Business Accounting

EMBA LECTURE 6
Lecture Plan

 Accounting for Returns and Discounts

Learning Areas  Accounting for Taxes
 Inventories (Partial)

Detailed  Types of Discounts

 Documentation
Discussion  Journal entries
 Presentation in financial statement
 Entries to record inventory cycle

Chapter 5 & 6
Recap

 Basis for classification of Assets and Liabilities

 Presentation in Financial Statements

 Accounts related to Equity

Sales and Purchase Returns

 Sales and Purchase Returns

 Primarily a reversal entry
 Returns are kept in separate account for control and monitoring
Discounts

 Trade Discounts
 Incentive for trade volumes
 Initial purchase and sales are recorded at net value i.e. Trade discounts are not
recognized separately
 Definite and upfront

 Settlement Discounts
 Incentive for early payment
 Initial purchase and sales are recorded at regular i.e. Settlement discounts are recorded
in separate GL accounts
 At the option of payee
Taxes Associated with Transactions

 Sales Tax
 Included in sales and purchase price but sales/purchase are recorded on ex-taxes values
 Paid along with due payments – Input tax
 Input sales taxes = Assets with Dr. balance
 Collected along with receipts – Output tax
 Output sales taxes = Liability with Cr. balance
 Payment made to government on net payment
 Support by Sales tax invoices
Taxes Associated with Transactions

 Withholding income tax paid

 Included in sales and purchase price but sales/purchase are recorded on ex-taxes values
 Paid along with due payments – Advance income tax
 Advance income taxes = Assets with Dr. balance
 Adjusted against income tax calculated at year end

 Withholding income tax collected

 Collected along with receipts = Liability with Cr. balance
 Payment made to government for all collected amount
Practice Question

Valerie’s business is registered for sales tax purposes. During the quarter ending 31 March 20X6, she made
the following sales, all of which were subject to sales tax at 17.5%:
 $10,000 excluding sales tax
 $7,402 including sales tax
 $6,745 excluding sales tax
 $11,632 including sales tax
She also made the following purchases all of which were subject to sales tax at 17.5%:
 $15,000 excluding sales tax
 $12,455 including sales tax
 $11,338 including sales tax
 $9,870 including sales tax
Record Journal entries, find GL balances of sales input and output? Is there any amount payable to
Govt. at the month end, if yes, process the payment entry.
Inventory

 Inventory cycle
 P&L  Balance Sheet  P&L
 Purchases  unsold/Unused  Closing Inventory  Sold  COGS

 Cost of Goods Sold

Opening inventory
+ Purchases
- Closing inventory
Annual Report of Pakistan Tobacco