GRADE 9 EMS TOPIC 1: FINANCIAL LITERACY CREDIT TRANSACTIONS Transactions are the building blocks of our accounts. Any transactions that occur within our business should be present in our accounting records. There are many different types of transactions to keep track of such as sales, purchases, and even more. A regular point of confusion that we come across when we talk to small businesses about their accounts is the difference between cash and credit transactions. So, what is the difference? The only difference between cash and credit transactions is the timing of the payment. A cash transaction is a transaction where payment is settled immediately. On the other hand, payment for a credit transaction is settled at a later date. Try not to think about cash and credit transactions in terms of how they were paid, but rather, when they were paid. For example, you may buy some groceries at your local shop and pay for them in cash there and then, that’s a cash transaction. However, what if you paid by card rather than cash? That can also be classified as a cash transaction because you paid immediately. On the other hand, credit transactions are paid at a later date than when the exchange of goods or services took place and almost all of time an invoice for the transaction is issued. The time period before payment can vary depending on the types of businesses or even the industry in which the transaction is taking place. Once again, when payment is finally settled for the invoice, it may be done with cash or card, or any other payment method but it is still a credit transaction. Businesses will have a mixture of cash and credit transactions make up their accounting records. Some businesses may have the majority of their transactions be either one or the other and some will have a more even split. However, you would be hard pressed to find a business that didn’t have at least one cash or credit transaction occur during its lifetime. Along with whether a transaction is classified as cash or credit another category is used to classify basic accounting transactions. We also need to know whether or not it is a sale, purchase or payment. This gives us a list of basic transactions: 1. Cash sale 2. Credit sale 3. Cash purchase 4. Credit purchase 5. Cash payment 6. Credit payment Some of these, like cash and credit sales as well as credit purchases are more common that the others but depending on what type of transaction we have, we can find a home for it in our accounts. Debtors Credit sales Debtors are normally first recorded in the Sales Ledger which contains a personal account for each customer. In this way a listing of the sales ledger accounts will give you a listing of outstanding debts or debtors. www.e-classroom.co.za © e-classroom If for example, sales are made on credit to Customer A for R200 and Customer B for R400 the first entry would be to the sales day book to record the sales. The next entry would be to the Sales Ledger to record the Debtors to the personal accounts of each customer. Finally the double entry posting would be the total from the sales day book and the sales ledger. Account Debtors Control Account Sales Total Debit 600 Credit 600 600 600 Debtors Debtors are amounts which are owed to you by your customers, they are sometimes referred to as Accounts Receivable. When you allow your customer credit and invoice them for a product or service and receive payment at a later date 30 days 60 days etc, then while they owe you the money they are classified as a debtor. Debtors are recorded in the balance sheet of the business under the heading Current Assets, that means they are convertible into cash within a year. CREDIT SALES OF MERCHANDISE A credit sale transaction takes place when goods are sold and delivered by a customer and the money is received by the trader at a later date. www.e-classroom.co.za © e-classroom 2 Source document: Invoice- the debtor takes the original invoice and the business keeps the duplicate. Journal: DJ RECORDING PAYMENTS FROM DEBTORS The debtor will have to settle his debt to the business because he/she purchased merchandise on credit. Source document: The debtor is given the original receipt and a copy is kept in the receipt book. The duplicate receipt serves as the internal source document. Journal: CRJ Example Instruction Use the CRJ and the DJ gven below to post to the Debtors Ledger and General Ledger of Crowder Traders. The following balances appeared in the books of Crowders Traders on 1 September 2013: S.Soomar (D1) R1 176 J.du Preez (D2) R 846 Debtors Control (B10) R2 022 Debtors Control (B10) R2 022 CROWDERS TRADERS DEBTORS JOURNAL –SEPTEMBER 2013 Inv. No. Day Debtors 140 7 S.Soomar 141 12 J.du Preez 142 12 S.Soomar Folio D1 D2 D1 Sales 240 60 216 516 B10/N1 Analysis of Bank Receipts Sales Cost of sales 200 50 180 430 N2/B9 CROWDER TRADERS CASH RECEIPTS JOURNAL – SEPTEMBER 2013 Doc. No. Day R86 3 CRT 67-70 R87 7 R88 21 CRT 71-80 Details Fol. S.Soomar D1 Sales J.du Preez D2 J.du Preez D2 Sales www.e-classroom.co.za 1 176 3 360 360 486 3 800 Cost of sales Debtors Control 1 176 4 536 360 3 360 4 286 9 182 3 800 7 160 N1 © e-classroom 2 800 360 486 3 166 5 966 N2/B6 2022 B7 3 DEBTORS LEDGER OF CROWDER TRADERS – SEPTEMBER 2013 Date 2013 Sept 1 3 7 12 Date 2013 Sept 1 3 7 21 Details/Doc.No. Suhail Soomar Account Rendered Duplicate Receipt 86 Duplicate Invoice 140 Duplicate Invoice 142 Folio Debit D1 + Details/Doc.No. Josh du Preez Account Rendered Duplicate Receipt 87 Duplicate Invoice 141 Duplicate Receipt 88 Folio Debit D2 + SCHEDULE OF DEBTORS BALANCES S.Soomar J. du Preez Balance of Debtors Control acc. CRJ DJ DJ CRJ DJ CRJ D1 D2 GENERAL LEDGER OF CROWDER TRADERS – SEPTEMBER 2013 TRADING STOCK (B6) (A) + 2013 Sept 30 Credit - 1176 240 456 1176 240 216 Credit 360 60 486 Balance Balance 846 486 546 60 SEPTEMBER 2013 456 60 516 Cost of Sales Cost of Sales DEBTORS CONTROL (B7) (A) + Owe More 2013 Sept 1 Balance bld 2022 2013 Sept 30 Bank 30 Sales DJ 516 Balance 2538 1 Balance bld 516 CRJ 5966 DJ 430 - Owe Less 2022 CRJ 516 cld 2538 Exp SALES (N1) (OE) Income 2013Sept 30 Bank CRJ 7160 Debtors control DJ 516 7676 Penal total Exp COST OF SALES (N2)(OE) 2013 Sept 30 Trading Stock CRJ 5966 Trading Stock DJ 430 6396 www.e-classroom.co.za © e-classroom Income 4 2014 March April 2014 March April GENERAL LEDGER OF CROWDER TRADERS- MARCH 2014 +TRADING STOCK (B5)(A) 1 Balance bld 8630 2014 31 Cost of Sales March 31 Cost of Sales Balance 8630 1 bld 1172.40 +DEBTORS CONTROL (B6) (A) 1 Balance bld 1260 2014 31 Bank March Sales DJ 2722 Balance 3982 1 Balance bld 1912 CRJ 5280 DJ cld 2177.60 1172.40 8630 CRJ 2070 cld 1912 3982 National Credit Act The National Credit Act (35 of 2005) is designed to protect the Consumer in the credit market and make credit and banking services more accessible. The purpose of the NCA is to promote and advance the social and economic welfare of South Africans; promote a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market and industry; and to protect consumers while balancing the rights of suppliers. To promote a fair and non-discriminatory marketplace for access to consumer credit and for that purpose to provide for the general regulation of consumer credit and improved standards of consumer information; to promote black economic empowerment and ownership within the consumer credit industry; to prohibit certain unfair credit and credit-marketing practices; to promote responsible credit granting and use and for that purpose to prohibit reckless credit granting; to provide for debt reorganisation in cases of over-indebtedness; to regulate credit information; to provide for registration of credit bureau, credit providers and debt counselling services; to establish national norms and standards relating to consumer credit; to promote a consistent enforcement framework relating to consumer credit; to establish the National Credit Regulator and the National Consumer Tribunal; to repeal the Usury Act, 1968, and the Credit Agreements Act, 1980; and to provide for related incidental matters. Debtors allowance When a debtor returns the goods purchased on account, the sale of the goods returned needs to be cancelled. The business will issue a credit note to the debtor and then the return is recorded in the DEBTORS