies but by their suppliers who issue their invoices to all their customers. Therefore, Sparks Electrical Supplies is receiving purchase invoices from a variety of suppliers who have other customers as well.

Question 25

Explain the effect of ‘GST incurred on credit purchases’ on the GST payable to the ATO.

Answer 25

The GST incurred on credit purchases will be forwarded to the ATO. Therefore, this GST incurred by Sparks Electrical Supplies will reduce their GST liability to the ATO

Question 26

Explain why there is no GST to account for when cash is paid to a creditor or received from a debtor.

Answer 26

There is no GST on a payment to a creditor because the GST is recognised and recorded at the time the purchase is made and becomes a part of what is owed to the creditor. The GST has been recorded in the Purchases Journal. If it was recorded in the Cash Payments Journal again the GST would be double counted.

Question 27

Explain how the preparation of a Creditors schedule can improve the reliability of the accounting reports.

Answer 27

A Creditors schedule can improve the reliability of reports by ensuring the accuracy of the creditors at end figure. This is done by a cross-checking mechanism that can check that the total from the Creditors schedule equals the total from the creditors formula. This double-checking process ensures that the information is free from error.

Question 28

Why are credit sales revenue

Answer 28

This transaction is considered revenue because it is an inflow of economic benefit that has increased assets (debtors) and will lead to an increase in owner’s equity and it is not capital contribution.

Question 29

Explain the effect of GST charged on credit sales on the GST payable to the ATO.

Answer 29

Any GST charged on credit sales is GST charged and collected later by the business on the Australian government’s behalf. Therefore, this is owed to the ATO and will increase GST payable.

Question 30

Explain why transactions with debtors should be recorded in both special journals and Debtors records.

Answer 30

Journals summarise and classify financial data so it can be converted into financial information to support Relevance and aid decision-making. However, sometimes summarised information does not provide the necessary detail, which is why the business also maintains Debtors records. This allows the business to better manage their debtors and determine how much each individual debtor owes and that there is verifiable source document evidence that shows their balance and how much they have paid.

Question 31

Why is payment to a creditor not an expense

Answer 31

It is a payment to reduce a liability therefore it has no effect on the owner’s equity of the business and does not meet the definition of a revenue.

Question 32

Function of a statement of account

Answer 32

The function of a Statement of account is to inform the customer of their recent transactions. It can also serve as a reminder of a balance that is owing. If a business receives a Statement of Account they can check the transactions against their records and source documents.

Question 33

Why is payment to a creditor not an expense

Answer 33

It is a payment to reduce a liability therefore it has no effect on the owner’s equity of the business and does not meet the definition of a revenue.

Question 34

Referring to one Qualitative Characteristic, explain why the Balance Sheet does not list each individual creditor.

Answer 34

The Balance Sheet does not need to list each individual creditor as this information would not be seen as material or significant; that is, it would not aid or improve decision-making. The same information would be conveyed with one figure for creditors.

Question 35

How should a business use a statement of account

Answer 35

Control mechanism to cross-check entries in subsidiary records to ensure accuracy/reliability of recording in records, check to ensure all transactions have been recorded and that the supplier/creditor records match yours.