Transactions with Cash, Credit & Discounts (Cambridge International A-Level Accounting)

Cash or credit

How can goods be sold or purchased?

• Goods can be sold or purchased using cash or credit

• A cash transaction involves cash in hand or money in the bank

  • A cash sale is when the business sells goods or a service and receives cash in hand or money in the bank
  • A cash purchase is when the business buys goods or a service and pays using cash in hand or money from their bank

• Cash is normally used for lower cost transactions or when the business has a large amount of cash available

• A credit transaction involves an agreement to pay money at a later date

  • A credit sale is when the business sells goods or a service to a customer who will pay in the future
  • A credit purchase is when the business buys goods or a service from a supplier and will pay in the future

• Credit is normally used for higher cost transactions or when the business has limited cash available

What are the advantages and disadvantages of using cash and credit for sales?

What are the advantages and disadvantages of using cash and credit for purchases?

Exam Hint You might be asked to advise a business on cash and credit decisions such as

• whether they should offer credit to their customers
• whether they should buy goods using cash or take advantage of credit offered

Sale or return

What is the sale or return basis?

• A business might sell goods on a sale or return basis
• This means the business sends goods to a customer and gives them the option to buy the goods or return them
• Businesses choose to use the sale or return basis to entice new customers to try their goods
• The transaction is not classed as a sale until the customer accepts the goods

Case Study Kez has $20 000 worth of inventory.

Kez sends $2 000 worth of goods with a selling price of $3 000 to a customer, Nina, on a sale or return basis.

Kez should still report the value of his inventory as $20 000.

If Nina chooses to buy the goods, she then keeps them. At this point, Kez subtracts $2 000 from his inventory and reports a sale of $3 000.

Trade & cash discount

What is a trade discount?

• A trade discount is a reduction in the selling price of goods or services

• Trade discount might be offered

  • If the customer buys in bulk
  • If the customer is a loyal and regular customer

• Trade discount is applied before a transaction takes place

• The discounted amount is the value that is entered into the books of prime entry

  • The value of the trade discount is not entered into the books of prime entry
  • Trade discount is not part of the double entry system

What is a cash discount?

• A cash discount is offered to credit customers for early repayment of an invoice

• The supplier will state the deadline for payment in order to claim the cash discount

• The amount before the cash discount is entered into the books of prime entry

• When the customer pays early and claims the cash discount

  • The amount of cash discount is recorded in the books of prime entry

What are the advantages and disadvantages of offering trade and cash discount?