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UNIT 2D

UNIT 2D. CREDIT TRANSACTIONS. POSTING DOCUMENTS TO THE LEDGER. JEAN’S PHOTOGRAPHY. Unit 2D. Credit Transactions. 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’.

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UNIT 2D

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  1. UNIT 2D CREDIT TRANSACTIONS POSTING DOCUMENTS TO THE LEDGER

  2. JEAN’S PHOTOGRAPHY Unit 2D Credit Transactions 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’ The seller keeps one or 2 copies of each Invoice Using the information on the Invoice, the buyer and seller make entries in their ledger accounts

  3. Credit Transactions Unit 2D The Invoice Usually has 3 copies - showing the same info It shows who is selling, who is buying, the date, quantity, description and price of goods being traded 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

  4. 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

  5. Credit Transactions Unit 2D V.A.T. VALUE ADDED TAX VAT is paid by the buyer on goods purchased and is charged at 17.5% on most goods 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

  6. Unit 2D Credit Transactions EXAMPLE Jean Sells Goods on Credit to Mr Hussain Extract from Jean’s copy invoice Jean prepares an Invoice for Hussain and keeps a copy 50.00 Less Trade Discount 5.00 NET GOODS VALUE 45.00 Add VAT (17.5%) 7.88 Total Value 52.00 In Jean’s Ledger Credit Sales Credit VAT Debit Hussain (because Hussain is her Debtor)

  7. 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 discount for paying even sooner This is called ‘Cash Discount’ Example ‘Terms 15% monthly’ The customer gets another 15% off if he pays up before the end of the month following

  8. Unit 2 Credit Transactions SUMMARY 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

  9. Unit 2D Credit Transactions Key Words Copy these into your jotter (Trade) creditors – firms purchased from on credit (Trade) debtors – people we havesold 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

  10. Unit 2D Credit Transactions EXAMPLE Jean Buys Goods on Credit from Photoshop Extract from Invoice sent to Jean Jean receives an Invoice from Photoshop who keeps a copy 50.00 Less Trade Discount 5.00 NET GOODS VALUE 45.00 Add VAT (17.5%) 7.88 Total Value 52.00 In Jean’s Ledger Debit Purchases Debit VAT Credit Photoshop (because Photoshop is her Creditor)

  11. Unit 2D Credit Transactions SUMMARY 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

  12. Credit Transactions Unit 2D 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.

  13. Credit Transactions Unit 2D EXAMPLE Mr Hussainreturns goods to Jean Jean prepares a Credit Note for Hussain and keeps a copy 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 In Jean’s ledger Debit Sales Returns Debit VAT Credit Hussain (to reduce the Debtor’s account)

  14. Unit 2D Credit Transactions SUMMARY 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

  15. Unit 2D Credit Transactions EXAMPLE Jean returns goods to Photoshop Extract from Jean’s Credit Note Jean receives a Credit Note from Photoshop 25.00 Less Trade Discount 2.50 NET GOODS VALUE 22.50 Add VAT (17.5%) 3.94 Total Value 26.44 In Jean’s ledger Credit Purchases Returns Credit VAT Debit Photoshop (to reduce the Creditor’s account

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