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 JEAN’S PHOTOGRAPHY Unit 2DCredit 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 2DCredit 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 purchased and is charged at 17.5% on most goods

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

Unit 2DCredit 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 ‘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 2DCredit Transactions Key WordsCopy 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 Less Trade Discount 5.00 NET GOODS VALUE Add VAT (17.5%) 7.88 Total Value52.00 Debit Purchases Debit VAT Credit Photoshop In Jean’s Ledger (because Photoshop is her Creditor) Unit 2DCredit Transactions Jean receives an Invoice from Photoshop who keeps a copy Extract from Invoice sent to Jean EXAMPLE

Unit 2DCredit 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 Hussain and keeps a copy In Jean’s ledger Extract from Jean’s Copy Credit Note Less Trade Discount 1.50 Net Goods Value Add VAT (17.5%) 2.36 Total Value 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 2DCredit Transactions Jean receives a Credit Note from Photoshop In Jean’s ledger Extract from Jean’s Credit Note Credit VAT Debit Photoshop Less Trade Discount 2.50 NET GOODS VALUE Add VAT (17.5%) 3.94 Total Value Credit Purchases Returns EXAMPLE (to reduce the Creditor’s account