ALLOWANCES JOURNAL. Before we actually make entries, let us look at the possible reasons for debtor’s allowances: 1. The goods are not as ordered or there are too many of a kind, then the debtor physically returns the goods. In this case the Cost of sales of the original sales will need to be cancelled as well, as the goods will be added back to the trading stock again. www.e-classroom.co.za © e-classroom 5 2. The goods delivered may have been damaged or are not exactly what the customer ordered, e.g. wrong colour, but the debtor decides to keep it, but wants a discount because the debtor is not completely satisfied with the goods. In this case the Cost of sales of the original sales will not be cancelled as well, because the goods were not physically returned and will Not be added back to the Trading stock again. The triple- entry system: • A debtor’s ledger implies a triple-entry accounting system. • With regard to credit sales, the individual sale is debited in the debtor’s personal account and is also included in the total sales debited in the debtor’s control account and is credited in the sales account. • The double entry is completed in the General Ledger (debit debtors control and credit sales). • The third entry is made in the debtors Ledger. The Debtors Allowance Journal (DAJ) • This is the journal in which all returns/allowances are recorded. • Debtors may be unhappy with their purchases. • Reasons for this unhappiness could be wrong size/colour, damaged stock, overcharges, and errors on the invoice. • Source document: Trader will issue a credit note to the customer (one copy is sent to the debtor and the other is the source document for entry to be recorded in the DAJ. • Journal: DAJ Record the following transactions R&R Retailers in the following journals: a) Debtors journal – columns for Sales and Cost of sales b) Debtors allowance journal – columns for Debtors allowance and Cost of sales c) Cash Receipts journal- columns for Analysis of receipts; Bank; Sales; Cost of sales; Debtors control and Sundry accounts. TRANSACTIONS- APRIL 20.5 1 Sold the following goods on credit to B. Baker and issued invoice213: One ironing Board, R450 and one Steam iron, R330.The business uses a profit mark-up of 25% on cost price. 4 Credit sales to: R. Rampala, R975. (Cost price, R780) Issued Invoice 214 B. Baker, R700. (Cost price, R560) Issued Invoice 215 7 B. Baker returned the ironing Board, purchased on 1 April 20.5, R450. Issued Credit note 01. (Cost price, R360) 10 Sold a set of 6 mugs to R. Rampala on Credit, R180. (Cost price, R144) Issued Invoice 216 12 R. Rampala complained that the one mug had a chip. R&R Retailers issued a credit note for R30. (Cost price, R24) Issued credit note 02. 15 Received R1 030 from B. Baker in settlement of his account. Issued receipt 554. www.e-classroom.co.za © e-classroom 6 NB: When you record the allowances in the Debtors allowances journal, it is important to verify whether the goods were returned or whether only an allowance was given. In the case of the transaction on the 7 April 2015, B. Baker returned the steam iron, therefore it needs to be added back to the trading stock. That is why the cost price is recorded in the Cost of sales column, to cancel the cost of sales and to add it back to the Trading stock. Use the Debtors journal, Debtors allowances journal and Cash receipts journal recorded in example 2.2 to complete the following instructions: a) Post from the Debtors Journal to the Debtors ledger and General ledger of R&R Retailers. Show folio references. b) Post from the Debtors Allowance Journal to the Debtors ledger and General ledger of R&R Retailers. Show folio references. c) Post the Cash Receipts Journal to the Debtors ledger and General ledger of R&R Retailers. Show folio references. INFORMATION: The following balances appeared, amongst others, in the General ledger of R&R Retailers on 1 April 20.5: Bank Trading Inventory R5 550.00 R3 400.00 www.e-classroom.co.za © e-classroom 7 www.e-classroom.co.za © e-classroom 8 Transaction 1: A debtor, J. Jackson returned goods with a selling price of R560 and a cost price of R448. Issued