accounting aso2 sac 2

What creates or increases Accounts Receivable?

Credit sales of inventory when a business sells inventory to a customer who pays later.

How is a credit sale of inventory verified?

By a sales invoice.

What is classified as a current asset in accounting?

Accounts Receivable, as it represents cash owed to the business for goods or services sold on credit.

What is the Going Concern assumption?

The assumption that a business will continue to operate in the future, allowing for the recognition of revenue when sales occur, not when cash is received.

What ethical considerations should businesses take into account regarding inventory sold?

Social and environmental effects, advertising strategies, and pricing practices.

What do credit terms specify?

When the account has to be paid, and may include settlement discounts for early payment.

What does '5/10, n/40' mean in credit terms?

5% discount if paid within 10 days and net amount is due in 40 days

net amount due within 40 days.

What is the role of the Sales Journal?

To record all credit sales of inventory to Accounts Receivable, including total sales revenue and GST incurred.

What information is recorded in the Cash Receipts Journal?

All cash receipts during a period, including cash sales and receipts from Accounts Receivable.

When is GST recorded in relation to credit sales?

At the time of the credit sale in the Sales Journal, not again when payment is received.

What is the purpose of the Accounts Receivable Record?

To summarize all credit transactions with individual Accounts Receivable, showing the amount owed at any time.

What is an Accounts Receivable Schedule?

A listing of all Accounts Receivable and their balances, prepared at the end of the reporting period.

What is a Sales Return?

The return of inventory to a business by an Account Receivable, verified by a credit note.

What does a receipt from Accounts Receivable indicate?

The payment received from a customer for goods or services previously sold on credit.

What is the format of a Cash Receipts Journal?

Includes date, details, source document, bank, classification columns, and amounts received.

How is the balance of Accounts Receivable calculated?

Starting balance + Credit sales

What is the significance of the GST Clearing account?

It increases when GST is collected on behalf of the ATO and must be passed on.

What is meant by 'Settlement of Account'?

It indicates that the entire amount owed by the Account Receivable has been received.

What is the difference between a Purchase Return and a Sales Return?

A Purchase Return is inventory returned by a business to an Account Payable, while a Sales Return is inventory returned to a business by an Account Receivable.

What should businesses avoid in their pricing strategies?

Using false or misleading prices to attract customers.

What is the importance of internal control in Accounts Receivable?

To ensure the balance of Accounts Receivable records matches the Accounts Receivable account, minimizing fraud risk.

What does the term 'accrual basis assumption' refer to?

The requirement to recognize revenue when it is earned, not when cash is received.

What information does the Sales Journal provide?

Total sales revenue, total GST incurred, and individual Accounts Receivable amounts for credit sales.

What does the Cash Receipts Journal classify?

All cash received during a period, including cash sales and receipts from Accounts Receivable.

What is the role of invoices in Accounts Receivable?

They serve as proof of credit sales and are essential for tracking amounts owed by customers.

What must be included in a credit note?

The name of the customer returning the inventory, the selling price and GST applicability, the name of the business issuing the credit note, the type and quantity of inventory returned, the date and credit note number, and the reason for the return.

How does a sales return affect GST?

It decreases GST Clearing because the sale is no longer considered to have occurred, meaning GST is not owed to the ATO.

Where is a sales return recorded?

In the IN column of the inventory card.

What is a settlement discount?

A reduction in the amount paid by a credit customer for early repayment, affecting the cash needed for credit transactions.

What do credit terms indicate?

They specify when the account has to be paid and may include settlement discounts for early payment.

What does '10/7, n/30' mean in credit terms?

10% discount if paid within 7 days and net amount due in 30 days

net amount due within 30 days.

What is a discount expense?

An expense given for early payment of a credit sale, not changing sales revenue, cost of sale, or GST incurred.

How does a discount expense affect Accounts Receivable?

It reduces the amount owed but does not change the total sales revenue.

What is the impact of a bad debt?

It is an expense incurred when a debt is written off as irrecoverable, decreasing assets and Owner's Equity.

What are the two types of bad debts?

Full amount written off and partial write

How does a bad debt affect GST?

It decreases the amount of GST owed to the ATO

10% of the amount written off will be GST if fully written off.

What is the formula for calculating Accounts Receivable balance?

Accounts Receivable at start + Credit sales

What is the role of the Cash Receipts Journal?

To record cash received from Accounts Receivable, including a new classification column for Discount Expense.

What is the difference between a service business and a trading business?

A service business generates profit by providing services, while a trading business generates profit by buying and selling goods.

What is the nature of a credit transaction?

Goods or services are provided, but cash is exchanged at a later date.

What creates Accounts Payable?

Credit purchases of inventory, which occur when a business receives inventory but pays for it later.

Why are Accounts Payable classified as current liabilities?

Because there is a present obligation to transfer cash as a result of past events, expected to be settled within the next 12 months.

What is the purpose of the Purchases Journal?

To record all credit purchases of inventory from Accounts Payable.

What is the significance of faithful representation in reporting bad debts?

It ensures that the amount reported in the Balance Sheet reflects the real

What is the effect of offering settlement discounts?

It can lead to faster cash receipts and potentially increase sales, but may decrease net profit due to the discount expense.

What happens when an account receivable is liquidated?

It may lead to a bad debt if the account cannot pay its outstanding debts.

