Returns, Tax and discounts Flashcards
What are trade discounts?
Trade discount are given to increase the volume of sales by the supplier. When buying items in bulk they provide a discount.
How are trade discount applied in accounting?
They are substracted from the total selling price before recording in journal or ledger.
Settlement discount?
Settlement discount is basically a discount provided by a supplier when goods are bought on credit. The goods bought on credit are provided a discount when the buyer makes payments at a earlier date than the agreed upon one.
How is Settlement discount recorded in accounting?
It is recorded as discount allowed and subtracted for buyer/purchaser
It is recorded as revenue generated(if discount not taken) and revenue lost(if discount taken) from the seller’s perspective’s.
Sellers don’t want to show discount on their accounting books
Is discount received debit or credit?
It is credit as it is included in income
Providing settlement discount is termed as?
Discount allowed (debit as it is expense)
Difference between Trade discount and settlement discount?
A trade discount is a definite reduction in price while a settlement discount is the reduction in overall invoice price if and only if the customer deicides to pay within the required timescale.
Illustration 1.
From the perspective of the seller the steps to do this problem is two fold
i) The invoice first
List price xxxx
less: X% settlement discount (xxxx)
~~~~~
Amount due xxxxxxxxxx
Then show receipt (already paid)
Dr Cash
Cr Receivables
a)Then if he takes discount(receipt)
Dr Cash (Received cash from the customer after substracting discount)
Dr Revenue (income that should have been received from customer becomes income lost therefore debit)
Cr receivables (the total amount supposed to be received and did receive)
b) already decided to take discount
The invoice first
List price xxxx
less: X% settlement discount (xxxx)
~~~~~
Amount due xxxxxxxxxx
Then show receipt (already paid)
Dr Cash
Cr Receivables
Dr Cash (Received cash from the customer after substracting discount)
Cr Revenue (income that is received from customer)
Cr receivables (the total amount supposed to be received and did receive)
_______________________________________________________________
a) The settlement discount is considered as revenue rather that discount allowed.
Note:(buyer shows discount allowed and seller shows revenue)
How is sales tax levied?
Sales tax is levied on the final consumer of a product.
How does tax return work? (for businesses)
If the input tax (on purchases) exceed the output tax (on sales) the entity is refunded the excess by tax authority.
(note only the excess TAX it doesn’t matter if the retail price fluctuates)
How is excess tax incurred?
When output tax (on sales) exceeds input tax (on purchases) the excess should be paid back to the required tax authorities.
Current standard tax rate in UK?
20 %
Previous Tax rate in UK?
17.5%
What is net selling price?
It is the TAX Exclusive Price which is recognized as sales income.
What is gross selling price?
It is the tax inclusive price that is charged to the customers.
