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CHAPTER 6 ACCOUNTING SUMMARY CASH PAYMENTS JOURNAL -Each cash payment requires a credit to to the bank account (reduces bank) Cash Payments Journal: An accounting record summarising all cash paid during a month NOTES FOR RECORDING IN A CASH PAYMENTS JOURNAL 1. Date: Transactions are recorded in date order, on the dat that they occur; although only the totals are posted to the General Ledger at the end of the month 2. Details: Every cash payment requires a credit entry, the only part of the double entry that must be specified for each payment is the other account (the debit account) 3. Cheque number: In order to satisfy the demands of reliability, the source document is identified. A cheque number is identifiable from the cheque butt, and businesses should be encouraged to make payments for all but the smallest amounts. All cheque numbers should be recorded in the Cash Payments Journal, even if the cheque is cancelled, so that all cheques are accounted for and theft is discouraged, or if it occurs, detected. 4. Bank: The amount of the payment must be recorded first in the Bank column, to allow calculation of the total cash paid. Where GST is involved, the amount recorded in the Bank column includes the GST amount. This amount will be posted to the Bank ledger account as one total at the end of the month. 5. Classification columns: The amount of each transaction is recorded twice: once in the Bank column to record the cash paid, and a second time in a classification column to record what the cash was paid for. These classification columns allow for frequent cash payments to be summarised, and the total posted to the appropriate account. Headings used for each classification columns vary between businesses seeing that their transactions vary. 6. Sundries: Any cash payments that are infrequent must be recorded in the sundries column 7. GST: For transactions that incur GST, this column is where the GST paid (10% of purchase price) is recorded. The GST increases the amount paid out of the Bank account, but does not affect the value of whatever has been purchased. At the end of the month, each column in the Cash Payments Journal should be totalled, as a double-checking mechanism, the total of the Bank column should equal the sum of the totals of the other columns. If these amounts do not match, then a transaction has been recorded incorrectly in the Cash Payments Journal, and the journal cannot be posted to the ledger until the error is rectified. -The Bank account does not follow the cross-reference rule because there is no single account linked to the amount paid out of the Bank account; it has been paid for a number of different purposes. For this reason, the cross-reference in the Bank account may simply be titled Cash Payments to indicate that there are a number of other accounts linked to this total payments figure -The use of this cross-reference also means that any GST paid is included in the total cash paid, and the GST Clearing account does not need to be noted in the cross-reference. Because it is the only entry in the GST Clearing account, the debit entry means that this business currently has a current asset in relation to GST.

-The Cash Payments Journal is posted to the Creditors Ledger using individual transactions on the day they occur

CASH RECEIPTS JOURNAL -Each cash receipt requires a debit to the bank account (increases bank) Cash Receipts Journal: An accounting record that summarises all cash received during a month NOTES FOR RECORDING IN A CASH RECEIPTS JOURNAL 1. Date: Transactions are recorded in date order, on the date they occur, although the totals are posted to the General Ledger at the end of the month 2. Details: Every cash receipt requires a debit to the Bank ledger account, the only part of the donut entry that must be specified for each receipt is the account that will be credited 3. Receipt number: Cash receipts are a source document, that is generated either manually or by a computer or cash register. Because these receipts are issued by the firm, the receipt numbers should run in sequence 4. Bank: The amount received must be recorded first in the Bank column, to allow calculation of the total cash received. Where GST is involved, the amount recorded in the Bank column includes the GST amount. This amount will be posted to the Bank ledger account as one total, at the end of the month 5. Classification columns: The amount of each transaction must be recorded twice- once in the Bank column to record the cash received, and a second time in a classification column to record the source of that cash. These classification columns allow for frequent cash receipts to be summarised, and the total posted to the ledger account 6. Cost of Sales: Each sale will involve two double entries, one at selling price and one at cost price. The amount of cash received from a sale (recorded at selling price) is recorded in the Bank and Sales columns. But because each sale decreases stock and creates an expense (Cost of Sales) it is also necessary to show the cost price of each sale in the Cash Receipts Journal. 7. Sundries: Infrequent cash receipts must be recorded in the Sundries column 8. GST: For cash sales, this is where the GST received (at 10% of the selling price) is recorded. The GST increases the amount received, as shown in the Bank column, but does not affect sales revenue earned, not the cost of the sale At the end of the month, each column in the Cash Receipts Journal should be totalled. As a double-checking mechanism, the total of the Bank column should equal the sum of the totals of the other (classification and sundries) columns, except Cost Of Sales. This is because Cost of Sales does not record cash received from sales; it only records the cost price of the stock that has been sold. It records an outflow of stock, rather than an inflow of cash -The amount posted to the Bank account is not linked to one account, but many. The crossreference in the Bank cannot, therefore, be the name of one ledger account; it must be Cash Receipts to indicate that there are a number of other accounts linked to this total receipts figure -The GST received is simply included in the total cash received, and the GST Clearing account does not need to be noted in the cross-reference. But in the GST Clearing, Debtors Control, Sales and Capital accounts the cross-reference can, and therefore must, be the name of the other ledger account involved: Bank

