Tuesday Year 12 Accounting Cash Journals Warning…Warning SAC! • Thursday P3? • You are now in VCE. If you are absent you must have a medical certificate. • It covers source documents, journals, Subsidiary Ledgers, posting to the General Ledger and relevant theory. • Please remember the VCAA monitor SAC’s. No talking, no messaging & closed books. When you are finished, you can then use your iPod or study but no noise. Remember? • Types of Special Journals. Cash payments journal • The special journals described in Chapter 5 dealt solely with credit transactions; the Purchases Journal summarised all stock purchased on credit, and the Sales Journal summarised all stock sold on credit. By summarising the transactions, it was possible to post the Purchases Journal to the General Ledger in only three entries, and the Sales Journal in only five: • Purchases Journal DR. Stock Control DR. GST Clearing CR. Creditors Control * • Sales Journal DR. Debtors Control * CR. Sales revenue CR. GST Clearing and DR. Cost of Sales CR. Stock Control Cash payments journal • The same approach (i.e. summarising similar transactions before posting them to the General Ledger), can be applied to cash receipts and cash payments, with the Cash Payments Journal used to summarise all cash paid, and the Cash Receipt Journal used to summarise all cash received. • See Green Thumb Plants example on p.108. Note that each of the transactions above is a cash payment, and therefore each has exactly the same effect on the ledger account for Bank (credit). • The Cash Payments Journal is an accounting record summarising all cash paid during a Reporting period. You! • Review Questions 6.1. • Q 1. TRANSACTIONS IN THE CASH PAYMENTS JOURNAL • See Figure 6.1 on p. 109. • Date Transactions are recorded in date order. • Details Because each and every cash payment requires a credit to the Bank ledger account, the only part of the double-entry which must be specified for each payment is the other account – the account to be debited. Note how the name of each individual creditor is listed when payments are made to creditors. The total paid to creditors ($750) will be posted to the Creditors Control account in the General Ledger, but the individual transactions will be posted to the individual creditor’s accounts in the Creditors Ledger. CASH PAYMENTS JOURNAL • 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 by cheque for all but the smallest amounts (see Chapter 4). 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 (at best) discouraged or (at worst) detected. THE CASH PAYMENTS JOURNAL • 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 Reporting period. • 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 ledger account. The headings used for each of these classification columns will, of course, vary between businesses, as their transactions vary. In Figure 6.1, frequent cash payments are made to creditors, for stock and for wages, and so these transactions have their own classification column. THE CASH PAYMENTS JOURNAL • GST For transactions that incur GST, this column is where the GST paid (10% of the purchase price) is recorded. The GST increases the amount paid out of the Bank account, but does not effect the value of whatever has been purchased (which, in this case, is stock, electricity and a vehicle). • Sundries Any cash payments that are infrequent must be recorded in the Sundries column. The cash purchase of the vehicle is unlikely to occur more than once in a Reporting period, and the payment of electricity is infrequent, so they do not warrant their own columns. Double-checking mechanism • At the end of the Reporting period, each column in the Cash Payments Journal should be totaled. As a doublechecking 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. You! • Review Questions 6.2. • Q’s 1, 3 & 4. Posting the cash payments journal to the general ledger • The Cash Payments Journal is posted to the General Ledger using the column totals at the end of the Reporting period. • Pay attention to the ledger entries Figure 6.2 (p. 111). • In all the ledger accounts shown in this text so far, the crossreference has been the name of the other ledger account effected by each transaction. Even when posting the Cash Payments Journal, the cross-reference in the Stock Control, Creditors, Wages, GST Clearing, Electricity, Drawings and Vehicle accounts was Bank. Note • However, the cross-reference in the Bank account itself does not follow this same rule – it is not the name of a ledger account. This is because there is no single account linked to the $15,057 paid out of the Bank account – it has been paid for a number of different purposes. For this reason, the crossreference in the Bank account must simply be Cash payments to indicate that there are a number of other accounts linked to this total payments figure. • This also means any GST paid ($1,257) 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 the business currently has a current asset in relation to GST.) You! • Review Questions 6.3. • Q’s 1 & 2. SAC • Covers the topics of establishing a double-entry accounting system including preparing journal entries, posting to the General Ledger, the payment of stock bought on credit, and balancing a Subsidiary Ledger on a monthly basis. POSTING THE CASH PAYMENTS JOURNAL TO THE CREDITORS (SUBSIDIARY) LEDGER • The same approach that was taken to posting the Purchases Journal (in Chapter 5) must be taken when posting the Cash Payments Journal. In the General Ledger, the total paid to creditors is debited to the Creditors Control account at the end of the Reporting period. However in the Creditors Ledger, the individual transactions must be debited to the account of each individual creditor on the day that they occur. • This is shown