ACCA F3 (INT) Financial Accounting - 2010 - Study text - Emile Woolf Publishing
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Chapter 3: The accounting equation and double-entry book-keeping
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6 A business entity makes a large loss on a business transaction. Which of the following
items will always be reduced in value as a result of a loss?
1 Cash balance
2 Total assets
3 Capital
4 Total liabilities
A 1, 2 and 3 only
B 1 and 3 only
C 2 and 3 only
D 1, 2, 3 and 4
(2 marks)
7 Is the following statement about computerised accounting systems true or false?
When entering purchase invoice details into a computerised accounting system it will
normally be necessary to enter standing data such as the supplier’s name and address
A True
B False
(1 mark)
8 Which of the following would result in a debit entry in an expense account?
A Payment in cash for postage stamps
B Payment to a supplier for a credit purchase of goods
C Purchase return of goods to a supplier
D Receipt of loan from a bank
(2 marks)
9 The owner of a business invests a further $80,000 in the business.
Which elements of the accounting equation will be affected by this transaction?
A Assets and liabilities only
B Assets only
C Capital and assets only
D Capital only
10 The following information relates to the sole trader business of Monty.
$
Netassetsat30June2010 62,500
Capitalintroducedduringtheyearto30June2010 17,500
Profitsintheyear 42,600
Drawingsintheyear 35,900
What was the balance on Monty’s capital account on 1 July 2009?
A $38,300
B $51,700
C $73,300
D $86,700
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Paper F3 (INT)
Financial Accounting
CHAPTER
4
Recording transactions:
sales, purchases and cash
Contents
1 Recordingtransactions:salesandpurchases
2 Accountingforsalestax
3 Moreaboutbooksofprimeentry
4 Pettycash
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Recording transactions: sales and purchases
Sales and purchases on credit: the basic rules
Sales returns and purchase returns
Discounts
Discounts received and discounts allowed
Accounting for discounts received and discounts allowed
Discounts allowed and received: the receivables and payables ledgers
Contra entries
1 Recording transactions: sales and purchases
1.1 Sales and purchases on credit: the basic rules
The previous chapter explained the general principles of double-entry book-keeping
and also the use of:
accounts for total receivables and total payables in the main ledger, and
individual accounts for credit customers and suppliers in the receivables and
payables ledgers.
The main ledger (nominal ledger or general ledger) is used to record the total value
of transactions relating to customers who buy on credit and the total value of
transactions with suppliers. At the same time, transactions relating to individual
customers and individual suppliers are recorded in their personal accounts, in the
receivables ledger or payables ledger.
The basic rules for recording sales and purchases on credit are as follows:
Sales on credit Debit Credit
Main ledger
Receivables X
Sales X
Receivables ledger
Individual customer accounts X
Purchases on credit Debit Credit
Main ledger
Purchases X
Trade payables X
Payables ledger
Individual supplier accounts X
These are the accounting entries that would be made by a business entity that does
not have an inventory control system, and does not maintain up-to-date records for
inventory.
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1.2 Sales returns and purchase returns
Sales returns and purchase returns are accounted for in a similar way. It is usual to
keep separate accounts in the main ledger for:
sales returns, and
purchase returns.
The effect of sales returns is to reduce the amount of:
sales revenue, and
receivables.
However, although sales returns reduce total sales revenue for the accounting
period, they are recorded initially in a separate account in the main ledger.
The effect of purchase returns is to reduce:
total purchases and
trade payables.
However, although purchase returns reduce total purchases for the accounting
period, they are recorded initially in a separate account in the main ledger.
The basic rules for recording sales returns and purchase returns are therefore as
follows:
Sales returns Debit Credit
Main ledger
Sales returns X
Receivables X
Receivables ledger
Individual customer accounts X
Purchase returns Debit Credit
Main ledger
Trade payables X
Purchase returns X
Payables ledger
Individual supplier accounts X
1.3 Discounts
When we record transactions with credit customers and suppliers we may need to
deal with discounts. There are two main types of discount:
trade discount
cash discount or settlement discount
Trade discount
A trade discount is a reduction in the list price of goods which is given to some
trade customers. This is often due to the long-term nature of the relationship
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between the customer and the supplier or due to the large quantity of purchases
made by the customer. (Trade discounts are sometimes known as bulk purchase
discounts.)
The trade discount is deducted from the list price of the goods in the invoice and the
customer then pays the amount shown in the invoice. It is very unusual to show the
amount of the trade discount in the invoice. In accounting terms the trade discount
is ignored and the only amount that needs to be recorded is the amount shown in
the invoice, which is the actual price for the goods.
Example
Apple sells goods with a list price of $10,000 to Orange and gives Orange a 20%
trade discount as he is a long-standing customer.
The goods will be recorded on Apple’s sales invoice as:
$
Listprice 10,000
Less:Tradediscount (2,000)
Netprice 8,000
Apple will record the sale at the net price of $8,000 and Orange will record the
purchase at the net price of $8,000.
Cash discounts or settlement discounts
A cash discount or settlement discount is offered to credit customers in return for
early payment. It is offered to persuade customers to pay the amounts due before
the end of the normal credit period.
Example
Apple has sent an invoice for $8,000 for goods to Orange, and the invoice states that
normal credit terms are 30 days. However the invoice also offers a settlement
discount of 4% if payment is made within 10 days.
