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QUESTION:
Your organisation sold goods to PQ Co for $800, trade discount @20% and cash discount @5% for payment within 14 days. The invoice was settled by cheque five days later. Which one of the following gives the entries required to record BOTH of these transactions?answer is:
DEBIT CREDIT
A) PQ Co 640
Sales 640
Bank 608
Discount allowed 32
PQ Co 640……………
Discount allowed 32? why 32 when they say both transactions doesnt this mean both trade and cash discount?thanks
The answer has dealt with both discounts.
If they give a trade discount it simply means that they charge less.
So the invoice will only be for 800 – 20% = 640.
We only enter the amount invoiced – there is no need for a separate entry for the discount (we are simply making a normal sale, albeit at a lower than normal price).The settlement discount it different for two reasons. Firstly, we do not know when we invoice whether or not they will pay in time (and therefore whether or not they will get the discount).
Secondly it is not treated at having sold at a cheaper price – our sales are still 640. It is an expense of getting money sooner and so it is shown as an expense in the Statement of profit or loss.i see the thanks the 800 is already deducted and made 640 for the trade discount.. its just when i read that discount allowed can be both trade&cash discount i assumed both should appear in discounts allowed.
i have a few more questions.
1) what happens in a trial balance if the cash account has a negative value of say 800 does this appear as DR (800) negative value or appear somewhere else i.e overdraft?
2) Is revaluation reserve Statement profit or loss? & revaluation a/c capital? only in your lecture (example 5 depreciation) profit on revaluation is debit side of revaluation account and credit side of revaluation reserve?
thanks again and im now watching all your lectures 🙂
Although I know what you mean, the cash account can not have a negative value. It is either a debit balance (which means we have cash) or it is a credit balance (which means we are overdrawn). If it is a debit balance it is listed in the debit column on the trial balance. If it is a credit balance then it is listed in the credit column of the trial balance.
The revaluation account is used to calculate the profit on revaluation, which is then transferred to the revaluation reserve (by debiting the revaluation account and crediting the revaluation reserve). The revaluation reserve will always be a credit balance – it is profit owning to the shareholders, but kept separate because it is not distributable as dividend and is therefore a capital reserve.
(Please start a new thread if you are asking questions on a different topic)
so what statement does a revaluation account appear in? last one… ill start a new thread next
The revaluation account does not appear in any statement – it is simply an account to calculate the profit on revaluation.
The revaluation reserve appears on the Statement of financial position.
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