in Figure 6.3 p. 113. You! • Review Questions 6.4. • Q 1. Cash receipts journal • The transactions in the Cash Payments Journal had one ledger entry in common – they all involved a credit to the Bank account in the General Ledger. The same principle can be applied to all cash receipts, but from the opposite perspective: each cash receipt requires a debit to the Bank account. • While the credit part of each entry will vary according to the source of the cash received, each cash receipt involves the same debit entry to Bank. As with the Cash Payments Journal, rather than a separate debit to the Bank account for each individual transaction (and these could number 30 or 40 per month) these transaction can be summarised in a Cash Receipts Journal. You! • Review Questions 6.5. • Q 1. RECORDING TRANSACTIONS IN THE CASH RECEIPTS JOURNAL • See Figure 6.4 on p. 114. • Notes for recording in the Cash Payments Journal • Date Transactions are recorded in date order. • Details Because each and every cash receipt requires a debit to the Bank ledger account, the only part of the double-entry that must be specified for each payment is the account to be credited. • Receipt number With cash receipts, the source document itself should be a cash receipt, generated either manually or by computer or cash register. Because these receipts are issued by the firm itself (in this case, Green Thumb Plants), the receipt numbers should run in sequence. RECORDING TRANSACTIONS IN THE CASH RECEIPTS JOURNAL • 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. • Classification columns As with the Cash Payments Journal, 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. • Cost of sales One of the complicating factors in recording cash sales is the fact that each sale will involve two double-entries – one at selling price, and one at cost price. The amount of cash received from the sale (recorded at selling price) is recorded in the Bank and Sales columns. But because each sale also 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. RECORDING TRANSACTIONS IN THE CASH RECEIPTS JOURNAL • GST For cash sales, this is where the GST received (10% of the selling price) is recorded. The GST increases the amount received (as shown in the Bank column), but does not effect sales revenue earned, nor the cost of the sale. • Sundries This column fulfils exactly the same function in the Cash Receipts Journal as it does in the Cash Payments Journal. Infrequent cash receipts must be recorded in the Sundries column. Double-checking mechanism • The Cash Receipts Journal has a checking mechanism just like the Cash Payments Journal, but it is complicated by one factor – the use of the Cost of sales column. At the end of the period, each column in the Cash Receipts Journal should be totaled. As a doublechecking 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.) You! • Review Questions 6.6. • Q’s 3 & 4. Wednesday POSTING THE CASH RECEIPTS JOURNAL TO THE GENERAL LEDGER • Once the columns in the Cash Receipts Journal have been totaled, these totals can be posted to the General Ledger accounts. Once again, this is done only at the end of the Reporting period (30 June). • The example does not account for all the information in the Cash Receipts Journal: we must also record the cost price of the sales made. This is done by posting an additional double-entry: POSTING THE CASH RECEIPTS JOURNAL TO THE GENERAL LEDGER • Figure 6.5 shows how the General Ledger accounts would appear after posting the Cash Receipts Journal (p. 116). • The Cash Receipts Journal is posted to the General Ledger using the column totals at the end of the Reporting period. Cross-references in the Bank account • As with the Cash Payments Journal, the amount posted to the Bank account ($12 470) is not linked to one account, but many (in this case, four: Debtors Control, Sales, Capital and GST Clearing). The cross-reference in the Bank cannot, therefore, be the name of a ledger account: it must be Cash receipts to indicate that there are a number of other accounts linked to this total receipts figure. • This means the GST received ($170) 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, Sales, and Capital accounts the crossreference can, and therefore must, be the name of the other ledger account involved: Bank. POSTING THE CASH RECEIPTS JOURNAL TO THE DEBTORS (SUBSIDIARY) LEDGER • Among other things, Figure 6.4 records the cash received from two debtors, G. Matthews and T. May. The total received from debtors ($600) is credited to the Debtors Control account at the end of the Reporting period (30 June 2015), but the individual transactions – on 8, 14 and 27 June – must be credited to the account of each individual debtor in the Debtors Ledger on the day they occur. This is shown in Figure 6.6 (p. 118). • The Cash Receipts Journal is posted to the Debtors Ledger using individual transactions on the day they occur. Tuesday’s revision Gst settlement & gst refund • At the end of the Reporting period, each business will balance its GST Clearing account to determine whether it has a GST liability, or a GST asset. At the end of its BAS period (when it must complete and submit its Business Activity Statement), the business will then have to pay any GST owing to the ATO as a GST settlement, or will receive a GST refund from the ATO for excess GST paid/incurred. • See Holding Furniture example on p.119. Gst settlement • Refer Figure 6.7. • Note that although the GST settlement is paid, it is not recorded in the GST column, as this column is only for GST paid to suppliers, on purchases. A GST settlement is paid to the ATO to settle a GST debt. As a result, it must be identified separately, and so is recorded in the Sundries column. Gst settlement • (Remember that although the GST