Orange now has a choice:
to wait for 30 days and pay the full amount due of $8,000, or
to pay within 10 days and pay only $7,680 (the $8,000 invoice total less the 4%
settlement discount of $320 ($8,000 × 4%))
1.4 Discounts received and discounts allowed
Discounts received are settlement discounts that a business has been offered by its
suppliers and which it takes up. The business pays earlier but pays less.
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Discounts allowed are settlement discounts that a business offers to its credit
customers. It is up to the customer to decide whether to pay the full amount or to
pay the smaller amount earlier.
1.5 Accounting for discounts received and discounts allowed
Discounts received and discounts allowed are recorded in the ledger accounts. For
example, if a settlement discount of $320 is received on an invoice for $8,000 and
only $7,680 is paid, we record the discount received of $320, the total amount
payable in the purchase invoice ($8,000) and the actual cash payment of $7,680.
Discounts received
Discounts received from suppliers are recorded in a discounts received account. If a
business decides to take up the offer of a settlement discount by paying the smaller
amount sooner, the double entry for the payment is:
Debit Trade payables (the amount payable in the invoice)
Credit Bank (the amount actually paid)
Credit Discount received (the discount received)
The entry in the discount received account is a credit entry because it is effectively a
reduction in an expense. (You might prefer to think of it instead as a form of
income.) In the income statement, it will be shown either as ‘other income’ or as a
negative expense.
Discounts received do not affect the total figure for purchases in the period, or the
total cost of sales. In this respect they differ from purchase returns, which do reduce
total purchase costs.
Discounts received are accounted for as an addition to profit in the period.
They are not accounted for as a deduction from purchase costs.
Discounts allowed
Discounts allowed to customers are recorded in a discounts allowed account. A
business will only know if a customer is taking a settlement discount that has been
offered when the payment is received. If the customer has taken the discount then a
smaller payment will be received. The double entry is:
Debit Bank (the amount of cash received)
Debit Discount allowed (the discount taken by the customer)
Credit Trade receivables (the full amount of the invoice value)
The discount allowed entry is a debit entry as this is an expense of the business.
Discounts allowed are shown as expenses in the income statement.
Discounts allowed do not affect the total figure for sales in the period. In this respect
they differ from sales returns, which do reduce total sales revenue.
Discounts allowed are accounted for separately as an expense for the period.
They are not accounted for as a deduction from total sales revenue.
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Example
Apple has sent an invoice for $8,000 for net goods to Orange and the invoice states
that normal credit terms are 30 days. However the invoice also offers a settlement
discount of 4% if payment is made within 10 days.
Orange takes up the offer of the settlement discount.
How should the payment be recorded in the ledger accounts of:
(a) Apple?
(b) Orange?
Answer
Apple’s accounts
For Apple this is a discount allowed to a customer:
Debit Bank $7,680
Debit Discount allowed $320
Credit Trade receivables $8,000
Orange’s accounts
For Orange this is a discount received from a supplier:
Debit Trade payables $8,000
Credit Bank $7,680
Credit Discount received $ 320
1.6 Discounts allowed and received: the receivables and payables ledgers
Discounts received and discounts allowed must also be recorded in the individual
supplier and customer accounts in the purchase ledger or sales ledger.
When discounts are received from suppliers, the entry in the account of the supplier
in the payables ledger is:
Credit: Amount of cash payment
Credit: Discount received
Similarly when a discount is allowed to a credit customer the entry in the account of
the customer in the receivables ledger is:
Debit: Amount of cash received payment
Debit: Discount allowed.
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Transactions in the receivables ledger
Consider the following transactions.
$
(1)Salesoncredit
(a)CustomerA 4,000
(b)CustomerB 5,000
(c)CustomerC 3,000
(d)CustomerD 2,000
14,000
(2)Salesreturns
(a)CustomerA 500
(3)Cashreceivedfrom:
(a)CustomerB 4,800
(b)CustomerC 1,000
5,800
(4)Earlysettlementdiscounttaken
(a)CustomerB 200
(5)Baddebtwrittenoff
(a)CustomerD 2,000
These transactions are recorded as follows.
In the receivables ledger:
CustomerAaccount
$ $
Sales (1)(a) 4,000 Salesreturns (2)(a) 500
CustomerBaccount
$ $
Sales (1)(b) 5,000 Bank (3)(a) 4,800
Discountsallowed (4)(a) 200
CustomerCaccount
$ $
Sales (1)(c) 3,000 Bank (3)(b) 1,000
CustomerDaccount
$ $
Sales (1)(d) 2,000 Baddebts (5)(a) 2,000
Tutorial note: The write off of a bad debt will be covered in detail in a later chapter.
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The balances on the accounts in the receivables ledger in total are:
Balances
$
CustomerA 3,500
CustomerC 2,000
Total 5,500
In the main ledger, the transactions are recorded as follows:
Salesaccount
$ $
Tradereceivables (1) 14,000
Salesreturnsaccount
$ $
Trade
receivables
(2) 500
Bankaccount
$ $
Trade
receivables
(3) 5,800
Discountsallowedaccount
$ $
Trade
receivables
(4) 200
Baddebtsaccount
$ $
Tradereceivables (5) 2,000
Tradereceivablesaccount
$ $
Sales (1) 14,000 Salesreturns (2) 500
Bank (3) 5,800
Discountsallowed (4) 200
Baddebts (5) 2,000
Closingbalancec/f 5,500
14,000 14,000
Openingbalanceb/f 5,500
Note: Discounts allowed to customers and bad debts are both expense accounts.
Note also that the balance on the total trade receivables account in the main ledger
is equal to the sum of the individual account balances in the receivables ledger.