Unit 2 Acc Chapter 13 Review Questions

Question 1

RQ 13.1 // Credit TransactionsQ1. Distinguish between a cash transaction and a credit transaction.

Answer 1

When a cash transaction occurs, the goods and cash are exchanged at the same time; when a credit transaction occurs, the exchange of goods occurs first, with the exchanging of cash occurring at a later date.

Question 2

RQ 13.1 // Credit TransactionsQ2. Referring to one Qualitative Characteristic, explain the importance of source documents in the accounting process.

Answer 2

Source documents provide the verifiable evidence that a transaction has occurred, thus ensuring that the reports are free from bias and subjectivity (Reliability).

Question 3

RQ 13.1 // Credit TransactionsQ3. Explain why credit terms should be noted on an invoice.

Answer 3

Credit terms allow the business to stipulate to the debtor (on the invoice) exactly when the invoice has to be paid.

Question 4

RQ 13.1 // Credit TransactionsQ4. Explain how a business can distinguish between a sales invoice and a purchase invoice.

Answer 4

The name of the seller is always identified at the top of the invoice, and the name of the customer is identified in the middle. Therefore, if the business for which we are accounting (‘our business’) is named at the top of the invoice, the document is a sales invoice. If, however, our business is named in the middle of the invoice, the document is a purchase invoice.

Question 5

RQ 13.1 // Credit TransactionsQ5. Define the terms debtor and creditor.

Answer 5

• debtor – a customer who owes a debt to the business for goods or services sold to them on credit• creditor – a supplier who is owed a debt by the business for goods or services purchased from them on credit

Question 6

RQ 13.1 // Credit TransactionsQ7. Explain how the GST affects the amount owed to a creditor for the purchase of stock on credit.

Answer 6

When stock is purchased on credit, the business must pay not only for the stock, but also the GST. Therefore, the amount owed to a creditor includes the supplier’s price for the stock and 10% GST.

Question 7

RQ 13.2 // Recording Credit PurchasesQ1. Explain the role of the Purchases Journal.

Answer 7

A Purchases Journal is an accounting record that summarises all transactions involving the purchase of stock on credit.

Question 8

RQ 13.1 // Credit TransactionsQ6. Explain how debtors and creditors are reported in the Balance Sheet.

Answer 8

Debtors are reported as a current asset as they are a resource controlled by a business from which future economic benefit is expected (when the debtor pays) in the next 12 months. Creditors are reported as a current liability as they are a present obligation, the settlement of which will result in an outflow of economic benefit (when the cash is paid to the creditor) in the next 12 months.

Question 9

RQ 13.2 // Recording Credit PurchasesQ2. State which type of source document is used to verify all transactions recorded in the Purchases Journal.

Answer 9

A purchase invoice is used to verify all transactions recorded in the Purchases Journal.

Question 10

RQ 13.2 // Recording Credit PurchasesQ3. Explain the effect of ‘GST incurred on credit purchases’ on the valuation of stock.

Answer 10

GST incurred on credit purchases will not affect the valuation of stock, because it is in fact a reduction in the GST liability to the ATO (it does not affect the economic benefit to be derived from stock). Therefore, stock is valued at the supplier’s price, and the GST incurred on credit purchases reduces the GST payable.

Question 11

RQ 13.2 // Recording Credit PurchasesQ4. Referring to the Purchases Journal, state one reason why the amount recorded in the Total Creditors column is greater than the value of stock purchased.

Answer 11

It is greater due to the amount of GST incurred on the credit purchase.

Question 12

RQ 13.2 // Recording Credit PurchasesQ5. Explain the effect of ‘GST incurred on credit purchases’ on GST payable.

Answer 12

GST incurred on credit purchases reduces GST payable because the GST will be forwarded to the ATO by the supplier and it is as if the business paid the GST directly to the ATO.

Question 13

RQ 13.2 // Recording Credit PurchasesQ6. State the effect of a credit purchase of stock on each element of the accounting equation.

Answer 13

Assets - Increase (Stock)Liabilities - Increase (increase Creditors, decrease GST payable)Owner’s Equity - No effect

Question 14

RQ 13.3 // Payments to CreditorsQ1. State the source document used to verify cash paid to a creditor.

Answer 14

A cheque butt is used to verify cash paid to a creditor.