credit Note 32. How do we reason this? We look at what happened: Because the debtor returned the goods, it means the original sales transaction needs to be cancelled, as well as the goods need to be put back with the trading inventory. This transaction involve two steps. First the sale has been cancelled: To do this the Debtors allowance account, an expenses account, has to be debited with the original sales amount, which will decrease the Owner’s equity. The debtor, J. Jacksons’ debt has to be decreased, therefore his account in the debtor ledger will be credited, because he does not owe www.e-classroom.co.za © e-classroom 9 that money any more, as well as the Debtors control account in the General ledger has to be credited. The debtor is a current asset which decreases. Transaction 1: A debtor, J. Jackson returned goods with a selling price of R560 and a cost price of R448. Issued credit Note 32. In the General Ledger: ASSET Dr (+) DEBTORS CONTROL Cr (-) 560 OWNERS’ EQUITY Dr (-) DEBTORS ALLOWANCES Cr (+) 560 Secondly the Trading inventory is returned to the stock in the business. The cost price of the goods has to be cancelled in the Cost of Sales account, which is an expense account, but in this case it becomes an “Income”, because the expense is cancelled, which means the Owners’ equity will increase and the Cost of sales account is credited. At the same time the trading stock increases, which means the Current assets are increasing, therefore the Trading inventory account is debited with the cost price. In the GENERAL LEDGER: OWNERS’ EQUITY Dr (-) COST OF SALES Cr (+) 488 ASSET Dr (+) TRADING INVENTORY Cr (-) 488 In the DEBTORS: no entry is made EFFECT OF DEBTORS ALLOWANCES ON ACCOUNTING EQUATION: Transaction 2: Issued credit not 222, R200 (Cost price, R160) to a debtor, H. Hlope, as an allowance (discount) for damaged goods. How do we reason this? We look at what happened: In this case the goods are not returned by the debtor, but a “discount” is given in the form of an allowance. This means the business cancelled and to do this the debtor allowances account, an expense account, has to be debited with the original sales amount, which will decrease the Owners’ equity. The debtor, H.Hlope’s debt has to be decreased, therefore his account in the Debtors ledger will be credited, because he does not owe that money any more, as well as the debtors control account in the General ledger has to be credited. The debtor is a Current asset which decreases. In the GENERAL LEDGER: ASSET OWNERS” EQUITY Dr (+) DEBTORS CONTROL Cr (-) Dr (-) DEBTORS ALLOWANCE Cr (+) 200 200 In the DEBTORS LEDGER: DEBTOR Dr (+) H. HLOPE Cr (-) 200 www.e-classroom.co.za © e-classroom 10 Transaction Source No. doc. 1. 2. Journal Duplicate DAJ credit note Duplicate DAJ credit note General Ledger Debtors Ledger Account Account Account Account debited credited debited credited Debtors Debtors J. Jackson allowances control Trading Cost of inventory sales Debtors Debtors H. Hlope allowance control A O/E L -560 -560 0 +488 +488 0 -200 0 -200 Accounting cycle The accounting cycle is the name given to the collective process of recording and processing the accounting events of a company. The series of steps begin when a transaction occurs and ends with its inclusion in the financial statements. Journal Types and Source Documents • CJ Original invoice This is the document we receive when purchasing goods on credit • CPJ Cheque and cheque counterfoil (NB: Cheques are seldom used today as Internet banking has become the norm) A cheque is a written instruction to pay a specific person an amount of money This is from a current/cheque account The cheque is issued to the person being payed The cheque counterfoil is the proof of transaction, kept by the business. Bank statement (same as in CRJ) A bank statement is issued by the bank to the holder of the account at the end of the month. It reflects all transactions that took place in that account, within a specified time. • PCJ Petty cash voucher A petty cash voucher is when you exchange money for vouchers at which you can use at any time • CRJ Bank statement A bank statement is issued