Financial literacy: Credit purchases and returns.
Here's a simplified summary of the information about Financial Literacy, specifically focusing
on Credit Transactions and Creditors for Week 6-7:
**Topic 3: Financial Literacy - Credit Transactions and Creditors**
1. **Introduction**
- Businesses need goods and services to operate, like cash registers and stationery.
- They buy these from suppliers.
- Payments can be made by cheque, and the transaction is recorded in the Cash Payments
Journal.
- Buying items results in cash going out of the business.
- If there's not enough cash, businesses can buy on credit, meaning they pay later.
2. **Creditors**
- When a business buys on credit, it's buying on account and owes the supplier (creditor)
money.
- Creditors are considered current liabilities.
- Credit terms specify how much can be bought on account and when it must be paid.
- Not paying on time might lead to interest charges on the overdue account.
3. **Creditors Allowances**
- When items bought on credit are returned to the supplier due to damage or issues, the
amount owed to the creditor decreases.
- This is called a creditors allowance.
4. **Accounting Cycle**
- When a business buys on credit, the supplier provides a credit invoice with details like
names, dates, quantities, and prices.
- Duplicate copies are made, with one kept by the supplier for their records.
- The original credit invoice is given to the buyer.
- Credit invoices are used to record credit purchases in a Creditors Journal (CJ).
- To make tracking easier, different suppliers' invoices may be renumbered.
- Each credit purchase is recorded in the Creditors Ledger (CL) daily.
- At the end of the month, the CJ is totaled, and the totals are posted to relevant accounts
in the General Ledger.
- General Ledger accounts are balanced, and a Trial Balance is compiled.
Understanding how businesses manage credit transactions with suppliers is important for
financial literacy.
5.
**Recording in Creditors Journal (CJ)**
1. **Credit Purchase Entry**: Record when a business buys on credit.
2. **Journal Format**: Use a special book for this.
3. **Invoice Details**: Write invoice info in columns.
4. **Supplier's Name**: Note the business you bought from.
5. **Cross Reference**: Use a reference number.
6. **Invoice Total**: Write the total cost.
7. **Categorizing Purchases**: Sort purchases into columns.
8. **Other Transactions**: Use a different column for unusual stuff.
9. **General Ledger Entry**: What you owe goes in a big book.
6.Recording in Creditors Allowance Journal (CAJ)**
1. **Handling Returns**: Use a debit note for returned items.
2. **Allowance Granting**: If they agree, you get a credit note, meaning you owe less.
3. **Creditors Allowance Journal**: Use another book for this.
4. **Decreasing Debts**: Creditors allowance means you owe less.
5. **Journal Format**: This book also has columns.
6. **Document Entry**: Note the note's number.
7. **Supplier's Name**: Mention the business you deal with.
8. **Cross Reference**: Use a reference number.
9. **Allowance Amount**: The amount you don't have to pay.
10. **Categorizing Allowances**: Sort allowances into columns.
11. **Other Transactions**: For things that don't fit elsewhere.
12. **General Ledger Entry**: What you save goes in a big book. At month end, add up the
columns. Make sure they match what you owe.
**Recording Payments to Creditors in CPJ**
1. **Cheque Issuance**: Pay when payment is due.
2. **CPJ Entry**: Use the cheque counterfoil in CPJ.
3. **Analyses Columns**: Record payments in the bank and Creditors Control columns.
4. **EFT Payments**: Same process with EFT-voucher or bank statement.
5. **Monthly Totals**: Add up Creditors Control column at month end.
**Posting to Creditors Ledger and General Ledger**
2.1. **Posting to Creditors Ledger**
- **Creditor Ledger**: Separate accounts for each creditor.
- **Daily Posting**: Post creditor entries daily.
- **Ledger Format**: Entries include source document, folio, and balance calculations.
- **Creditor Balances**: Show amounts owed to creditors.
- **Monthly Process**: Compile creditors list and check it matches the Creditors Control in
the General Ledger.
2.2. **Posting to General Ledger**
- **Creditors Control**: Summary of all creditor transactions.
- **Opening Balances**: Start with balances from the creditors list.
- **Monthly Posting**: Total columns and post to the General Ledger.
- **Rules**: Follow accounting equation for debits and credits.
**Effect of Credit Transactions on Accounting Equation**
- **Credit Purchases**:
- Debit: Relevant expense/asset account (A+/OE–)
- Credit: Creditors Control (L+)
- **Payments to Creditors**:
- Debit: Creditors Control (L–)
- Credit: Bank (A–)
**Posting the CAJ to Creditors Ledger and the General Ledger**
4. **Creditors Allowance Journal (CAJ)**
- Complete when a credit note is received for returned goods/services.
- Daily posting to individual creditor accounts in the Creditors Ledger.
- Creditors' accounts debited as money owed decreases (L decreases).
- Monthly posting totals to Creditors Control account in General Ledger.
- Creditors Control account (L decreases), analysis columns (A decreases, OE increases).
**Effect of Creditors Allowances on the Accounting Equation**