Chapter 4: Purchases on Credit

Question 1

Overview:

The purchasing process

Answer 1

• Purchase order ->
• delivery note
• goods received Note (GRN)
• purchase invoice
• credit note
  -remittance advice

Question 2

A purchase order is a document completed by

Answer 2

the customer and sent to the supplier highlighting items the customer wishes to order. It shows the customer’s commitment to buy the items at the agreed price.

Question 3

Delivery Note
A delivery note is a document that accompanies the delivered goods. it shows

Answer 3

details and the amount of each item brought.

The supplier uses a delivery note to verify that the correct goods are being packed before sending. The delivery note is then SIGNED by the customer when delivered to confirm the PROOF OF DELIVERY.

Question 4

Goods Received Note (GRN)

Answer 4

A goods received note (GRN) is an internal document completed by the customer to ensure that all items ordered have been received.

The goods received are compared to the delivery note and recorded in the GRN.

Question 5

A PURCHASE INVOICE is an

Answer 5

invoice from a supplier from which the business brought goods or services on credit.

It is a purchase invoice when a business receives an invoice from a supplier for goods purchased. From the supplier’s point of view, it is a sales invoice.

Question 6

The purchase invoices detail the items brought, such as:

Answer 6

the purchased amount

the units brought

the length of the credit items (eg. 30 days)

the purchase invoice unique number code

The customer compares the received invoice to the purchase order, the delivery note, and the goods received note to confirm that the correct number of items and PRICE have been included in the purchase invoice

Question 7

iNPUT SALES TAX
Input tax is

Answer 7

a tax charged on purchases 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. Therefore, the input sales tax amount is categorised as a current asset at the point of purchase.

Question 8

Trade and Settlement Discounts

Answer 8

A credit purchase from a supplier can include trade and settlement discounts similar to credit sales.

Trade discounts are given by sellers, usually as an incentive to order in bulk. Trade discounts are a part of the net price.

Settlement discounts are given for prompt payments.

The business will decide whether to take up the prompt payment discount or make payments according to the credit terms.

Settlement discounts received (customer perspective) are accounted for as income (Discounts Received ledger accounts).

Question 9

a CREDIT NOTE

Answer 9

is a document issued to customers from the seller due to faulty goods delivered or incorrect invoices sent. The credit note will REDUCE THE VALUE OF AN INVOICE previously issued.

Question 10

REMITTANCE ADVICE is a document

Answer 10

sent by the customer to the supplier to show that payment has been made.

At the end of the period, the outstanding balances for each supplier account are paid with cash, cheque, or bank transfer. Remittance advice is generated and sent to the supplier upon successful payment as supporting documentation.

Question 11

INTRODUCTION TO CREDIT PURCHASES ACCOUNTING
A financial document accompanies each credit purchase transation

Answer 11

Credit purchases are recorded in a PURCHASE INVOICE

Any purchase return is recorded in a CREDIT NOTE

A REMITTANCE ADVICE evidences payment to a supplier

These credit purchase transactions are then reflected in a business’s accounting system by transferring information from the financial documents into the relevant Credit Purchases ledger accounts using double entries

Question 12

Relevant Credit Purchases Account

A business uses double-entry bookkeeping to record credit purchase transactions in the general ledger.
Credit purchase transactions are recorded to relevant ledger accounts below (5)

Answer 12

1. Trade payables account (liability)
2. purchase account (expenses)
3. purchase return account (income)
4. sales tax account (asset)
5. bank account (asset)

Question 13

1. trade payables account (liability)

Answer 13

payables are amounts owed to a seller for credit purchases. in credit purchases, a business purchases goods or services for payments made in the future. At the point of purchase, the business owes the seller an amount known as Trade Payables.

Question 14

2. purchase amount (expenses)

Answer 14

A business purchases by buying goods or services from a supplier. The amount charged for the purchase is recorded in the Purchase Account.

Question 15

3. purchase return account (income)

Answer 15

Purchase returns are goods returned to the supplier due to faulty delivery or product. When a business returns goods, the amount returned is recorded in this Purchase Return account.

Question 16

4. Sales tax account (asset)

Answer 16

Tax authorities charge sales taxes on the sale of goods or services. The business is charged a sales tax for the purchases.

The sales tax can be reclaimed from the tax authorities. At the point of purchase, the tax authority owes the business the sales tax amount. Therefore, the amount is recorded in the Sales Tax asset account.

