Credit Purchases & Journals
What source document verifies a credit purchase of inventory?
Purchase Invoice
Name two source documents that can verify a payment to Accounts Payable
Cheque, EFT receipt, ATM statement
What is a subsidiary record?
A secondary record providing detailed supporting information for a general ledger account
What happens to Inventory and Accounts Payable when inventory is returned to a supplier?
Both decrease
What is discount revenue?
A discount received from a supplier for paying an Account Payable within the agreed early-payment period
Which journal summarises all credit purchases of inventory for a period?
Purchase Journal
True or false: GST is recorded again when paying an Account Payable. (Explain!)
False
What does the Accounts Payable Schedule list, and when is it prepared?
The name and balance of every individual Account Payable, prepared at the end of the period, before the Balance Sheet
Stoneware House inventory worth $140 (excl. GST, $14 GST) is returned. What is the total decrease in Accounts Payable?
$154
AB Catering's terms are 5/7, n/60. What does this mean?
5% discount if paid within 7 days of the invoice date; full amount due within 60 days
Uptown Ceramics purchased inventory from A. Potter Studios for $600 plus GST. State the two effects on the accounting equation
Increase Inventory $600 (asset); Increase Accounts Payable $660, including $60 GST (liability)
Northcote High paid $440 to AB Catering for settlement of account. State the effect on the accounting equation.
Decrease Bank $440; Decrease Accounts Payable $440
The total of the Accounts Payable Schedule doesn't match the formula-calculated AP balance. What does this indicate, and why does it matter?
indicates a recording error somewhere; it matters to ensure faithful representation
Explain the effect of a purchase return on the GST payable to the ATO.
The GST liability decreases for that portion ( the business no longer owes the supplier for that inventory or the GST charged on it)
Northcote HighSchool pays AB Catering on day 10 instead of within the 7-day settlement period (terms 5/7, n/60). Explain what happens to the discount revenue.
No discount revenue is earned - payment falls out of settlement period
Explain why a credit purchase of inventory creates a liability rather than an expense.
The business has an obligation, arising from a past event (receiving the inventory), to transfer an economic resource within 12 months
Give the formula used to calculate the closing Accounts Payable balance for a period
Opening AP balance + Credit purchases − Payments to AP = Closing AP balance
Name and explain two benefits of subsidiary records other than error detection.
Ease of reporting - only one total figure is needed on the Balance Sheet; better management of accounts payable
Why does a purchase return not affect an expense account?
It reverses part of the original asset (inventory) purchase (not a decrease in owner's equity from operating the business)
Explain, using the accounting equation, all three effects of paying $418 to settle a $440 Accounts Payable balance early.
Decrease Bank $418; Decrease Accounts Payable $440; Increase Owner's Equity $22 (discount revenue)
Explain why trade credit is often a cheaper source of finance?
Trade credit is usually interest-free within the credit period, unlike a bank loan which charges interest from day one
Why many large retailers deliberately negotiate 60- or 90-day payment terms with suppliers, even when they have the cash available to pay sooner?
Extending payment terms lets the retailer hold onto its own cash longer --> effectively an interest-free loan from the supplier that can use elsewhere in the business.
Evaluate the risk of a bookkeeper being solely responsible for both recording purchases and approving supplier payments, with no one else reconciling the Accounts Payable Schedule.
Fraud or error (e.g. a fictitious supplier, a misdirected payment) can go undetected since one person controls the whole cycle.
Explain why must a supplier issue an adjustment note before a purchase return can reduce the GST originally charged, rather than just a verbal agreement between business and supplier?
Without it, the reduced GST claim can't be substantiated to the ATO, and the accounting record would fail the faithful representation / verifiability qualitative characteristic.
A business consistently misses its suppliers' 5/7, n/60 settlement discount, even though it has the cash available to pay early. Why this is a poor financial decision
Forgoing a 5% discount to keep cash for an extra ~53 days is equivalent to paying an implied annual interest rate far higher than any normal bank loan rate