Transcript Account Balances and Terminology

Chapter 4
 Assets
have debit balances
 Liabilities and Capital have credit balances
Occasionally, an account that would normally
have a debit balance ends up with a credit
balance, or vice versa.
 Situations where an exceptional account balance
may occur:
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A customer sends a cheque in payment for more than
he/she owes – E.g. A customer sends a cheque for $55
when he/she only owes $50.
A company might temporarily spend more money than
it has in the bank (the bank would have to agree to
this).
A company overpays an account payable.
A customer with no account balance returns
unsatisfactory merchandise for credit.
A company returns goods for credit to a supplier with
whom the company has no account balance.
 The
account ‘Cash’ is to be called ‘Bank’ in
the ledger.
 Note: When an accountant describes an item
as bought for cash, this means that it is paid
for at the time it is purchased. However, the
payment is usually made by cheque and not
by actual cash.
 Businesses
with good reputations are able to
buy goods on short-term credit. E.g. The
purchaser is able to delay payment for a
short period of time, usually 30 days.
 The
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term ‘on account’ is used in four ways:
If an item is purchased on credit, this means it is
not paid for at the time of purchase. This is a
purchase on account.
When an item is sold on credit, it is not paid for
at the time it is sold. This is a sale on account.
If money is paid out to a creditor to decrease the
amount owed to the creditor, it is a payment on
account.
When money is received from a debtor to reduce
the amount owed, it is a receipt on account.