| Invoice | Whenever there is a credit sale, the selling business will send a document to buyer showing full details of the goods sold. This document is called as Invoice. It is known to the buyer as a “Purchases invoice”. And to the seller as a “Sales invoice”. |
| Debit Note | This document is prepared by the purchaser and it is sent to the supplier to report him if any faulty goods are been sent or shortages or overcharges are been made. |
| Credit Note | When goods are returned, or there has been an over-charge, a supplier may issue a credit note to the buyer. This reduces the amount owed by the customer. |
| Statement of Account | This document is prepared and sent to the customer by the supplier. It is issued to remind the customer about his due amount. It is basically a summary of the transaction of a customer during the month like sales made, Returns received and Cash received |
Notes:
- Entries in the sales book and the purchases Book are made with the help of an invoice.
- Credit note is used to make the entries in both the purchases returns Book and the sales returns Book.
- Suggest two ways in which Owner might be able to encourage his customers to pay their invoices.
Send statement
Offer cash discount (not trade discount)
Limit credit (no more credit sales)
Charge interest on overdue amounts
Use debt collection methods
- Give one purpose of sending a statement of account to a customer.
To inform or remind the customer of the amount due
To confirm the settlement terms
To ensure that no errors have been made by customer or supplier
State one reason why a supplier of goods on credit sends a statement of account to the customer
To show all transaction for period
To show amount owing
To agree records, settle difference
To act as reminder to pay
- State one reason why a supplier would give trade discount to a customer Customer is in same type of trade; for bulk purchases.
- Give four items of information you would expect to find on a statement of account.
Customer’s name, address, date, total sales, sales returns, invoice numbers, amount due, discount, net total, cash/cheques received, terms of business, due date.
- Suggest two ways in which Owner might be able to encourage his customers to pay their invoices.
- Send statement
- Offer cash discount (not trade discount)
- Limit credit (no more credit sales)
- Charge interest on overdue amounts
- Use debt collection methods
CASH BOOK
Cash book is the only book of original entry which is given ruling in such a way that it could act at the same time as a book of original entry and as a ledger account.
| Trade Discount | It is an allowance or deduction given by the supplier to the retailer on the catalogue price or list price. It is given to encourage him to buy in bulk. It is given so that retailer could make some profit. |
| Cash Discount | It is an allowance or deduction given by the receiver of cash to the payer of cash for prompt payment. It is of two types discount allowed and discount received. It is given to encourage the payer to pay on or before the due date |
- Trade discount is not recorded in the books either by the seller or the buyer.
- Cash discount is recorded in the Cash Book. Discount allowed is recorded at the debit side and discount received on the credit side. – Discount columns are never balanced. It is just totaled.
Every month the Total’s of discount allowed column is transferred to debit side of Discount allowed account in General ledger and the total of discountreceived column is transferred to the credit side of Discount received account in the General ledger.
- Contra Entry: When a transaction effects both cash and bank accounts at the same time, such entries are called as Contra Entries.
- Jannah‟s business has a bank overdraft at 31 August 2015. Suggest one way in which he could reduce or eliminate the overdraft.
Overdraft may be reduced by collecting debtors, reducing inventory, delaying payment of creditors, delaying drawings, increasing capital , Sell Non- current assets, Long Term Loan
- Explain how a bank overdraft can arise.
A business has paid out more from the bank than it has paid in
State one reason why we maintain a petty cash book in addition to her main cash book.
To avoid recording small cash payments in the main cash book
To reduce the number of entries in the main cash book
PETTY CASH BOOK
Imprest System: It is a system where a reimbursement is made of the total amount paid in a period or it can also be called as a system where petty cashier begin each new accounting period with the same amount of petty cash.
Advantages Of Petty Cash Book:
1. The number of entries in the main cashbook is reduced. 2. The main cashier’s burden is reduced.
3. The chances of mistakes in recording is minimised. 4. Posting become more easy with the Total’s Analysis Columns.
Advantages of using Analysis columns:
It let us know the money spent on each different nature of small expense.
The double entry for each analysis column by transferring the totals of the analysis columns to their respective accounts which are available in the General ledger.
- Explain what is meant by the imprest system in relation to petty cash books
The petty cashier starts each period with the same amount of money (the imprest). At the end of the period the chief cashier will make up the cash remaining so that it is equal to the imprest amount
- Explain how the double entry is completed for the items recorded in the analysis columns of the petty cash book.
At the end of each period (1) the totals of the analysis columns for expenses (1) are debited to the appropriate expense account (1) The individual items in the ledger accounts column are debited to the appropriate creditors’ accounts (1)
- State two reasons why Company maintains a petty cash book.
To remove small cash payments from the main cash book.
To reduce the number of entries in the main cash book and the expenses in the ledger.
To allow the chief cashier to delegate some of the work.
State one advantage of the imprest system
- The chief cashier is aware of exactly how much is spent in each period.
- The cash remaining and the total of the vouchers received should always be equal to the imprest amount.
- Suggest one reason why there was a difference in the petty cash between the amount actually in the box and the expected amount.
- Lost or missing voucher
- Lost or stolen cash
- Error brought forward or in counting cash
- Amount not recorded
TRIAL BALANCE
Trial balance may be defined as a statement or a list of all ledger account balances taken from various ledger books on a particular date to check the arithmetical accuracy.
Objectives Or Advantages Of Trial Balance (reason for preparing a trial balance)
- It checks the arithmetical accuracy of ledger accounts.
- It gives material for preparing Final accounts.
- To have a proof that the double entry of each transaction is made.
Important Points To Prepare Trial Balance:
- It should be remembered that all the Assets and expenses accounts are always debited.
- All liabilities and incomes are always credited.
- All provisions are always credited.
- Closing inventory is never taken in trial balance. (it is to be shown out of the trial balance).
- Give one reason for preparing a trial balance.
To prepare final account / To check arithmetical accuracy of books
To check accounts balance / To locate errors
- Explain why the capital account balance in the trial balance is that of opening Capital.
The trial balance was drawn up before the preparation of the income statement/before profit for the year has been calculated
