Transactions with Cash, Credit & Discounts (Cambridge (CIE) AS Accounting): Revision Note
Exam code: 9706
Cash or credit
How can goods be sold or purchased?
Goods can be sold or purchased using cash or credit
A cash transaction involves cash in hand or money in the bank
A cash sale is when the business sells goods or a service and receives cash in hand or money in the bank
A cash purchase is when the business buys goods or a service and pays using cash in hand or money from their bank
Cash is normally used for lower cost transactions or when the business has a large amount of cash available
A credit transaction involves an agreement to pay money at a later date
A credit sale is when the business sells goods or a service to a customer who will pay in the future
A credit purchase is when the business buys goods or a service from a supplier and will pay in the future
Credit is normally used for higher cost transactions or when the business has limited cash available
What are the advantages and disadvantages of using cash and credit for sales?
Advantages | Disadvantages | |
|---|---|---|
Cash |
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Credit |
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What are the advantages and disadvantages of using cash and credit for purchases?
Advantages | Disadvantages | |
|---|---|---|
Cash |
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|
Credit |
|
|
Examiner Tips and Tricks
You might be asked to advise a business on cash and credit decisions such as
whether they should offer credit to their customers
whether they should buy goods using cash or take advantage of credit offered
Sale or return
What is the sale or return basis?
A business might sell goods on a sale or return basis
This means the business sends goods to a customer and gives them the option to buy the goods or return them
Businesses choose to use the sale or return basis to entice new customers to try their goods
The transaction is not classed as a sale until the customer accepts the goods
Case Study
Kez has $20 000 worth of inventory.
Kez sends $2 000 worth of goods with a selling price of $3 000 to a customer, Nina, on a sale or return basis.
Kez should still report the value of his inventory as $20 000.
If Nina chooses to buy the goods, she then keeps them. At this point, Kez subtracts $2 000 from his inventory and reports a sale of $3 000.
Trade & cash discount
What is a trade discount?
A trade discount is a reduction in the selling price of goods or services
Trade discount might be offered
If the customer buys in bulk
If the customer is a loyal and regular customer
Trade discount is applied before a transaction takes place
The discounted amount is the value that is entered into the books of prime entry
The value of the trade discount is not entered into the books of prime entry
Trade discount is not part of the double entry system
What is a cash discount?
A cash discount is offered to credit customers for early repayment of an invoice
The supplier will state the deadline for payment in order to claim the cash discount
The amount before the cash discount is entered into the books of prime entry
When the customer pays early and claims the cash discount
The amount of cash discount is recorded in the books of prime entry
What are the advantages and disadvantages of offering trade and cash discount?
Advantages | Disadvantages | |
|---|---|---|
Trade discount |
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Cash discount |
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