Section 2 Practice Questions:
1. Which statement about a credit note is correct?
A) It is sent to a customer when there has been an overcharge on an invoice.
B) It is sent to a customer when there has been an undercharge on an invoice.
C) It is sent to a supplier when there has been an overcharge on an invoice.
D) It is sent to a supplier when there has been an undercharge on an invoice.
2. Which book of prime entry is part of the double entry system?
1) cash book 2) petty cash book
3) purchases journal 3) sales journal
A) 1 only B) 1 and 2 C) 3 and 4 D) 1, 2, 3 and 4
3. Ryan buys and sells on credit terms and keeps a full set of accounting records. Where does he
maintain the accounts of his credit customers?
A) sales journal B) sales ledger C) purchases journal D) purchases ledger
4. Cheyenne sells goods on credit terms and allows her customers a trade discount of 25%. In June,
the list price of goods returned by customers totalled $2,400. What entry will Cheyenne make in
her nominal ledger on 30 June?
A) sales returns account $1,800 debit
B) sales returns account $2,400 debit
C) purchases returns account $1,800 credit
D) purchases returns account $2,400 credit
5. On 1 May, Sally owed William $400. On 21 May, she purchased goods, list price $1,440, subject
to a trade discount of 25%. She returned one third of these goods on 24 May. How much did Sally
owe William on 31 May?
A) $630 B) $720 C) $1,030 D) $1,120
Breakdown:
Price after discount = 1440 – 25% x 1440 = 1080
Good returned = 1080/3 = 360
Amount owed after return = 400 + (1080-360) = 400+720 = 1 120
6. Phayo is a trader. He maintains a full set of accounting records.
(a) Complete the following table to name one source document from which Phayo will complete
each book of prime entry
Book of prime entry Source document
Purchases journal invoice received / purchases invoice
Sales journal invoice issued / sales invoice
Purchases returns journal credit note received
Sales returns journal credit note issued
Petty cash book petty cash voucher / receipt
Cash book cheque counterfoil / bank statement / paying-in book
/ till receipt
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Phayo sells goods on credit to Phupho. On 1 May 20–7 Phupho owed Phayo $1,350.
They exchanged the following documents during May 20–7:
Invoice $1,500
Debit note $120
Credit note $100
Statement of account $1,750
Cheque $1,350
(b) For each document name the person who issued that document and suggest one reason for the
issue of that document.
Document Person issuing Reason
Invoice Phayo To show full details of the goods supplied on credit and the prices
Debit note Phupho To request a reduction in the invoice received for goods bought, to
request a credit note or to notify seller of unacceptable goods or an
overcharge in an invoice
Credit note Phayo To notify of a reduction in an invoice, to accept a request for a
reduction in an invoice or to accept a debit note
Statement Phayo To notify of a reduction in an invoice, to accept a request for a
of account reduction in an invoice or to accept a debit note
Cheque Phupho To pay the supplier the amount owing at the start of the month
(c) Prepare the account of Phupho as it would appear in the ledger of Phayo for the month of May
20–7.
Balance the account and bring down the balance on 1 June 20–7.
(d) Name the ledger in which Phayo would maintain the account of Phupho.
Sales ledger
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7. Aryan is a retailer. He trades with Mikhail, a wholesaler.
The following business documents were exchanged in May:
Cheque, credit note, debit note, invoice, receipt, statement of account.
(a) List these documents in the order in which they would be issued. Name the person who issued
each document.
Document Person issuing
Invoice Mikhail
Debit note Aryan
Credit note Mikhail
Statement of account Mikhail
Cheque Aryan
Receipt Mikhail
(b) Explain why each document was issued.