by the bank to the holder of the account at the end of the month. It reflects all transactions that took place in that account, within a specified time. Cash Invoice This is the same as a CRR, but it has more detail It is issued when a business sells a few items a day or provides a service for cash Cash Register Roll Slip that is given to you when you purchase at a till Till slip Proof of purchase There is a second one that is kept for the owner At the end of the day there is a summary printed from the till of the total of the day’s sales www.e-classroom.co.za © e-classroom 11 This includes all purchase payed with… Check Cash Credit Card Voucher Duplicate receipt Dressed to a specific person or business A receipt is issued when the business receives money for capital from people that owe money Debtors Original vs. Duplicate The customer always gets the original The business keeps the duplicate Bank deposit slip A deposit slip is completed whenever money is deposited INTO the businesses bank account The bank keeps the original The business keeps the duplicate as confirmation that the money was deposited • DJ Duplicate invoice Invoice means credit This invoice is for credit sales You give the original to people that owe you money These people become your debtors • CAJ Duplicate debit note This is linked with CREDITORS CONTROL The business issues a debit note when… It returns an un-satisfactory product to their creditor When it requests an allowance from their creditor as they are not satisfied with their product • DAJ Duplicate credit note This is used for allowances and returns It is not possible for anyone to receive an original credit note The business gives a credit note because… When it agrees to accept goods returned by the debtor When it gives the debtor an allowance because they were not satisfied with the product 1. SOURCE DOCUMENTS 2. JOURNALS 3. LEDGER (T-ACCOUNTS) 4. TRIAL BALANCE www.e-classroom.co.za 5. FINANCIAL STATEMENTS © e-classroom 12 Recording of transactions to Debtors Journal (DJ) Buying the product (Bought by the business from another business): When buying a product, you either buy it on credit or with cash. • Buying with cash When purchasing with cash or any transaction that involves giving the company money (paying it to the company directly or depositing into the company’s bank account) will always fall under the CPJ (Cash payments journal). This also includes payments for things such as telephone bills, rent, cash drawings and salaries. • Buying on credit When buying on credit or purchasing a product or service with the intention of paying the company back later, it will fall under the CJ (Creditors journal). Selling a product (Sold by the business to a customer): When selling a product, you either sell it on credit or cash. • Selling and receiving cash When selling a product and receiving cash (or any transaction that involves receiving money or a payment to the company’s bank account) it will always fall under the CRJ (Cash receipts journal). This will also involve things such as rental income, income on current account, capital transfers/ contributions from the owner and payments from a debtor settling his account. • Selling on credit When selling on credit (or any transaction that involves giving a product or service with the intention of receiving the money later), it will always fall under the DJ (Debtors journal). It is important for the business to keep track of all its debtors because they are only going to pay back the money at a later stage. Returning a product: This includes both returns from someone and returns to someone when you/they are not happy with the product received. • Returns from someone One reason why people return goods is to get a full cash refund on the item. This happens for many reasons like damage, product defect, incorrect size or just not according to product advertisement. This falls under the DAJ (Debtors Allowance Journal). • Returns to another business One reason why goods are returned is to get a full cash return on the product for various reasons This falls under the CAJ (Creditors Allowance Journal). Basic tips to