Financial Accounting

2 Section D: Recording Transactions and Events D1. Sales and purchases D3. Inventory D4. Tangible non-current assets D5. Depreciation D7. Accruals & payments D8. Receivables & payments D9. Provisions & contingencies Designed to give you knowledge and application of:

3 D1: Sales and Purchases  Record sales and purchases transactions in ledger accounts and in day books  Understand and record sales and purchase returns  Understand the general principles of the operation of sales tax  Calculate sales tax on transactions and record the consequent accounting entries  Account for discounts allowed and discounts received Learning outcomes

4 Purchases and Sales Sales of goods arising in the course of ordinary activities of an entity are treated as sales for the purposes of accounting Purchases of goods arising in the course of ordinary activities of an entity are treated as purchases for the purposes of accounting Finished goods Trading Goods The product sold & purchased also known as merchandise Sales and purchases are accounted when the merchandise is transferred in name from the seller to the buyer. Sale & purchase are accounted for using invoices  When are sales & purchases accounted for ?

5 Accounting for Sales and Purchases Merchandise Purchased Merchandise Sold Debit Purchases Account Credit Sales Account SOCI (income statement) Sale and Purchase of Merchandise Other assets purchased Sale and purchase of assets other than merchandise Other assets sold Debit concerned asset account Credit concerned asset account SOFP (balance sheet) Example For a manufacturer of cars, sale means the sale of cars and also the sale of different components of a car But The sale of old furniture which was used in the office would not be a sale but a decrease in an asset.

6 Cash Purchases Vs Credit Purchases Merchandise Purchases Cash Purchases Credit purchases Dr Purchases Cr Cash Dr Purchases Cr Payables Merchandise Sales Cash salesCredit Sales Dr Cash Cr Sales Dr Receivables Cr Sales

7 Sales and Purchases Day Book Need for sales and purchases day books:  Summarises all sales or purchase transactions in one place  Summarised posting Purchases Day Book Only records credit purchases No cash purchases Book of original entry Sales Day Book Only records credit sales No cash sales Book of original entry

8 Recording Sales and Purchases The double entry in the nominal ledger for purchases is as follows: Dr Purchases X Cr Total accounts payable X Being total purchases during the period recorded Recording / posting of sales transactions in sales ledger and nominal ledger: Dr Total accounts receivable (since it is an increase in an asset) X Cr Sales (since it is an item of income) X Being total credit sales made during the period recorded  Purchases are posted on the credit side of the Payables ledger  Sales are posted on the debit side of the Receivable ledger

9 Understand and Record Sales and Purchase Returns Sales returns Goods returned by customer to seller Purchase returns Goods returned to suppliers by buyer Reasons for returns Defective material Goods not according to specification Shortage in quantity Delayed delivery Amount charged higher than that agreed Sales returns day book Sales returns are recorded in a sales return day book Purchase returns are recorded in a purchase return day book Purchase returns day book

10 Journal Entry Dr Sales returns 3,620 Cr Trade receivables3,620 (Being sales returns) Fertile Co. Customer returned goods $3,620 as they were not of required quality Dimension Co. Seller DateCustomer name & goodsCredit note number Receivables ledger folio number Total amount ($) 01/05/20X9Fertile Co all goods ref invoice ,620 Total3,620 Sales returns day book  Cash Collections –$ 820  Credit sales - $870 Example Continued…

11 Postings in the respective accounts in the nominal ledger & also in the personal accounts DateFolio no $DateFolio no $ 01/05/20X9Fertile Co All goods 3,62031/05/20X9By Balance c/f 3,620 Total3,620Total3,620 Dr Cr DateFolio no $DateFolio no $ 02/04/20X9Sales -invoice 0713,62030/04/20X9Cash collections invoice /04/20X9Sales -invoice /05/20X9Sales returns CN 253,620 31/05/20X9Balance c/f50 Total4,490Total4,490 Fertile Co Account Sales returns account Continued…

12 General Principles of the Operation of a Sales Tax Sales tax (value added tax – VAT)  Tax on a sales transaction and it is charged at each point of sale  It is an indirect tax  The chain of transactions starts with the producer and ends with the final consumer  Dealers required to be registered with tax authorities Sales tax paid to government piecemeal = Sales tax collected from customer – sales tax paid at the time of purchase

13 Accounting Entries to record Sales Tax on transactions Sr NoJournal Entries 1.At the time of credit sale Dr Trade accounts receivable (SOFP) xxx Cr Sales (Net ( SOCI (Income statement)) xxx Cr Sales tax (SOFP) 2.At the time of credit purchases Dr Purchases SOCI (IS) xxx Cr Sales tax (SOFP) xxx Cr Trade account payable (SOFP) xxx 3.At the time of cash purchases Dr Cash purchases (SOCI) xxx Dr Sales tax (SOFP) xxx Cr Cash (SOFP) xxx 4.At the time of cash sales Dr Cash (SOFP) xxx Cr Cash sales (Net SOCI) xxx Cr Sales tax (SOFP) xxx 5.Tax amount due actually paid Dr Sales tax xxx Cr Cash xxx

14 Not accounted & not disclosed in financial statements Discount Trade Discount Cash Discount Not recorded Adjusted in transaction value and hence no need to record trade discount in the accounts Recorded Transaction is booked at the invoice value and discount provided on prompt payment Types of discounts

15 Example Gemini Enterprises sold goods worth $20,000 to Abraham for $19,000 & a trade discount of $1,000. Journal Entry DrTrade receivables19,000 CrSales 19,000 (Being credit sale to Abraham recorded) Trade Discount allowed Trade Discount received To continue the example of Gemini, Abraham will record the purchase transaction for $19,000 and not for $20,000.The discount is automatically adjusted in the transaction. Journal Entry DrPurchases19,000 CrTrade Payables 19,000 (Being credit purchase from Gemini recorded) Examples of discounts

16 Cash Discount allowed Example Gemini Enterprises sold goods to Abraham for $19,000. It also offered a cash discount of $500 if Abraham makes his payment within 20 days Journal Entry DrDiscount allowed account500 CrAbraham account (receivables)500 (Being discount allowed to Abraham) Cash Discount received To continue the example of Gemini, the books of Abraham will show the following: Journal Entry DrGemini Enterprises account19,000 CrCash account 18,500 Cr Discount received account 500 (Being cash paid and discount received from Gemini) Examples of discounts

17 RECAP  Record sales and purchases transactions in ledger accounts and in day books?  Understand and record sales and purchase returns?  Understand the general principals of the operation of sales tax?  Calculate sales tax on transactions and record the consequent accounting entries?  Account for discounts allowed and discounts received?