EMS Financial Literacy - Creditors and Accounting Equation

Introduction

• Topic: Creditors and Accounting Equation
• Instructor: Juliana Lowe
• Grade: Nine
• Term: Three

Definitions

Creditors

• Suppliers that allow businesses to buy items and pay later.
• Benefits of purchasing on credit:
  • Receive and sell goods before payment.
  • Aids in cash flow.

Trade Discount

• Discount manufacturers and retailers give when purchasing large quantities.
• Not shown in financial records.
• Calculation: Subtract discount from initial amount.

Key Concepts

Creditor as a Current Liability

• Current Liability: Business owes money to creditors.
• Example: Buying goods on credit increases liabilities.

Accounting Cycle and Transaction Examples

Example 1: Purchasing Goods with Trade Discount

• Transaction: Received invoice for goods worth 6000 Rand, 10% trade discount.
• Calculation:
  • 10% of 6000 Rand = 600 Rand
  • New purchase price = 6000 Rand - 600 Rand = 5400 Rand
• Effect on Accounting Equation:
  • Assets: Trading stock (current asset) increases by 5400 Rand.
  • Liabilities: Creditors (current liability) increase by 5400 Rand.

Example 2: Purchasing Stationery on Credit

• Transaction: Bought stationery for 670 Rand on credit from Squirrel Traders.
• Effect on Accounting Equation:
  • Owner's Equity: Decreases by 670 Rand (stationery expense).
  • Liabilities: Creditors increase by 670 Rand.

Example 3: Paying off Debt

• Transaction: Paid Veggie World 689 Rand via EFT to settle debt.
• Effect on Accounting Equation:
  • Assets: Cash (current asset) decreases by 689 Rand.
  • Liabilities: Creditors (current liability) decrease by 689 Rand.

Source Documents

• Invoice: Original document from suppliers, renumbered, and recorded in the creditors journal.
• EFT Reference Number: Source document for electronic fund transfers.

Journals

• Will be discussed in the next lesson.
  • Creditors Journal: When items are bought on credit.
  • Cash Payments Journal: Recording payments to creditors.

Conclusion

• Next Lesson: More on source documents and journals.