settlement will be recorded in the Cash Payments Journal when it is paid on 4 October 2015, the Cash Payments Journal will not be posted to the General Ledger until 31 October 2015.) GST refund • If GST paid and incurred on purchases is greater than GST received and charged on sales, the business will be entitled to a GST refund from the ATO. • See Garner Electronics example. Again it is recorded in the Sundries column of the Cash Receipts Journal. • Again the GST refund would have the same effect as a GST settlement in terms of clearing the previous balance in the GST Clearing account, as is shown on p. 103. GST Cash flows • The GST charged on credit sales increases the GST liability, but it is not a cash flow. • The same applies to GST incurred on credit purchases, which decreases the GST liability, but does not involve a payment of cash. Discounts • For a business that sells on credit terms, the issue of how to make sure debtors pay – either early or on time – can be a vexed question. One of the more obvious options is to offer a settlement discount, which rewards debtors who pay early by reducing the amount that they are required to pay. 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 10% reduction in the invoice amount if the invoice is paid within 7 days • n/30 the net amount (the balance owing) must be paid within 30 days. • The discount rate and the number of days allowed to pay will vary between firms, depending on how quickly they need their cash and the relationships they develop with their customers, but the format for expressing the credit terms is generally fairly consistent. discounts • See advantages & disadvantages on p. 122. • Of course, if the discount is received from a creditor (rather than given to 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. • Note: A settlement discount does not reduce the amount of revenue earned from the sale – it reduces the cash received from the debtor, and because it is an expense (to the seller), also reduces profit. Any GST effect is simply absorbed by the business offering the discount. • See method of calculating on p. 123. Recording discount revenue • When a creditor is paid early and a discount is received, the amount paid to that creditor is reduced. The amount of this reduction is known as discount revenue, as it is a reduction in an outflow of economic benefits (less cash is paid to creditors) in the form of a reduction in liabilities (creditors) that increases owner’s equity. • Figure 6.10 uses the transactions from Figure 6.1, but with the two transactions involving payments to creditors – on 5 June (to Mills Bros) and 24 June (to Johnson Ltd) – adjusted to reflect a discount revenue. • Note the total reduction in creditors is actually $400 ($360 paid plus $40 discount) and it is this total that must be recorded in the Creditors column. The Creditors column thus records the total by which Creditors Control will decrease, with the Bank column recording the amount of actual cash paid. Recording discount revenue • Double checking mechanism: The total of the Bank column plus the discount revenue column should equal the sum of the totals of the other (classification and sundries) columns. • Posting the Cash Payments Journal: Figure 6.11 shows how the General Ledger accounts would appear after the Cash Payments Journal had been posted. Note how the cross-reference in the Creditors Control account now refers to two accounts – Bank and Discount revenue. This is because the amount debited to Creditors Control ($750) accounts consists of some cash ($675), and also some discount revenue ($75). On the other hand, the crossreference in the Discount revenue account refers only to Creditors Control. There is no connection between the Bank and Discount revenue accounts, as by definition, the discount is the amount that has not been paid! The same principle applies in the Creditors Ledger, shown in Figure 6.12. Recording discount expense • When cash is received from a debtor who pays early and a discount is granted, the amount actually received from the debtor is reduced. The amount of this reduction is known as discount expense, as it is a reduction in an inflow of economic benefits (less cash is received from debtors) in the form of a reduction in assets (debtors) that decreases owner’s equity. • Figure 6.13 uses the transactions from Figure 6.4, but with the three transactions involving receipts from debtors – on June 8 and 27 (from G. Matthews.) and June 14 (from T. May) – adjusted to reflect a discount terms of 10/7, n/30. Note the Debtors column records the total by which Debtors Control will decrease, with the Bank column recording the amount of actual cash received. • See Effect on Accounting Equation & Double Checking Mechanism. Posting discount expense • See General Ledger entries p. 128. • This time it takes two debits (to Bank and Discount expense) and four credits to form a matching double-entry. Figure 6.14 shows how the General Ledger accounts would appear after the Cash Receipts Journal had been posted. • As with cash payments involving a discount revenue, a cash receipt from a debtor which also involves a discount expense is posted to the Debtors Control account using one figure - the total of the Debtors column from the Cash Receipts Journal ($600). But this figure includes some cash received (in the example above, $540) plus some discount expense ($60), so the crossreference must refer to both Bank and Discount expense. • On the other hand, the cross-reference in the Discount expense account refers only to Debtors Control, as the discount is the amount not received. • The same principle applies in the Debtors Ledger, which is shown in Figure 6.15. You! • Read Summary. • Do a minimum five exercises. • Copy chart p. 130.