Part C The use of double
entry and accounting systems
6: From trial balance to financial statements
113
Quick Quiz
1
What is the purpose of a trial balance?
2
A trial balance may still balance if some of the balances are wrong.
Is this statement correct?
A Yes
B No
3
In a period, sales are $140,000, purchases $75,000 and other expenses $25,000. What is the figure for net
profit to be transferred to the capital account?
A $40,000
B $65,000
C $75,000
D
$140,000
4
The balance on an expense account will go to the I & E account. However, the balance on a liability
account is written off to capital.
Is this statement correct?
A Yes
B No
5
The balance brought forward on the bank account is a debit figure. This means that the balance is
overdrawn. True or false?
114
6: From trial balance to financial statements Part C The use of double entry and accounting systems
Answers to Quick Quiz
1
To test the accuracy of the double entry bookkeeping.
2
A
See
Section 1.4
.
3
A
INCOME & EXPENSE ACCOUNT
$
$
Purchases 75,000 Sales
140,000
Gross profit c/d
65,000
140,000
140,000
Other expenses
25,000 Gross profit b/d
65,000
Net profit – to capital a/c
40,000
65,000
65,000
B is the
gross profit figure, while C is the figure for purchases and D sales.
4
B
When an expense account is balanced off, the balance is transferred
to the income and expense
account. When a liability account is balanced off, the balance is carried forward to the next
accounting period.
5
False. A debit balance b/f is an asset and means that the bank account is
not overdrawn.
Now try the question below from the Exam Question Bank
Number
Level
Marks
Time
Q10
Examination
2
2 mins
117
Sales tax
Introduction
Many business transactions involve sales tax (eg VAT in the UK). Invoices and
bills show any sales tax charged separately.
Sales tax is charged on the supply of goods and services. It is an
indirect tax.
Section 1 explains how sales tax works.
Section 2 deals with the accounting treatment of sales tax. If you understand
the principle behind the tax and how it is collected, you will understand the
accounting treatment.
Topic list
Syllabus reference
1 The nature of sales tax and how it is collected
D1(c)–(d)
2 Accounting for sales tax
D1(d)
118
7: Sales tax Part D Recording transactions and events
Study guide
Intellectual level
D1
Sales and purchases
(c)
Understand the general principles of the operation of a sales tax.
1
(d)
Calculate sales tax on transactions and record the consequent accounting
entries.
1
Exam guide
This topic could well be examined as part of another topic eg whether sales tax needs to be included when
accounting for non-current assets. Be prepared for a range of rates to be used in the exam.
1 The nature of sales tax and how it is collected
Sales tax is an indirect tax levied on the sale of goods and services. It is usually administered by the local
tax authorities.
1.1 How is sales tax levied?
Sales tax is a cumulative tax, collected at various stages of a product
'
s life. In the illustrative example
below, a manufacturer of a television buys materials and components and then sells the television to a
wholesaler, who in turn sells it to a retailer, who then sells it to a customer. It is assumed that the rate for
sales tax is 15% on all items. All the other figures are for illustration only.
1.2 Example
Price net
Sales tax
Total
of sales tax
15%
price
$
$
$
(a)
(i)
Manufacturer purchases raw materials
and components
40
6
46
(ii)
Manufacturer sells
the completed television
to a wholesaler
200
30
230
The manufacturer hands over to tax authorities
24
(b)
(i)
Wholesaler purchases television for
200
30
230
(ii)
Wholesaler sells television to a retailer
320
48
368
Wholesaler hands over to tax authorities
18
(c)
(i)
Retailer purchases television for
320
48
368
(ii)
Retailer sells television
480
72
552
Retailer hands over to tax authorities
24
(d)
Customer purchases television for
480 72 552
The total tax of $72 is borne by the ultimate consumer. However, the tax is handed over to the authorities
in stages. If we assume that the sales tax of $6 on the initial supplies to the manufacturer is paid by the
supplier, the tax authorities would collect the sales tax as follows.
$
Supplier of materials and components
6
Manufacturer
24
Wholesaler
18
Retailer
24
Total sales tax paid
72
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