UNIT 2D

CREDIT TRANSACTIONS

POSTING DOCUMENTS TO THE LEDGER

Up till now, all transactions have been for ‘cash’

ie paid for at the time using cash or cheque

Most businesses also trade goods ‘on credit’

meaning they are paid for 1, 2 or 3 months later

When goods are sold on credit, the buyer is given a document called an ‘Invoice’

Using the information on the Invoice, the buyer and seller make entries in their ledger accounts

Unit 2D Credit Transactions

The seller keeps one or 2 copies of each Invoice

Unit 2D Credit Transactions

The Invoice

Usually has 3 copies - showing the same info

The top copy is for the buyer to take back to his/her firm and make entries in the buyer’s ledger accounts

The other copies stay with the seller so that entries can be made in the seller’s ledger accounts

It shows who is selling, who is buying, the date, quantity, description and price of goods being traded

Unit 2D Credit Transactions

Trade Discount

In order to keep customers coming back, a trade discount is often given

This means money is taken off the cost of the goods – usually 5% or 10%

The invoice shows, if and how much, discount is allowed

The discount comes off the cost of the goods and does not appear anywhere in the ledger

Unit 2D Credit Transactions

V.A.T. VALUE ADDED TAX

It is a tax collected for the Customs and Excise by the seller

The Invoice must show how much the VAT is

The tax is added on to the cost of goods AFTER any Trade Discount has been allowed and is posted to a VAT account in the ledger

VAT is paid by the buyer on goods purchasedand is charged at 17.5% on most goods

Unit 2D Credit Transactions

Jean Sells Goods on Credit to Mr Hussain

50.00

Less Trade Discount 5.00

NET GOODS VALUE 45.00

Add VAT (17.5%) 7.88

Total Value 52.00

Credit Sales

Credit VAT

Debit Hussain

In Jean’s Ledger

(because Hussain is her Debtor)

Jean prepares anInvoice for Hussain and keeps a copy

Extract from Jean’scopy invoice

EXAMPLE

Unit 2D Credit Transactions

The ‘Terms’ of the Invoice

The Invoice will also tell the buyer what the ‘terms’ of credit are

ie how long the buyer has to pay

also if the buyer gets a further discountfor paying even sooner

‘Terms 15% monthly’Example

The customer gets another 15% off if he pays up before the end of the month following

This is called ‘Cash Discount’

Unit 2 Credit Transactions

Processing Credit Sales from the copy invoice

Credit Net Goods Value to Sales Account

Credit the VAT to the VAT Account

Debit the Debtor’s Account with the Total

SUMMARY

Unit 2D Credit Transactions

Key Words Copy these into your jotter

(Trade) creditors – firms purchased from on credit

(Trade) debtors – people we have sold to on credit

Invoice – document given to buyer showing what is owed and the terms of payment

Copy Invoice – copy of the invoice kept by seller

Unit price – the price of a single item

Trade Discount – money taken off cost of goods

VAT – Value Added Tax – paid by customer to Govt

Jean Buys Goods on Credit from Photoshop

50.00

Less Trade Discount 5.00

NET GOODS VALUE 45.00

Add VAT (17.5%) 7.88

Total Value 52.00

Debit Purchases

Debit VAT

Credit Photoshop

In Jean’s Ledger

(because Photoshop is her Creditor)

Unit 2D Credit Transactions

Jean receives an Invoicefrom Photoshop who keeps a copy

Extract from Invoicesent to Jean

EXAMPLE

Unit 2D Credit Transactions

Processing Credit Purchases from the Invoice

Debit Net Goods Value to Purchases Account

Debit the VAT to the VAT Account

Credit the Creditor’s Account with the Total

SUMMARY

Unit 2D Credit Transactions

Processing the Return of Goods on Credit

When goods bought and sold on credit are returned no cash refund can be given

Why?

because the goods have not yet been paid for so no refund is necessary

Instead, a document called a credit note is given

The customer returning the goods gets the Credit Note (top copy) and the seller keeps the copy credit note.

Unit 2D Credit Transactions

Mr Hussain returns goods to Jean

Jean prepares a Credit Note for Hussainand keeps a copy

In Jean’s ledger

Extract from Jean’s Copy Credit Note

15.00

Less Trade Discount 1.50

Net Goods Value 13.50

Add VAT (17.5%) 2.36

Total Value 15.86

Debit Sales Returns

Debit VAT

Credit Hussain

EXAMPLE

(to reduce the Debtor’s account)

Unit 2D Credit Transactions

Processing Sales Returns from the Copy Credit Note

Debit Net Goods Value to Sales Returns Account

Debit the VAT to the VAT Account

Credit the Debtor’s Account with the Total

SUMMARY

Jean returns goods to Photoshop

Unit 2D Credit Transactions

Jean receives a Credit Note fromPhotoshop

In Jean’s ledger

Extract from Jean’sCredit Note

Credit VAT

Debit Photoshop

25.00

Less Trade Discount 2.50

NET GOODS VALUE 22.50

Add VAT (17.5%) 3.94

Total Value 26.44

Credit PurchasesReturns

EXAMPLE

(to reduce the Creditor’s account