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Topic 6 – Credit Transactions

Topic 6 – Credit Transactions . Recording transactions in the Credit Sales Journal and the Credit Purchases Journal Posting to the Ledger Accounts Control Accounts – Stock Control, Debtors Control and Creditors Control Subsidiary Debtors and Creditors Accounts Accounting for Discounts:

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Topic 6 – Credit Transactions

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  1. Topic 6 – Credit Transactions Recording transactions in the Credit Sales Journal and the Credit Purchases Journal Posting to the Ledger Accounts Control Accounts – Stock Control, Debtors Control and Creditors Control Subsidiary Debtors and Creditors Accounts Accounting for Discounts: Discount Expense (given to Debtors Discount Revenue (received from Creditors)

  2. Credit Journals • Introduction • Credit sale/purchase = goods provided now, payment is made late (e.g. 30 days) • Buying stock on credit avoids the need for writing constant cheques. • Regular purchases can be put on account. At end of month, a statement showing all purchases is received and a single cheque can be written to repay the total amount owed. This arrangement also gives the business time to sell their stock, preferably before payment is due. • Terms - can be expressed as “2/7, n 30” = 2% discount if paid within 7days, otherwise the full amount must be paid within 30 days • Offering credit can attract more customers • Source document is an Invoice (issued by seller – customer gets the original, seller keeps a copy) –Sales Invoice (credit sales), Purchases Invoice (credit purchases) • Sales invoice numbers will run in sequence, purchase invoice numbers will not – it therefore becomes really important to keep the DATES in sequence in the Credit Purchases Journal

  3. Debtors & Creditors Schedules • These are a list of individual debtors (and creditors) and their balances. They allow for checking, as the sum of all the balances in each debtor’s (and creditor’s) account should equal the balance in the Debtors or Creditors Control. • The Debtors Control column in the cash receipts journal can now be used to post the total amount received from debtors directly into Debtors Control. In addition, individual amounts received from debtors can be recorded into the relevant debtor’s subsidiary ledger accounts. • The Creditors Control column in the cash payments journal can now be used to post the total amount received from creditors directly into Creditors Control. In addition, individual amounts received from creditors can be recorded into the relevant creditor’s subsidiary ledger accounts.

  4. Control Accounts • If there are numerous debtors, the general ledger will get cluttered with many individual accounts. So, one debtors control account can be used in the general ledger, with a separate debtors subsidiary ledger, showing details of each debtor. Replacing individual debtors accounts in the general ledger with the debtors subsidiary ledger, removes bulky detail from the general ledger and streamlines posting to the general ledger. • See pages 109 – 110. • Note: In the Debtors and Creditors Subsidiary ledgers, only one entry is made – i.e. a single entry. • For example - for a credit sale, the individual debtor is debited, but there is no corresponding credit entry – it has already been made when posting the details from the Credit Sales Journal. Also, unlike the general ledger, all entries in a subsidiary ledger are made on the day they occurred.

  5. Control Accounts • Control Accounts – Advantages • Bulky detail is removed from the general ledger • Trial balance figures provide a summary of totals, rather than individual accounts • Accounting departments (in larger firms) can be set up for specific areas. • Provides a checking mechanism to detect recording errors (control account with subsidiary ledgers) • Reduces likelihood of errors by assisting in enforcing internal control procedures (different staff independently maintain the 2 sets of records (control account & subsidiary ledger) • Control Accounts – Disadvantages • Not suited to all businesses – can create unnecessary work • May need additional staff to handle the additional recording involved. • A computerised system may need to be introduced rather than hiring additional employees.

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