The Sales Tax account will have debit balances due to input sales tax (Purchases) and credit balances due to output sales tax (Sales). At the end of the period, these two entries are net off, and the business identifies whether the account is an asset (debit) or liability (credit) position.

Question 17

5. bank account (asset)

Answer 17

Businesses make payments to the seller for outstanding balances within the credit terms and record them in the Bank account.

Question 18

Credit purchase transactions and their associated double entries
CREDIT PURCHASES

Answer 18

Information on credit purchases is taken from the financial document: Purchase invoice
A credit purchase arises when a business purchases goods or services from suppliers for future payment. At the point of purchase, the business owes money to the seller. The amount owed is classified as Trade Payables.

Question 19

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

Answer 19

Purchases Account

Trade Payables Account

The amount to be entered into these accounts is the net amount (price after trade discount)

Question 20

for credit purchases incorporating SALES TAX, the amount attributable to sales tax is recorded in the

Answer 20

sales tax account

Question 21

Purchase returns
Information on purchase returns is taken from the financial document:

Answer 21

credit notes

Purchase returns are goods returned to the seller by the business due to an error, such as delivering damaged or incorrect items. The seller issues credit notes to reduce the value of the previously issued purchase invoice.

Question 22

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

Answer 22

Trade Payables account
Purchase Return account
Sales Tax (if any)

Question 23

Payments to Suppliers
Information on business payments to suppliers is taken from the financial document:

Answer 23

REMITTANCE ADVICE

At the end of the credit term, the business should pay the supplier for the purchased items. Since the business does not owe the supplier for the payable balance, debiting the account removes the amount in the Trade Payables account.

Question 24

Payments to suppliers will be recorded into two ledger accounts.

Answer 24

Trade Payables account

Bank account

Question 25

SETTLEMENT DISCOUNTS or prompt payment discounts received are treated as Discount Received and shown as Other Income in the Statement of Profit or Loss. Settlement discounts are not considered until the business takes advantage of the discount by making the payment within the allotted period.

Answer 25

SEE SCREENSHOTS for the doublt entry to record payment to credit suppliers (Trade Payables) with settlement discounts

Question 26

Preparing Remittance Advice

Answer 26

Remittance advice is a document slip showing evidence of a supplier’s payment. It highlights the amount paid and the invoice to which the payment relates (see examples)

invoices are added together, and credit notes are deducted from the total amount owed

Question 27

Computerised Accounting System

Answer 27

The purchase system is integrated with the business’s accounting system. As purchase transactions occur, the general ledger accounts and the individual supplier account is updated automatically.

For example, when a business receives and keys a purchase invoice from XYZ Ltd into its accounting system, the general ledger accounts (Trade Payables and Purchases) and the individual supplier account (XYZ Ltd.) are updated simultaneously.

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

[see diagram]

Question 28

Individual Supplier Account
The individual supplier account provides information about each of the business suppliers, such as:

Answer 28

• Amount owed to each supplier

-Purchase invoices paid to each supplier

• Invoices are still outstanding to each supplier

Question 29

Supplier Statement Account is a financial document RECEIVED FROM A SUPPLIER to a business at the end of each month detailing all transactions between the two parties.

The transactions include purchases, any purchase returns and payments made to the supplier. The main objective of a supplier statement account is to remind the business of the amount owed to the supplier at month’s end.

A supplier account statement contains the following:

Answer 29

BALANCE BROUGHT DOWN (b/d) – This is the balance owing to the supplier at the start of the period (previous month’s closing)

INVOICE RECEIVED during the month – Details include invoice number, invoice date, and invoice amount issued

CREDIT NOTE received during the month – Details include credit note number, credit note date and amount issued

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

NET TOTAL – This refers to the balance owed to the supplier at the end of the month

The document received is a supplier statement account. From the supplier’s perspective, the same document is referred to as their customer statement account.

Question 30

Individual Supplier Account Reconciliation
A business performs trade payables reconciliations every month end by comparing the balances between the:

Answer 30

Individual supplier account and

Supplier statement account received

Reconciliation between these two balances is performed to verify internal information (supplier account) and an external source (supplier statement).

In essence, the supplier account and the supplier statement balance should match as they both show amounts owed from a business to the supplier. However, these balances may differ due to TIMING DIFFERENCEs or ENTRY ERRORS.

Question 31

Differences may arise due to TIMING DIFFERENCES such as:

Answer 31

Supplier recorded invoices or credit notes that a business has not received

Payments were made to the supplier after the supplier statement was generated

Payments made but not yet received by the supplier