-The Cash receipts Journal is posted to the General Ledger using the column totals at the end of the month -The Cash receipts Journal is posted to the Debtors Ledger using individual transactions on the day they occur

GST SETTLEMENT AND GST REFUND GST SETTLEMENT -If GST on sales is greater than GST on purchases, the business will be required to make a GST settlement, that is, settle the GST owing nay making a cash payment to the ATO -Although GST settlement is paid, it is not recorded in the GST column (of the cash payments journal), as this column is only for the GST paid to suppliers on purchases. By contrast, a GST settlement is paid to the ATO, only infrequently, to settle a GST debt. As a result, it must be identified separately and is recorded in the Sundries column and separately in the Cash Flow Statement. GST REFUND -If GST on purchases is greater than GST on sales. the business will be entitled to a GST refund from the Ato -The GST column (in the cash receipts journal) is only for GST received from customers for cash sales, whereas the GST refund is received from the ATO itself, Therefore it is recorded separately in the Sundries column, and will be reported separately in the Cash Flow Statement. *Both GST refund and GST settlement will clear the previous balance in the GST Clearing account GST CASH FLOWS The payments of a GST settlement or a receipt of a GST refund means that there are four potential cash flows related to GST: -GST paid on cash purchases (from the Cash Payments Journal) -GST received on cash sales (from the Cash Receipts Journal) -GST settlement paid (from the Sundries column of the Cash Payments Journal) -GST refund received (from the Sundries column of the Cash Receipts Journal) The GST charged to debtors on credit sales increases the GST liability BUT IT IS NOT A CASH FLOW!, the same applies to GST charged by creditors on credit purchases, which decreases the GST liability, but DOES NOT INVOLVE A PAYMENT OF CASH

DISCOUNTS Settlement discount: A reduction in the amount repayable by a credit customer in return for early repayment -The terms of a settlement discount must be stated on the sales invoice, and are usually expressed in the form of ’10/7, n/30’ 10/7: Means that a 10% discount is given if invoice is paid within 7 days n/30: The net amount must be paid within 30 days (balance owing)

BENEFITS: *Cash is received faster from debtors. This allows the business to: -Pay its debts on time, (allowing the business to take advantage of any discounts offered by creditors) -Make other payments (such as wages or other expenses) *The possibility of bad debts is reduced -The longer a debt goes unpaid, the more likely the debtor will not actually pay at all *Greater sales may be encouraged -Customers may be more willing to buy from a firm that offers discounts than one that does not, knowing that the amount they end up paying will be less COSTS *Less cash is received from debtors -Because a discount reduces the amount a debtor has to p ay, less cash is received *Net profit is reduced -The amount of the discount is an expense, and thus reduces net profit If the discount is received from a creditor (rather than a debtor) then these costs become benefits. A discount means less cash is paid to creditors and, as the discount is a revenue profit increases -A settlement discount does not reduce the amount of revenue earned from the sale. Instead it reduces the cash received from the debtor, and because it is an expense to the seller, also reduces profit Discount revenue: A revenue (in the form of a decrease in creditors) earned when creditors are paid early

NOTE: -The creditors control account has two entries with a double cross-reference: Bank/Discount Revenue on the debit side, and Stock Control/ GST Clearing on the credit side -Due to the discount, the amount recorded in the Creditors Control column should be larger than the amount recorded in the Bank column -The cash paid to creditors is the amount in the Creditors column less the Discount Revenue Discount expense: An expense, in the form of a decrease in debtors, incurred when cash is received early from debtors

NOTE: -The cash received from debtors is the amount in the Debtors Control column less the Discount Expense -The Debtors control account has two entries with a double cross-reference: Bank/Discount expense on the credit side, and Sales/GST Clearing on the debit side...