SAC 1 - BOOKLET 1

Question 1

Transactions and reliability

Answer 1

Transactions are the financial dealings of the business. There are many different types of transactions, buying goods from a supplier, selling goods to a customer or paying for office expenses. It is important that for every transaction there is evidence of that transaction. The qualitative characteristic of reliability ensures that all transactions should be verified with written evidence, which exists in the form of source documents. Source documents include receipts, cheque butts, sales and purchased invoices, bank statements, statements of account and memos.

Question 2

Documents to journals to ledgers

Answer 2

Transactions are entered from the documents into the accounting journals (single entry) and then from there they are posted monthly to the ledgers accounts (double entry).

Question 3

Statement of account

Answer 3

A statement of account is a summary of the transactions a firm has had with a particular debtor/creditor over a certain period of time that is usually one month. This is not a source document used for recording.

Question 4

What is a statement of account used for?

Answer 4

Internal control - Statement of accounts provide external verification/check that the transactions recorded by the creditor agree with those in the debtors records. It identifies any errors or omissions and ensures final reports are accurate and hence reliable. Any discrepancies would be followed up with the supplier.

Question 5

Memorandums

Answer 5

Documents issued from within the business (internal document) to verify an internal transaction which describe a particular entry and requests that it be recorded into the business financial records.

Question 6

Order forms

Answer 6

An order form is not a source document and it does not get recorded into the businesses financial records. It is simply a request for stock/goods. It allows the business to follow up with the customer who requested the order but it does not become a source document until the sale or purchase has occurred.

Question 7

3 reasons why special journals are used

Answer 7

To classify transactions
To provide a daily detailed record
To summarise transactions

Question 8

Special journals are used to classify transactions

Answer 8

Journals are used to sort transactions into groups or to classify transactions before they are entered into the ledger. For example, all cash received is classified as cash received and recorded in the cash receipts journal.

Question 9

Special journals are used to provide a daily detailed record

Answer 9

Transactions are recorded in the journals in order of date. Therefore the journals provide a daily record of transactions. You can look back and find out what transactions occurred on a certain date.

Question 10

Special journals are used to summarise transactions

Answer 10

Each journal records only one type of transaction. Therefore amounts can be totalled and only the totals are posted to the ledger. The journals summarise similar transactions, reduce the number of repetitive entries in the ledger accounts and stop the ledger accounts from becoming too large and detailed.

Question 11

Cash receipts journal

Answer 11

An accounting record that summarises all cash received during a month. Many businesses have designed special journals to cater for groups of transactions with similar characteristics. Journals are built upon source documents. All transactions should be evidenced by documentation to verify its occurrence. A receipts book provides one type of source document for a cash receipt.

Question 12

Function of the bank column CASH RECEIPTS JOURNAL

Answer 12

The bank column records the amount of cash received and allows for the calculation of total cash received, this amount will be posted to the bank ledger account as one goal at the end of the month.

Question 13

Why does the cash receipts journal for a trading business using the perpetual inventory method contain a cost price column. CASH RECEIPTS

Answer 13

It is necessary to show the cost price of each sale to allow the recording in the stock control account (to reduce stock) and to record in the cost of sales account (to increase the expense)

Question 14

What is the purpose of the GST COLUMN.

CASH RECEIPTS

Answer 14

To record the GST received on cash sales. It represents an increase in the GST liability which increases the firms obligation to the ATO.

Question 15

Discounts

Answer 15

Businesses that buy and sell goods and services on credit give and receive cash discounts. When items are bought or sold on credit they come with credit terms. A cash discount is a discount received on your account for paying early.

Question 16

Why do firms offer cash discounts

Answer 16

Helps encouraging debtors to pay on time.

Reduces the chance that debtors won’t pay their account.

Question 17

Discount expense

Answer 17

A discount given to debtors which reduces the amount they have to pay to settle their account. It is entered in the cash receipts journal.

Question 18

Discount revenue

Answer 18

A discount received from creditors which reduces the amount the firm has to pay to settle its account. It is entered in the cash payments journal.

Question 19

Why is a discount expense an expense.

Answer 19

A discount expense means the business gives a debtor a discount to settle their account. This is treated as an expense because the business is forgoing future economic benefits.

Question 20

Bank equation cash receipts journal

Answer 20

Bank = debtors + sales + gst + sundries - discount expense

Question 21

Cash payments journal

Answer 21

The cash payments journal is an accounting record summarising all cash paid during a month. The process of recording cash payments is similar to the process that applies to cash receipts. Transactions are examined in order to determine suitable column headings. At the end of the reporting period the totals of the columns together with the individual amounts appearing in the sundries column are posted to the ledger accounts in the general ledger.

Question 22

Bank equation cash payments

Answer 22

Bank = creditors control + stock control + sundries + gst + other columns - discount revenue

Question 23

Sundries column

Answer 23

Any payments or receipts that are infrequent must be recorded in the sundries column as they do not warrant their own column.

Question 24

Discount revenue

Answer 24

It means the business has received a discount from one of their creditors to settle their account. It is treated as a revenue because the business is reducing the amount of economic benefits it would have sacrificed in the future. It is a saving in an outflow.

Question 25

Explain why the name of each creditor is identified in the details column of the cash payments journal

Answer 25

So that the creditor can be easily identified without having to look back at the source documents when preparing other accounting records and reports.

Question 26

Sales journal

Answer 26

An accounting record summarising all transactions involving the sale of stock on credit during a month. Entries in a sales journal are based on information contained in sales invoices (copies.)

Question 27

Subsidiary debtors ledger

Answer 27

A business will normally have more than one debtor, therefore it is important to be able to keep track of the relationship ship between each individual one. This is done via the use of the SUBSIDIARY (individual) record or ledger. To develop a system and to ensure that you do not miss any transactions, it is easier to first of all record the transaction to the special journal then if it relates to a debtor, record the transactions into the debtors ledger for that debtor. In both of these records the transaction is recorded on the date the transaction actually occurred. This can be link into the characteristic of reliability.

Question 28

Debtors schedule

Answer 28

Prepared to check the accuracy of posting against the general ledger by listing the names and account balances of each individual debtor which is then checked against the balance in the debtors control account in the general ledger. The debtors acts as a control by acting as a checking mechanism against the balance in the debtors control account in the general ledger.

Question 29

Purchases journal

Answer 29

The journal used to record all credit purchases of stock.

Question 30

Posting the purchases journal to the creditors ledger

Answer 30

We can see from the total of the purchases journal how much stock we have purchased on credit this month but we can’t see what the actual relationship is with each of our individual creditors as there is no record. Hence, we establish a set of subsidiary ledgers called creditors ledgers and as per the journal the transaction is recorded on the date the transaction actually occurred.

Question 31

Creditors schedule

Answer 31

A creditors schedule is prepared to check the accuracy of the posting against the general ledger by listing the names and account balances of each individual creditor which is then checked against the balance in the creditors control account in the general ledger. The creditors schedule acts as a control by acting as a checking mechanism against the balance in the creditors control account in the general ledger.

Question 32

Statement of account

Answer 32

A source document sent from the supplier to the customer and details the transactions during the month or another period of time.

Question 33

Explain how the receipt of the statement of account would help the business meet the reliability characteristic.

Answer 33

It allows the business to double check their records with the the records of Old Fashion Stuff. If there are discrepancies the business would investigate and make any necessary changes.