Chapter 5: Recording Business Transactions and Sales Tax PDF

Chapter 5: Recording Business Transactions and Sales Tax Ajmal Fayis Types of Business Transactions This chapter will discuss the recording of these business transactions:  Cash and Credit Sales  Sales Returns  Cash and Credit Purchases  Purchase Returns  Petty Cash...

Chapter 5: Recording Business Transactions and Sales Tax Ajmal Fayis Types of Business Transactions This chapter will discuss the recording of these business transactions:  Cash and Credit Sales  Sales Returns  Cash and Credit Purchases  Purchase Returns  Petty Cash transactions Cash and Credit Sales Cash and Credit Purchases Petty Cash Transactions Petty cash refers to small amounts of money kept on business premises for small-value purchases. The petty cash ledger records when cash is used to make sundry small payments such as postage stamps, coffee and taxi fares. The two sources of petty cash are:  Small Receipts:- A business may make petty cash sales on small-value items on the business premise.  Imprest System:- The business decides how much float it would like to keep in the cash box by employing an imprest or non-imprest system. Imprest Amount = Balance in the Petty Cash tin + Petty Cash Vouchers Sales Tax A sales tax is an indirect tax imposed by tax authorities or governments. A percentage is charged on goods sold.  An indirect tax is a tax charged on goods and services rather than on the profits made by a business.  Businesses charge tax on sales (output tax) and reclaim tax on purchases (input tax). If Output tax exceeds Input Tax = Tax Payable to authorities (Current Liability) If Input tax exceeds Output Tax = Tax Reclaimable from authorities (Current Asset) Sales Tax Calculation o The Net Amount is the sale or purchase price before sales tax and is always 100%. o Gross Figure is the sale or purchase price, including sales tax. The gross figure is always 100% + sales tax %.  Gross Figure: the sale or purchase price, including sales tax.  Net Figure: the sale or purchase price, excluding sales tax. Accounting for Sales Tax Trade Discounts A trade discount reduces the cost of goods or services bought or sold. It is given unconditionally on either cash or credit transactions. Settlement Discounts A settlement discount (or prompt payment discount) is a discount offered to customers or given by suppliers for payment made within a specific timeframe. It is offered only in credit transactions. Bank Reconciliations A bank reconciliation is a reconciliation between the bank statement balance and the balance on the Bank ledger account. Reasons for Differences  Errors may occur due to transactions posted twice or an incorrect amount reflected in either of these balance statements.  Omission:- Transactions such as standing orders, direct debits, bank charges, or interest received could be reflected in the bank statement but not in the Bank ledger account or vice versa.  Dishonored cheques (bounced cheques) are cheques received from a customer that has not been honoured by the customer’s bank due to insufficient funds or incorrect cheque filing.  Timing Differences:- 1. Unpresented Cheque 2. Outstanding Lodgement 3. Direct credit Preparing Bank Reconciliation