Chapter 3: Sales on Credit

Question 1

What is a Sale Invoice?

Answer 1

a financial document sent from a business to the customer, highlighting details of the sale transaction.

It includes information about the sales transaction, such as the name and address of the buyer and seller, the items sold, and the price of the items.
If there is sales tax, its details are included in the sales invoice.

Question 2

Sales Tax - need to be able to calculate in exam using %

Answer 2

A percentage of sales tax is charged on goods and services sold.Sales tax is charged at different percentages in different countries.

Question 3

OUPUT TAX IS

Answer 3

a tax charged on sales to customers. It is collected by the seller and subsequently paid to the tax authorities.

Question 4

INPUT tax is

Answer 4

a tax charged on the purchase from suppliers. The supplier collects and subsequently pays the sales tax to the tax authorities. Input tax can be reclaimed from the tax authorities for registered businesses.

Question 5

Businesses complete a sales tax return form (VAT Return) every quarter as the tax authorities require.

If the output tax is more than the input tax (net output tax), the net amount will remain as a current liability until the money is paid to the tax regulatory body.

Question 6

If the input tax is more than the output tax (net input tax), the net amount will appear as a

Answer 6

CURRENT ASSET until the money is refunded to the business.

Question 7

Miscalculating sales tax may lead to the outcomes below:

Penalties charged by the authorities for mistakes that lead to inaccurate sales tax return submission.
If the tax charged to customers on behalf of the tax authorities is overstated, customers will complain, and the sale of the business may be affected.
If the tax charged to customers on behalf of the tax authorities is understated, the business may have to pay the difference to the authorities using its funds.

Question 8

• may need to calculate the gross or net amount of sales tax.

Definition of NET PRICE and GROSS PRICE

Answer 8

The net price is the total price for the goods before sales tax is added.
The net price always represents 100% of the price. (amount before sales tax added)**

(For example, the price for goods is $200)

To this, we add the sales tax. Sales tax is given as a percentage.
(for example, sales tax is 20%)

The gross price is the invoice total of the net price and the sales tax. (amount after including sales tax**)

Question 9

TRADE DISCOUNT =

Answer 9

reduces the cost of goods or services bought or sold. A trade discount reduces the total price of the goods (list price).

Businesses may choose to offer Trade Discounts to customers for two reasons:
1) They are valued customers who regularly buy goods from the business.
2) The discount offers customers an incentive to order in larger quantities.

Question 10

Trade discounts are deducted from the price of the goods before the sales tax is calculated. The sales tax is recalculated based on the revised net amount

Answer 10

If the business offers its customers trade discounts, the sales tax percentage is calculated on the net amount after deducting the trade discount**

Question 11

A SETTLEMENT DISCOUNT or prompt payment discount (should be able to calc)=

Answer 11

is a discount offered to customers or received from suppliers for prompt payment

encourage credit customers to pay sums owing to the business earlier than the standard credit agreement time (credit period).
Businesses will determine the percentage of discount and the period for prompt payment discount entitlement.
For example, a business can offer a 2% prompt payment discount if payment is made within seven days, although the standard credit period is 30 days.

Question 12

what is a CREDIT NOTE?

Answer 12

is a financial document issued to customers from a business that reduces the value of an invoice previously issued, for example due to sales returns.
The credit note (negative invoice) is issued due to problems with goods delivered already invoiced. Examples of issues are:

Damaged or faulty goods
Wrong item delivered

Credit notes are numbered consecutively, like sale invoices
If a trade discount was offered, it needs to be considered in the credit note, or the refund will be overstated.
Settlement discount is not considered in a credit note because it is unlikely that the customer will pay for a faulty sales invoice.

Question 13

Credit sale is recorded in a

Answer 13

sales invoice

Question 14

any sales return is recorded in a

Answer 14

credit note

[a remittance advice is evidence of receipt from a customer]
noted in relevant credit sales ledger account using double entries

Question 15

2.2 relevant credit sale accounts - credit sale transactions are recorded to 5 relevant ledger accounts below

Answer 15

Trade receivables account (asset)
Sales account (income)
Sales return account (expense)
Sales tax account (liability)
Bank account (asset)

Question 16

Trade receivables account (asset)

Answer 16

Receivables are amounts owed to a business by credit customers. In credit sales, customers are provided goods or services (sales), and payment is made in the future. At the point of sale, the customer owes the business an amount known as trade receivables.

Question 17

Sales account (income)

Answer 17

A business makes a sale by providing customers with goods or services. The amount charged for the sale is recorded in the sales account.