What information does the Purchases Journal identify?

Total inventory purchased on credit, total GST incurred, total amount owed to Accounts Payable, and individual Accounts Payable suppliers.

When is GST recorded in relation to credit purchases?

At the time of the credit purchase in the Purchases Journal.

What does the Cash Payments Journal record?

All cash payments during a period, including payments to Accounts Payable.

How is a payment to Accounts Payable recorded?

In the Cash Payments Journal on the date the payment is made.

What must be stated in the details column when recording a payment to Accounts Payable?

The name of the Account Payable.

What is the formula for calculating the Accounts Payable balance?

Accounts Payable at start + Credit purchases!

What is the role of the Accounts Payable Record?

To summarize all credit transactions with individual Accounts Payable and show the balance owed.

What is an Accounts Payable Schedule?

A listing of the names of all Accounts Payable and their balances, prepared at the end of the reporting period.

What is the significance of faithful representation in accounting?

Information must be complete, free from material error, and neutral to accurately reflect economic events.

What happens if Accounts Payable is understated in the Balance Sheet?

The business may appear to have less debt, which could mislead prospective buyers or financial institutions.

What is a Purchase Return?

The return of inventory by a business to an Account Payable, verified by a credit note.

What does a credit note include?

Customer name, selling price, GST applicability, issuing business name, inventory details, date, and reason for return.

How does a Purchase Return affect Accounts Payable?

It reduces the debt owed to Accounts Payable and increases GST Clearing.

What is the impact of settlement discounts on cash payments?

They reduce the amount of cash that needs to be paid for credit transactions.

What is the effect of recording GST twice?

It would inaccurately inflate the GST amount recorded in the accounts.

When is GST not recorded again in the Cash Payments Journal?

When the inventory is paid for, as it was already recorded in the Purchases Journal.

What is the relationship between the Accounts Payable Subsidiary Record and the Accounts Payable account?

They should show the same amount owed to Accounts Payable to ensure accuracy.

What is the purpose of preparing an Accounts Payable Schedule?

To detect recording errors before preparing financial reports.

What does the Cash Payments Journal classify?

All cash paid to other entities during a period.

What is the impact of a Purchase Return on GST Clearing?

It increases GST Clearing because the purchase is no longer considered to have occurred.

What is the significance of the Accounts Payable balance in the Balance Sheet?

Only the total of all Accounts Payable is recorded

individual balances are not listed.

What does '10/7, n/30' mean in payment terms?

10% discount if the invoice is paid within 7 days

net amount must be paid within 30 days.

What is Discount Revenue?

Revenue received for early payment of a credit purchase of inventory, not a sales discount.

How does Discount Revenue affect Accounts Payable?

The discount amount is deducted from the amount owing to Accounts Payable but does not change the cost price of the inventory.

What is the classification of Discount Revenue?

It is a revenue account recorded in the Income Statement.

Why is Discount Revenue classified as revenue?

It involves an increase in assets or a decrease in liabilities, resulting in increased Owner's Equity.

What are the benefits of paying Accounts Payable early?

Less cash is paid, allowing funds to be used for other expenses

increases Net Profit as the discount is classified as revenue.

What are the limitations of paying Accounts Payable early?

Cash is paid faster than required, limiting time to generate cash from sales

cash cannot be used for other payments.

How is the Accounts Payable balance calculated?

Starting balance + Credit purchases

What is a Statement of Account?

A document summarizing transactions involving a particular Account Payable or Receivable over a period, used to verify accuracy.

What is the purpose of the Income Statement?

To determine a firm's profit or loss over a reporting period.

What does the Balance Sheet provide?

A snapshot of the business's financial position on balance day.

What does the Cash Flow Statement report?

It reports cash inflows and outflows separately over a reporting period.

What are the classifications of cash transactions in the Cash Flow Statement?

Operating Activities, Investing Activities, Financing Activities.

What is the format of the Cash Flow Statement?

Includes sections for cash flow from operating, investing, and financing activities, along with net increases/decreases in cash position.

What is the role of Accrual Accounting?

Revenue is recognized when earned and expenses when incurred, allowing accurate profit calculation.

What is included in the Other Revenues section of the Income Statement?

Revenues not directly related to sales, such as Discount Revenue and Interest Revenue.

What does the Income Statement format include?

Lists all revenue and expenses to determine Net Profit or Loss for the period.

What is the difference between profit and cash?

Profit is determined by the Income Statement, while cash flow is reported in the Cash Flow Statement.

What is the significance of the Accrual Basis Assumption?

It ensures that the Income Statement reports all revenue earned and expenses incurred for accurate profit calculation.

What is included in the Other Revenue Section?

Any revenue that is not a direct result of selling inventory, such as Discount Revenue, Interest Revenue, and Sales Revenue.

How is Accounts Receivable reported on the Balance Sheet?

As a Current Asset.

What is the formula for calculating Accounts Payable balance?

Accounts Payable at start + Credit purchases

How is Accounts Payable reported on the Balance Sheet?

As a Current Liability.

What is the classification of GST collected by a business?

Typically classified as a Current Liability.

What does a positive GST balance indicate when it starts as a liability?

GST clearing remains a liability if the end balance is positive.

What does a negative GST balance indicate when it starts as an asset?

GST clearing becomes a Current Liability if the end balance is negative.