remember: • • When speaking about an invoice, it always refers to a transaction on credit. When speaking about a receipt it always refers to transaction paid with cash. www.e-classroom.co.za © e-classroom 13 • There are 7 types of journals. CRJ (Cash Receipts Journal) DJ (Debtors Journal) DAJ (Debtors Allowance Journal) CPJ (Cash Payments Journal) CJ (Creditors Journal) CAJ (Creditors Allowance Journal) PCJ (Petty Cash Journal) Recording of receipts from debtors in the Cash Receipts Journal (CRJ) When debtors pay their debt, the cash received is recorded in the CRJ. The CRJ makes provision for an additional column headed Debtors Control. A receipt is issued to the debtor as proof that the money was received. This is called the source document for the entry. The effect of the transaction on the accounting equation is as follows: • Assets + (Cash in bank increases) • Assets – (Debtors’ debt decreases) Use the information below to complete the Cash Receipts Journal (CRJ) and Debtors Journal (DJ) of Highway Dealers. Highway Dealers sell goods on credit and for cash. The following transactions must be recorded in DJ 3.3.1 for May and DJ 3.3.2 for June 2003, and in CRJ 3.3.1 for June 2003. May 2003 3 Sells goods for R320 on credit to S. Weston and issues invoice no. 141 (cp. R256) 8 Issues invoice 142 to A. Niemand for goods sold on credit for R240 (cp. R192) 10 Sells goods for R160 on credit to H. Olwage and issues invoice no. 143 (cp. R128) 12 Sells goods on credit to: S. Selby for R280, invoice no. 144 (cp. R224) W. Willow for R120, invoice no. 145 (cp. R96) June 2003 3 Receives a cheque from S. Weston for R320, issues receipt no. 61 Cash sales of goods, R4 000 (cp. R3 200) 5 Receives R160 cash from H. Olwage and issues receipt no. 62 to him Cash sales of goods, R1 600 (cp. R1 280) 6 Receives a cheque for R280 from S. Selby and issues receipt no. 63 Cash sales of goods, R1 200 (cp. R960) 14 Sells goods on credit to: W. Willow for R80, invoice no. 146 (cp. R64) A. Niemand for R40, invoice no. 147 (cp. R32) 24 Supplies goods on credit to: S. Selby together with invoice no. 148 for R120 (cp. R96) 30 Cash sales of goods, R4 800 (cp. R3 840) www.e-classroom.co.za © e-classroom 14 www.e-classroom.co.za © e-classroom 15 [55] Desmond’s Dealers had the following balances/totals (among others) in their books at the beginning of March 2014: General Ledger: Trading stock Debtors control Bank Sales Cost of sales B5 B6 B7 N1 N2 R 8 630 R1 260 R8 613 R3 420 R2 736 Debtors Ledger: P. Barry T. White S. Adams D1 D2 D3 R410 R330 R520 Instruction 1. Calculate the percentage mark-up by making use of the given information. 2. Record the transactions below in the following journals: 3. Debtors Journal for March 2014 4. Cash Receipts Journal for March 2014 5. Close off the Journals and post to the Debtors Ledger and General Ledger. Transactions - March 2014 04 Issued invoice no. 301 to P. Barry for goods sold to him, R960 Recieved S. Adam’s cheque for R520 in settlement of his debt; issued receipt no. 909 08 Cash sales of merchandise according to the cash register roll, R6 600 15 Delivered trading stock on credit to S. Adams, R720 (cost price=576) 22 Recieved P. Barry’s cheque in settlement of his debt to date. Issued receipt. 24 Received a cheque from T. White for R180 in part-payment of his debt. Issued receipt. www.e-classroom.co.za © e-classroom 16 31 Sold goods on credit: T. White (CP=R369.60 S. Adams (SP=R580) DEBTORS JOURNAL – Inv. No. Day Debtors Folio Sales Cost of Sales CASH RECEIPTS JOURNAL – Doc No. Day Details Folio Analysis of Bank Sales Receipts Cost of Sales Debtors control [12] [18] DEBTORS LEDGER OF Date Details/Doc. No. Folio Debit Credit P. Barry Balance Date Details/Doc. No. T. White Balance Folio Debit Credit [9] www.e-classroom.co.za © e-classroom 17 - [1] 31 Sold goods on credit: T. White (CP=R369.30) S. Adams (CP=R580) References https://goo.gl/myM6tS https://goo.gl/Q7sMwv https://goo.gl/Yty1Mi https://goo.gl/Wucy6Y https://goo.gl/2VBGbQ https://goo.gl/R5SRbY https://goo.gl/BUW9Uu https://goo.gl/c4TTW4 https://goo.gl/1sKWGE https://goo.gl/FgTzqG www.e-classroom.co.za © e-classroom 18
