Chapter 5: Accounts Payable Part 2 Flashcards
What is a settlement discount?
A reduction in the amount paid by a credit customer in return for early repayment
What is discount revenue?
Revenue in the form of a decrease in liabilities which results in an increase in owner’s equity, earned when accounts payable are paid early and a settlement discount is given by the supplier
What is the equation for calculating discount revenue?
Discount Revenue = Discount Rate x Amount Owing
What is the effect on the accounting equation for a discount revenue?
Decrease in assets (bank)
Decrease in liabilities (account payable)
Increase in owners equity (discount revenue)
Why does a settlement discount not reduce the cost of sales expense?
This expense is incurred at the point of sale, however the settlement discount does increase revenue and profit when cash is paid
What are the benefits of discount revenue?
Less cash is paid to accounts payable which allows cash to be retained for other payments
Net profit is increased
What are the costs of discount revenue?
Cash is paid to accounts payable faster which means there may be less time to generate cash from sales
cash is unavailable to make other payments
What is a statement of account?
A summary of the transactions a business has had with a particular account payable or receivable, over a certain period of time, usually a month
What type of transactions does a statement of account contain?
Transactions which have already occurred and been recorded
Regarding qualitative characteristics and source documents, discuss a statement of account?
It is not a source document that must be recorded, but it does allow for the checking of each transaction and the final balance, which supports verifiability and provides faithful representation
How do sales and payments affect the balance?
Sales increase the balance (debit)
Payments decrease the balance (credit)
What does a statement of account include?
Issuer of the statement, business receiving the statement, transactions from the seller’s point of view, sales as debits and receipts as credits
When does a business receive a statement of account?
Each month, from every supplier
What occurs if discrepancies are detected between statement of accounts and the general ledger?
They should be communicated to the supplier or corrected in the records of the business
What does accounts payable turnover measure?
The average number of days it takes for a business to pay its accounts payable, which indicates the effectiveness of management
