UNIT 2D
CREDIT TRANSACTIONS
POSTING DOCUMENTS TO THE LEDGER
Unit 2D
Credit Transactions
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’
The seller keeps one or 2 copies of each Invoice
Using the information on the Invoice, the buyer
and seller make entries in their ledger accounts
Unit 2D
Credit Transactions
The Invoice
Usually has 3 copies - showing the same info
It shows who is selling, who is buying, the date,
quantity, description and price of goods being
traded
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
Unit 2D
Credit 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
VAT is paid by the buyer on goods purchased
and is charged at 17.5% on most goods
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
Unit 2D
EXAMPLE
Credit Transactions
Jean Sells Goods on Credit to Mr Hussain
Extract from Jean’s
copy invoice
Less Trade Discount
NET GOODS VALUE
Add VAT (17.5%)
Total Value
50.00
5.00
Jean prepares an
Invoice for Hussain
and keeps a copy
In Jean’s Ledger
45.00
Credit Sales
7.88
Credit VAT
52.00
Debit Hussain
(because Hussain is
her Debtor)
Unit 2D
Credit 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
This is called ‘Cash Discount’
Example
‘Terms 15% monthly’
The customer gets another 15% off if he pays
up before the end of the month following
Unit 2
SUMMARY
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
Unit 2D
Key Words
Credit Transactions
Copy 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
Unit 2D
EXAMPLE
Credit Transactions
Jean Buys Goods on Credit from Photoshop
Extract from Invoice
sent to Jean
Less Trade Discount
NET GOODS VALUE
Add VAT (17.5%)
Total Value
50.00
5.00
45.00
7.88
52.00
Jean receives an Invoice
from Photoshop who
keeps a copy
In Jean’s Ledger
Debit Purchases
Debit VAT
Credit Photoshop
(because Photoshop
is her Creditor)
Unit 2D
SUMMARY
Credit 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
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.
Credit Transactions
Unit 2D
EXAMPLE
Mr Hussain returns goods to Jean
Jean prepares a
Credit Note for Hussain
and keeps a copy
Extract from Jean’s
Copy Credit Note
15.00
Less Trade Discount
Net Goods Value
Add VAT (17.5%)
Total Value
1.50
13.50
2.36
15.86
In Jean’s ledger
Debit Sales Returns
Debit VAT
Credit Hussain
(to reduce the Debtor’s
account)
Unit 2D
SUMMARY
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
Unit 2D
EXAMPLE
Credit Transactions
Jean returns goods to Photoshop
Extract from Jean’s
Credit Note
Jean receives a
Credit Note from
Photoshop
25.00
Less Trade Discount
NET GOODS VALUE
Add VAT (17.5%)
Total Value
2.50
In Jean’s ledger
3.94
Credit Purchases
Returns
Credit VAT
26.44
Debit Photoshop
22.50
(to reduce the
Creditor’s account