Question 18

Sales return account (expense)

Answer 18

Sales returns are goods returned to the business due to faulty delivery or product. When a customer returns goods, the amount returned is recorded in this sales return account.

Question 19

Sales tax account (liability)

Answer 19

Tax authorities charge sales taxes on the sale of goods or services. A business will collect sales tax from the customer and pay the proceeds to the tax authorities.

At the point of sale, the business owes the sales tax amount to the tax authorities. Therefore, the amount is recorded in the sales tax liability account.

Output tax is a tax charged on sales to customers. It is collected by the seller and subsequently paid to the tax authorities.
Input tax is a tax charged on the purchase from suppliers. The supplier collects and subsequently pays the collected tax to the tax authorities.

Question 20

Bank account (asset)

Answer 20

Customers should make payments to the business within the credit terms. The receipt from the customers is recorded in the bank account.

Question 21

Credit Sale Transactions and Double Entries
Credit Sales
- Information on credit sales is taken fromt he financial document:…

Answer 21

sales invoice

Question 22

In a typical credit sale, two ledger accounts are affected.

Answer 22

Trade Receivables Account [receivables asset increased]
Sales Account [sales income increased]
Sales Tax Account (if applicable)

{a credit sale arises from a sale to a customer for future payment. At the point or purchase, the customer owes the business the sale amount, which is classified as trade receivables)
The amount to be entered into these accounts is the net amount (price after trade discount)

Question 23

For credit sales incorporating SALES TAX, the amount attributable to sales tax is recorded in the Sales Tax Account

Answer 23

Sales tax - liability - taxes to authorities (liability)increased

Question 24

For credit sales with SETTLEMENT DISCOUNTS, the business will determine whether the customer is expected to take up the discount. if it is likely that the customer will take up the offer, the business will enter the amount inclusive of the settlement discount into the individual ledgers

Answer 24

the settlement discount can be ignored if the customer is not likely to take up the offer

Question 25

Sale Returns

• info on sale returns is taken from the financial document: CREDIT NOTES
  Sale returns are goods returned to the business by the customers due to an error on the business’s part, such as delivering damaged or incorrect items. Credit notes are issued by the business to reduce the value of the previously issued sales invoice.

A sale return transaction will impact two ledger accounts. The Sales Tax account is also affected if the returned items are subject to sales tax:

Answer 25

Sales Return account
Trade Receivables account
Sales Tax account (if applicable)

Question 26

Receipts from Customers
information on customer receipts is taken from the financial document:

Answer 26

REMITTANCE ADVICE

At the end of the credit term, the customers should pay for the purchased items. When payment has been made, the customer no longer owes money to the business.

Payments made by customers will be recorded into two ledger accounts.

Bank Account
Trade Receivables Account

Question 27

Computerised Accounting System

The sales system is integrated with the accounting system. as sales transactions occur, the general ledger accounts and the individual customer account is updated automatically.
For example, when a business raises a sales invoice to customer ABC Ltd, the general ledger accounts (Trade Receivables and Sales) and the individual customer account (ABC Ltd) are updated simultaneously

Answer 27

[see red flow diagram in screenshots]

Question 28

Receivables Reconciliation

Answer 28

Since the same transaction information is used to update the Trade Receivables ledger account and the individual customer account, there is no longer any need to perform reconciliations between their balances.

Question 29

Individual Customer Account

To identify each cutomer’s balance, the business looks into the individual customer account. This account will provide information such as:
- Amount the customer owes
- Invoices the customer paid
- Invoices are still outstanding from the customer

Answer 29

As the sales transaction occurs, the individual customer account is updated. The general Trade Receivables ledger account summarises the total receivable amount in a period. Therefore, the business cannot analyse the balance owed by each customer.

Question 30

Customer Statement Accounts
The customer account statement is a FINANCIAL DOCUMENT sent from the business to the customer at the end of the month detailing transactions between seller and customer. The transactions include sales, credit received, and customer payments.

Answer 30

The main objective of sending customer statements is to remind the credit customer of outstanding balances not paid yet.

Question 31

A customer Account Statement will contain the following:

Answer 31

Balance brought down (b/d) – This is the unpaid balance from the previous month (the amount the customer owes at the start of the month).

Invoice issued during the month – Details include invoice number, date, and amount issued.

Credit note issued during the month – Details include credit note number, date, and amount issued.

Payment made – Details to include are payment amount and payment date

Net total – This refers to the balance owed by the customer at the end of the month.