Document Reason
Invoice Document issued by the supplier of goods on credit showing details, quantities and prices of
goods supplied
Debit note document issued by a purchaser of goods on credit to request a reduction in the invoice
received
Credit document issued by a seller of goods on credit to notify of a reduction in an invoice previously
note issued
Statement document issued by the seller of goods on credit to summarise the transactions for the month
of account
Cheque written order to a bank to pay a stated sum of money to the person or business named on the
order
Receipt written acknowledgement of money received and acts as proof of payment
(c) Name the book of prime entry in which each trader would record the documents. If the
document would not be recorded in a book of prime entry give a reason for this.
Document Aryan Mikhail
Invoice purchases journal sales journal
Debit note no entry no entry
Credit note purchases returns journal sales returns journal
Statement of account no entry no entry
Cheque cash book cash book
Receipt no entry no entry
Reasons for no entry:
Receipt - Possibly the receipt could be used to make an entry in the cash book instead of the cheque.
Debit note - A debit note is simply a request to the supplier to reduce the total of the original invoice: no entry
can be made in the accounting records until the supplier agrees to this and issues a credit note.
Statement of account - A statement of account is simply a summary of the transactions which have taken place
in the month and which have already been recorded.
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8. Nelson sells goods on credit. He maintains a full set of accounting records.
The following information was extracted from his accounting records for October 20–4:
1 October 20–4
Debit balances in sales ledger: Jamil - $600
Nawaz - $140
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(a) Write up the following accounts for the month of October 20–4: sales, sales returns, Jamil, and
Nawaz. Balance the accounts of Jamil and Nawaz and bring down the balances. There is no
need to total or balance the other accounts.
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(b) Suggest two differences between cash discount and trade discount.
Cash discount is a means of encouraging customers to pay their accounts in a given period
of time. The supplier receives less than the total of the invoice, but it is possibly received
more quickly so reducing the possibility of irrecoverable debts. It does not appear as a
deduction on an invoice, but is entered in the accounting records.
Trade discount is a reduction in the price of goods and is shown as a deduction on an
invoice. It often increases according to quantity purchased and so encourages bulk
purchasing. It is not entered in the accounting records (apart from possibly a note in sales,
purchases or returns journals).
(c) Calculate the rate of trade discount that Nelson allowed Jamil on 4 October.
98/490 × 100 = 20%
(d) Calculate the rate of cash discount that Nelson allowed Jamil on 7 October.
18/600 × 100 = 3%
9. Annie opened a wholesale clothing business on 1 August 20–6. She received the following
documents during August 20–6:
Invoices
August 4 From Sue, for goods, list price $1,960 less 25% trade discount
15 From Amos, for goods, list price $290
21 From Jane, for goods, list price $2,950 less 20% trade discount
Credit notes
August 10 From Sue, for return of faulty goods, list price $120, purchased on 4 August
26 From Jane, for return of all the goods purchased on 21 August as not what was ordered
Annie issued the following documents during August 20–6:
Invoices
August 7 To Andrew, for goods, list price $2,100
18 To Ben, for goods, list price $3,150 less 20% trade discount
27 To Andrew, for goods, list price $1,820
Credit note
August 29 To Andrew, for half of the goods purchased on 27 August returned as faulty
(a) Make the necessary entries in the purchases journal, sales journal, purchases returns journal
and sales returns journal.
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(b) Make the necessary posting to the appropriate accounts in the purchase ledger, sales ledger and
nominal ledger. It is not necessary to balance or total any of the accounts.
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(c) Suggest two reasons why Annie allowed Andrew a trade discount.
Two from:
• because of purchasing in bulk
• because he is in the same trade
• to allow him to make a profit when selling the goods
(d) Name the document which Annie may have issued before she received a credit note from Sue
on 10 August.
Debit note
(e) Explain why Annie may issue a statement of account to each credit customer at the end of every
month.
It summarises transactions for the month and acts as a reminder of the balance due. It also
enables the purchaser to check this against his records
On 21 September 20–6 Annie paid the amount owing to Sue on 31 August, less a cash discount of
3%.
(f) Calculate the amount paid to Sue on 31 August 20–6.
Balance owing 1380 − 3% cash discount = 1380 − 41.40 = 1338.60
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