Business Documents & Books of Prime Entry (Cambridge (CIE) IGCSE Accounting): Flashcards

True.

In accounting a cash transaction means one settled at the time, whether by physical cash in hand or by money in the bank. What makes it a cash transaction is the timing of the payment, not the form the money takes.

Credit is normally used for higher cost transactions, or when the business has limited cash available. Cash tends to be used for lower cost transactions, or when the business is holding plenty of it.

A trade discount is a reduction in the selling price of goods or services. It is usually offered when a customer buys in bulk, or is a loyal and regular customer.

Offering credit:

• can increase sales, by giving customers more opportunity to buy

• builds relationships and customer loyalty

A cash discount is offered to a credit customer for paying an invoice early. The supplier states the deadline by which payment must be made in order to claim it.

Offering credit:

• means statements of account must be issued and customers chased for payment

• carries the risk that a customer never pays their balance

The completed sentence is:

A trade discount is applied before the transaction takes place.

For a trade discount only the discounted amount is entered, the discount itself is never recorded, and it is not part of the double entry system. For a cash discount the amount before the discount is entered, and the discount is recorded separately when the customer pays early.

It encourages early payment and reduces the risk of a balance never being paid. Against that, it means less revenue and lower profit, and some customers will only pay early if a discount is on offer.

An invoice is the record of a credit sale or credit purchase, issued by the supplier to the credit customer. The customer refers to it as a purchases invoice, while the supplier keeps a copy and calls it a sales invoice.

An invoice shows:

• the date, and the names and addresses of the supplier and the customer

• the quantity and unit price of the goods or services

• any trade discount, deducted before the total is stated

• the total amount owed, the terms for cash discount, and the date payment is due

A debit note is issued by a credit customer to a supplier, requesting a reduction in the balance of an invoice. It is sent when goods are damaged, faulty, the wrong items, or missing from the order.

The total owed is $190. The items come to 50 × $4 = $200, and the trade discount is 5% × $200 = $10, which leaves $200 − $10 = $190.

A credit note is issued by a supplier to a credit customer when the balance on an invoice is reduced. It is the supplier's authorisation of the reduction that the customer requested.

False.

No entry is made at that stage, because the supplier has not yet authorised the reduction. The entry is made only when the credit note is issued or received.

The sequence is:

• the invoice, issued by the supplier when the goods are bought

• the debit note, issued by the customer to request the reduction

• the credit note, issued by the supplier to grant it

A statement of account shows all transactions between a credit customer and a supplier within a given period. It is issued regularly by the supplier, and usually shows the balance after each transaction.

The completed sentence is:

The customer can check the balance on the statement against the balance in their purchases ledger account.

A statement of account contains no new transactions. It only summarises transactions that have already been recorded, so entering it again would count them twice.

It is written from the supplier's point of view. Transactions that increase the customer's balance are labelled debit, and those that decrease it are labelled credit.

A receipt is the record of a cash payment. The supplier issues it to the customer when they pay for goods, usually using physical cash.

The completed sentence is:

When a customer pays a supplier using cash, both of them use a receipt as the business document.

A cheque is a form of payment written by the customer and given to the supplier. The supplier takes it to the bank and deposits it into the business bank account.

A cheque shows:

• the details of the customer's bank account

• the name of the supplier being paid

• the amount to be paid, and the date the cheque is written

• the customer's signature

A petty cash voucher records a payment for a small purchase made from the petty cash till, where a cheque would not be worth writing. The details are then transferred into the petty cash book.

The customer tears off the cheque and hands it to the supplier as payment. The customer keeps the counterfoil as their own record of what was paid.

A paying-in slip is used when depositing cash or cheques into a bank account. The business keeps it as its own record of the deposit.

The customer uses the petty cash voucher, while the supplier uses a receipt. The two sides of the same transaction do not always use the same document.

A bank statement is issued regularly by the bank and details every bank transaction in a given period. It shows the money going in and out of the account, and the opening and closing balances.

True.

Some payments produce no other document at all, including credit transfers, telephone transfers, direct debits and standing orders. For those the bank statement is the record the book-keeper works from, along with bank charges and interest.

A direct debit is set up by the party receiving the money, and the dates and amounts can change. A standing order is set up by the party making the payment, and the dates and amounts are fixed.

The supplier depositing their cash and cheques into the bank. That is not a transaction with the customer, so only the supplier has a document, the paying-in slip.

The sales journal records all credit sales, written up from the sales invoices issued. Cash sales never appear in it, because they go straight into the cash book.

The completed sentence is:

The total of the sales journal is credited to the sales account, and the individual amounts are debited to the trade receivables accounts.

The purchases journal records all credit purchases, written up from the purchases invoices received. Cash purchases and purchases of non-current assets never appear in it.

False.

The amounts entered are the ones after the trade discount has been taken off the list price. What the journal shows is what the customer actually owes.

Debit the purchases account with the total, labelling the entry Purchases journal. Then credit each individual trade payable's account with the amount owed to them.

The completed sentence is:

Where a sales journal is kept, only one entry is made in the sales account for the whole period, rather than one for each sale.

The sales returns journal records returns from credit customers, written up from the credit notes issued. The purchases returns journal records returns to credit suppliers, written up from the credit notes received.

Debit the sales returns account with its total, and credit the individual trade receivables. Credit the purchases returns account with its total, and debit the individual trade payables.

The cash book, not the purchases journal. The purchases journal records only the purchase itself, and any later payment for it is a cash-book entry.

True.

The cash book and the petty cash book are unusual in doing both jobs at once. The other books of prime entry are not part of the double entry system, and their totals have to be posted into it separately.

The general journal, often called simply the journal, is the book of prime entry for transactions that fit none of the other six books. It is where anything unusual or one-off gets recorded.

The cash books are written up from:

• receipts

• cheques and cheque counterfoils

• paying-in slips and bank statements

• petty cash vouchers

The completed sentence is:

In a journal entry, the total of the debit column must always equal the total of the credit column.

The general journal records:

• opening balances when a business is first created

• introducing capital, and taking drawings

• purchasing or selling a non-current asset

• correcting errors

• transferring balances to the statement of profit or loss

The narrative is a brief written explanation of the transaction, placed underneath the entry. It matters most for one-off transactions and for corrections of errors, where the reason would otherwise be lost.

The accounts to be debited are written first. The accounts to be credited follow, conventionally written with an indent, so the two groups can be told apart at a glance.

Debit the computer $4000 and the bank $3000, because they are assets. Credit the bank loan $5000 and capital $2000, because they are a liability and the owner's claim on the business.