Question 32

Remittance Advice

Answer 32

A remittance advice is a financial document sent by the customer when payment is made. The remittance advice shows how much the customer has paid and which invoice the amount relates to.

Businesses may provide pre-completed remittance advice to the customer, which will be completed and sent back by the customer with successful payment. Examples of remittance advice can be found in Appendix 1.

Question 33

Customer Payments Reconciliation

to identify is customers have paid the correct amount, businesses need to reconcile the amount paid in the remittance advice and teh amount noted in the SALES INVOICE and CREDIT NOTES.
The sales invoice will stipulate the terms agreed with the customer. The terms include:

Answer 33

number of days allowed before the customer must pay

terms for a settlement discount are allowed

Question 34

IRRECOVERABLE DEBTS are

Answer 34

receivables that a customers cannot pay so need to be written off to the Irrecoverable Debt expense

Question 35

Customers may be unable to pay for various reasons such as:

Answer 35

Customers facing financial difficulties

Customer is bankrupt

Customer has fraudulent intentions

Writing off a debt means that the debt is removed from the customer’s account in trade receivables. The business does not believe that the debt will ever be paid, so its value is zero. The debt is removed by crediting the trade receivables. A corresponding debit is made in the Irrecoverable Debt expense ledger, recognising the cost of the bad debt.

In cases where a customer pays part of the amount owed, only the remaining unpaid portion is written off to the Irrecoverable Debt expense ledger account.

Question 36

ALLOWANCE FOR IRRECOVERABLE DEBTS is an

Answer 36

estimate of the value of receivables that will not be recovered. The allowance is netted off against the trade receivables balance in the statement of financial position so that the net trade receivables includes only the amount that the business expects to recover

An allowance for irrecoverable debts (allowance for doubtful debts) may include an allowance against specific debts, and a general allowance.

Question 37

When there is uncertainty about whether a debt will be paid, but the company does not wish to write it off, because they wish to continue trying to collect the debt, then the value of that debt is added to the ALLOWANCE FOR IRRECOVERABLE DEBTS.

Answer 37

however, the individual debts remain in the customer balances until the customer pays, or the debt is finally written off. Irrecoverable debts that have been written off are not included in the allowance for irrecoverable debts.

Question 38

the GENERAL ALLOWANCE reflects the fact that based on experience, a business might be aware that a certain percentage of their receivables will go bad, but they are unable to predict which specific ones. Typically, a general allowance will be a percentage of the total receivables balance at the end of the year.

Answer 38

The total allowance for irrecoverable debts is the sum of the specific allowances and the general allowance. At the end of the year, the allowance for irrecoverable debts is deducted from the value of trade receivables in the statement of financial position.

Question 39

Accounting for Irrecoverable Debts

Answer 39

A business writes off irrecoverable debt to remove the amount owed to the business in the Trade Receivables Account. If the irrecoverable debt is not written off, the irrecoverable amount will continue to remain as receivables (asset) of the business, although the money will never be received.

Businesses must regularly review their outstanding invoices to determine their recoverability. Businesses should cease trading goods or services for customers who do not pay.

Question 40

Writing off irrecoverable debts.
When it becomes clear that a debt will not be recovered, it should be written off. this is done by

Answer 40

CREDITING THE TRADE RECEIVABLES ACCOUNT,

and removing the debt from the customers account. The Irrecoverable Debt expense account (Bad Debts) expense account) is debited by the same amount.

All balances are also removed from the individual customer account

Question 41

Allowance for Irrecoverable Debts

Answer 41

An allowance for Irrecoverable Debts is calculated at the end of each reporting period. Assuming there is no allowance brought forward from previous years, the accounting entry is: [see table]

Question 42

If there was already an allowance for Irrecoverable Debts brought forward from the previous reporting date, then the difference between the new allowance and the brought forward allowance is calculated.
The VALUE OF THE DEBIT TO THE Irrecoverable Debt EXPENSE and the CREDIT TO THE ALLOWANCE FOR IRRECOVERABLE DEBTS is equal to the increase in the Allowance for receivables.

Answer 42

If the allowance for Irrecoverable debts at the end of the reporting period is LESS THAN THE VALUE BROUGHT FORWARD from the previous period, then the DIFFERENCE IS CREDITED TO THE IRRECOVERABLE DEBTS EXPENSE ACCOUNT, and DEBITED TO THE ALLOWANCE FOR IRRECOVERABLE DEBTS. A credit to the expense account means that a negative expense will arise.