Question 15

RQ 13.3 // Payments to CreditorsQ2 Explain why there is no GST to account for when cash is paid to a creditor.

Answer 15

There is no GST on a payment to a creditor because the GST is recognised and reported only at the time the original purchase is made.

Question 16

RQ 13.3 // Payments to CreditorsQ3. State one reason why ‘payments to creditors’ are recorded in their own classification column in the Cash Payments Journal.

Answer 16

Payments to creditors will be a frequent cash payment, and therefore will be recorded in their own classification column in the Cash Payments Journal.

Question 17

RQ 13.3 // Payments to CreditorsQ4. State the effect of a payment to a creditor on each element of the accounting equation.

Answer 17

Assets - Decrease (Bank)Liabilities - Decrease (Creditors) Owner’s Equity - No effect

Question 18

RQ 13.3 // Payments to CreditorsQ5. Show the formula to calculate the balance of creditors at the end of the reporting period, identifying the sources of the information it uses.

Answer 18

Creditors balance at start (From the previous Balance Sheet)+ Credit purchases including GST (From the Purchases Journal)– Payments to creditors (From the Cash Payment Journal)= Creditors balance at end (Goes into the next Balance Sheet as a Current Liability)

Question 19

RQ 13.4 // Credit Purchases & Subsidiary Records Q1 Explain the effect of recording a credit purchase in a stock card.

Answer 19

A credit purchase is recorded in the IN column of a stock card and increases the quantity of stock on hand.

Question 20

RQ 13.4 // Credit Purchases & Subsidiary RecordsQ2 Referring to the stock card, state one way of distinguishing between a cash purchase and a credit purchase.

Answer 20

One way of distinguishing is to check the source document. A credit purchase is verified by reference to a purchase invoice whereas a cash purchase is verified by reference to a cheque butt.

Question 21

RQ 13.4 // Credit Purchases & Subsidiary RecordsQ3 Explain the role of a Creditors record.

Answer 21

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

Question 22

RQ 13.4 // Credit Purchases & Subsidiary RecordsQ4 Explain the role of a Creditors Schedule.

Answer 22

A Creditors Schedule is a listing of the name and balance of each creditor’s record and is used to check that the same information has been recorded in both the journals and creditors records.

Question 23

RQ 13.5 // Recording Credit SalesQ1 Explain why a credit sale is classified as revenue

Answer 23

A credit sale is revenue because it creates an inflow of future economic benefits, in the form of an increase in assets (Debtors) that leads to an increase in owner’s equity.

Question 24

RQ 13.5 // Recording Credit SalesQ2 State which type of source document is used to verify all transactions recorded in the Sales Journal.

Answer 24

A sales invoice is used to verify all transactions recorded in the Sales Journal.

Question 25

RQ 13.5 // Recording Credit SalesQ3 Explain how the cost price of a credit sale is determined

Answer 25

The cost price of a credit sale is determined in the OUT column of the stock card using the FIFO assumption.

Question 26

RQ 13.5 // Recording Credit SalesQ4 Explain the role of the Sales Journal

Answer 26

The Sales Journal is an accounting record that summarises all transactions involving the sale of stock on credit during a reporting period.

Question 27

RQ 13.5 // Recording Credit SalesQ5 Explain why the source documents in the Sales Journal run in sequence.

Answer 27

The source documents run in sequence because they are all issued by the business keeping the journal.

Question 28

RQ 13.5 // Recording Credit SalesQ6 Explain the effect of ‘GST incurred on credit sales’ on sales revenue

Answer 28

GST incurred on credit sales has no effect on sales revenue, but rather it increases the debt owed by the debtor.

Question 29

RQ 13.5 // Recording Credit SalesQ7 Explain the effect of ‘GST charged on credit sales’ on GST payable to the ATO

Answer 29

GST charged on credit sales will increase GST payable because it is levied and collected on behalf of the ATO, and so must be forwarded to the ATO.

Question 30

RQ 13.5 // Recording Credit SalesQ8 State the effect of a credit sale on each element of the accounting equation

Answer 30

Assets - Increase (increase Debtors, decrease Stock)Liabilities - Increase (GST payable)Owner’s Equity - Increase (Sales less Cost of Sales = Profit)