Credit Transactions Flashcards
Credit transactions
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
Invoice
a source document that veri es the details of a credit transaction
Sales invoice and purchase invoice
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
Debtor
a customer who owes a debt to the business for goods or services sold to them on credit. Classified as a current asset.
Creditor
a supplier who is owed a debt by the business for goods or services purchased from them on credit. Classified as a current liability.
Terms
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.
Special journals
Cash receipts - receipt no
Cash payment - CHq no
Sales journal - invoice
Purchases journal - invoice
What accounts are affected
But stock 500 + GST on credit from a supplier A Potter Studio
Stock - current asset increased by 500
GST - current liability decreased by 50
Creditor - current liability increased by 550
A=l+oe
500=500+0
Creditors formula
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
Purchase journal
an accounting record which summarises all transactions involving the purchase of stock on credit
3 benefits of using subsidiary records for creditors and debtors
Management of creditors/debtors
Detection of errors
Ease of reporting
Credit purchase
a transaction that involves the acquisition of stock (or other goods) from a supplier who does not require payment until a later date
Creditors record
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
Creditors schedule
a listing of the name and balance of each creditor’s record
Credit sale
a transaction that involves the provision of goods
to a customer who is not required to pay until a later date
Sales journal
an accounting record that summarises all transactions involving the sale of stock on credit during a reporting period
Debtors record
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
Debtors schedule
a listing of the name and balance of each debtor’s record
Subsidiary records benefit of management of creditors/debtors
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.
Subsidiary record benefit of detection of errors
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.
Subsidiary record benefit of ease of reporting
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.
Explain why the GST incurred on credit purchases does not affect the valuation of
stock.
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.
Purpose of purchases journal
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.
Explain why the source documents in the Purchases Journal do not run in sequence.
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.
