Unit Two Accounting: Accounts Payable and Accounts Receivable

Flashcards covering key definitions, formulas, accounting equation effects, and concepts from Chapters 13 and 14 for Accounts Payable and Accounts Receivable in a Trading Business.

What is the definition of credit terms?

The number of days a credit customer has to pay the balance owing, including the number of days to earn a settlement discount.

Why should credit terms be noted on an invoice?

To stipulate to the Account Receivable exactly when the invoice has to be paid and to display possible discounts.

How can a business distinguish between a sales invoice and a purchase invoice?

The logo on top of the invoice stipulates who the seller is (who issues the sales invoice), whereas a purchase invoice is received by the customer.

How are Accounts Receivable and Accounts Payable reported in the Balance Sheet?

Accounts Receivable are reported as current assets, while Accounts Payable are reported as current liabilities.

What is a credit purchase of inventory?

A transaction that involves the acquisition of inventory from a supplier who does not require payment until a later date.

What is the role of the Purchases Journal?

It is an accounting record that summarises all transactions involving the purchase of inventory on credit.

How does GST affect the amount owed to Accounts Payable for credit purchases of inventory?

GST is included in the amount owing and is not recorded separately when payment is made.

What is the effect of a credit purchase of inventory on the elements of the accounting equation?

Assets increase (Inventory), Liabilities increase (Accounts Payable) while GST debt decreases, and Owner's Equity has no effect.

How can a business distinguish between a cash purchase and a credit purchase in an inventory card?

Cash purchases are recorded using an EFT source document, whereas credit purchases are recorded using an Invoice as a source document.

Which source document is used to verify cash paid to Accounts Payable?

EFT receipt.

Why is there no GST to account for when cash is paid to Accounts Payable?

GST is accounted for when the purchase is made, so the entire payment is recorded in the payments journal without separating GST.

What formula is used to calculate the balance of Accounts Payable at the end of the reporting period?

Start Balance + Credit Purchases (including GST) - Purchase Returns (including GST) - Payments to Accounts Payable.

What is the role of an Accounts Payable record?

It records every transaction between the business and an individual supplier, including credit purchases, payments, discount revenue, and purchase returns.

Which qualitative characteristic explains the purpose of preparing an Accounts Payable Schedule?

Verifiability.

Why would it be unethical to omit amounts owed to Accounts Payable from the Balance Sheet?

Liabilities would be understated, failing to show the true value of amounts owing and misleading banks when applying for a loan.

What source document is used to verify a Purchase return?

A credit note issued by the supplier.

What is settlement discount?

An opportunity to repay a supplier earlier and receive a discount, expressed as a percentage.

What is discount revenue and where is it recorded?

It is a saving of outflows from reducing the amount paid to a supplier, recorded in the Income Statement under 'other revenue'.

What does the notation '5/7, n/60' on an invoice mean?

'5/7' means a 5% discount is given if repaid within 7 days, and 'n/60' means the full net amount must be paid within 60 days.

What are the benefits and costs of paying Accounts Payable early?

Benefits: saving money by paying less than owed and increasing profit by the discount amount. Costs: having less cash on hand for other expenses.

How does a Statement of Account ensure Faithful representation?

It can be compared to the business's own records to ensure accuracy.

Why is a credit sale classified as revenue under the Accrual Accounting assumption?

Accrual Accounting states that revenues earned must be included in the reporting period they occur, regardless of whether cash has been received.

What is the role of the Sales Journal?

It summarises all credit sales for a particular reporting period.

What source document verifies all transactions recorded in the Sales Journal?

Sales invoice.

What is the effect of a credit sale transaction on the accounting equation?

Assets increase (Accounts Receivable increases, Inventory decreases), Liabilities increase (GST payable), and Owner's Equity increases (Sales revenue less Cost of sales).

Why is there no GST to account for when cash is received from Accounts Receivable?

GST is recorded when the sale occurs, so the cash received includes the GST previously charged.

How can an ethical approach to Sales Returns generate profits?

Offering sales returns entices customers to shop confidently, which helps retain or increase customers, leading to higher overall profits.

Why are discounts given to Accounts Receivable classified as expenses?

Discount expense reduces assets and owner's equity because it represents a reduction in economic inflow (less cash received).

What are the benefits and costs of offering discounts to Accounts Receivable?

Benefits: attracts customers, receives cash faster (improves liquidity), improves accounts receivable turnover, and reduces bad debts. Costs: decreases profit and results in receiving less cash.

What is a Bad Debt?

An expense recorded in business records when a debt from a customer is deemed irrecoverable.