Process Accounts Payable and Receivable

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1 Process Accounts Payable and Receivable UNIT PURPOSE On successful completion of this unit the learner will be able to maintain financial records of a business using both manual accounting processes and computer accounting software. In order to qualify for a distinction grade, this unit (manual and computerised) must be completed within the nominated 54 hours of commencement of study. Specifically, the learner will be able to: Maintain financial journal systems Prepare bank reconciliations Maintain accounts payable and accounts receivable systems Process payments for accounts payable Prepare statements for accounts receivable Follow up outstanding accounts. This learning program provides information and exercises that are designed to help you become a proficient bookkeeper, accounts receivable clerk or accounts payable clerk. This learning program comprises the following: Manual Tasks explanations and some procedures for entering information in the accounting books practice exercises worksheets. Computerised Tasks Selected chapters in MYOB procedures textbook Handouts Competency self-assessment/trainer assessment outline Log sheets manual and computerised Student Assessment Guide TAFE NSW, Newcastle V1. 2/ of 14

2 INTRODUCTION The Need for Accounting What is Accounting? Accounting is the process of recording, classifying, interpreting, summarising and communicating information. The records of the financial activities of a business are called financial records. What is the difference between a bookkeeper and an accountant? A bookkeeper prepares financial records by transferring information from source documents to journals, posting this information to ledgers and preparing reports. An accountant summarises and analyses these financial records. Why is accounting needed? Accounting is needed so as to provide interested parties with information on the profitability and financial position of a business. Businesses are also required to keep accurate records that comply with government laws and regulation. The parties who are interested in the profitability and financial position of a business are: owners, management, creditors, investors, potential investors, government, employees, trade unions and the general public. Types of Business Enterprise In Australia you will find many different types of business that fit into the following broad categories: Primary producers: agricultural and extraction of natural resources Manufacturers: production of goods (raw to finished product) any assembling a product Wholesalers: bulk purchases from manufacturers and resale of same goods to other businesses (retailers) Retailers: buy in bulk from wholesalers and sell in smaller quantities to the general public Service businesses: sale of professional time and knowledge eg doctor, accountant, solicitor Non-profit organisation: sporting or charity organisation eg facilities for members/community Forms of business ownership All business are owned in one of the following ways: Sole trader: owned by one person, usually managed by the owner, owner provides all capital necessary to operate and maintain the business, owner enjoys the benefits of all profits and suffers the consequences of all the losses, owner has unlimited liability ie the owner is liable to the full extent of his/her personal assets to meet the debts of the business. TAFE NSW, Newcastle V1. 2/ of 14

3 Partnership: association of two or more persons, usually professional groups eg accountants, solicitors, dentists, unlimited liability in respect to the partnership debts, partnership can raise more capital and have a greater variety of skilled people involved in the running of the business. Companies: a company is a business with a separate legal identity created by law and is much more complicated to set up. Separate legal identity means it can enter contracts as a legal person and can sue or be sued as a legal person it continues to exist after the death of a member because the shares are transferable Cooperatives: formed by a number of people with a common interest eg Dairy Farmers Cooperative, St Vincent de Paul Thrift Shops. Processing information through the accounting system The main elements of the accounting system are the source documents, the journals and the ledger. These devices are used to collect and summarise financial data, which is then displayed in financial reports. You have already completed the module involved in the preparation of source documents. This was the first step in the accounting process. ACCOUNTING THEORY You now have a knowledge of types of business enterprise and the differences in business ownership. Before beginning to work in an accounting system, you will need to understand some common business terms and basic theory. Accounting terms used in a business Account: is a means of recording all relevant data to a particular person or thing eg in the Cash at Bank account would only be recorded the movement of money coming into and out of the business. Aging Accounts: the process of determining the age of a debt or how long the debt has been owing. Aging a statement tells the customer and your own accounting department how long various amounts have been owing. This is especially important to the business as it can monitor customers who are not paying their accounts promptly. Assets: items of value, OWNED by the business, for USE within the business eg Cash at Bank, Office Furniture, Office Equipment. Buying/Selling on Credit: the business will purchase/sell goods and services/assets without paying/receiving cash at the time of the transaction. Instead, the amount will be paid to the supplier/received from the customer within one month (30 days) of the date of the transaction. TAFE NSW, Newcastle V1. 2/ of 14

4 Chart of Accounts: is a complete list of accounts in the general ledger. It is a list of account titles classified and indexed according to the nature (type) of the account eg Proprietorship, Asset, Liability, Expense or Revenue. (See page 8) Credit: means to enter an amount in the credit column of the ledger card. Cross Reference: when posting from the journal to the ledger card, it is necessary to record the journal page number beside the ledger card entry and to cross reference ledger account number beside the journal entry which has been posted. Cycle Billing: staggering the preparation and sending of statements eg on a set date each month. Customers records are divided into groups (alphabetical or geographical) eg A-F sent on the 1 st day of each month, G-L sent on the 8 th day of each month, M-R sent on the 15 th day of each month and S-Z sent on the 23 rd day of each month. Debit: means to enter an amount in the debit column of the ledger card. Double-entry Accounting: is a system of recording transactions according to the accounting equation for which every debit entry must be accompanied by a corresponding credit entry of equal value. Drawings: withdrawals of cash and goods from a business by its owner. Expenses: the costs and/or losses incurred in the day-to-day running of the business eg Purchases, Wages, Advertising, Electricity, Bad Debts. Folio Number: page number eg S1 means Sales Journal page 1. General Ledger: contains details of all accounts relating to the business, except the trade debtors and trade creditors personal accounts. These accounts are represented in the general ledger by control accounts of the same name. Goods and Services Tax: It is a consumption or value added tax which will be applied at a flat rate of 10% on the sale of most goods and services. It came into effect on 1 July GST is added to the selling price of goods and services as they pass through the business supply chain until they are finally consumed. To avoid the tax cascading and multiplying through the sales process, each registered business is given a rebate of the GST they paid to their supplier when they on sell the goods. Liabilities: items of value OWED by the business, eg Bank Overdraft, Mortgage. Proprietorship: value of the owner s investment in the business. It is also known as Capital, Owner s Equity or Net Worth of the business. Purchases: trade goods bought for cash or on credit, with the intention of resale TAFE NSW, Newcastle V1. 2/ of 14

5 Revenues: the earnings or gains made during day-to-day running of the business eg Sales, Rent Receivable, Interest Receivable. Sales: trade goods sold for cash or on credit. Schedule of Creditors (Accounts Payable) Balances: the listing and totalling of outstanding balances from the Creditors Ledger. This total should agree with the balance in the Creditors (Accounts Payable) Control account in the General Ledger. Schedule of Debtors (Accounts Receivable) Balances: the listing and totalling of outstanding balances from the Debtors Ledger. This total should agree with the balance in the Debtors (Accounts Receivable) Control account in the General Ledger. Settlement Discount: a monetary reduction or deduction applicable when the account is paid and which is conditional upon the buyer paying for the goods within an agreed time. If payment is late the discount will not be allowed. Discount Allowed: allowance given by the business to trade debtors Discount Received: allowance received by the business from trade creditors Sundry Creditor: the supplier to whom the business owes money for the purchase of an asset/services (non-trade goods/services) on credit. Sundry Debtor: the customer to whom the business has sold an asset (non-trade goods) on credit. Trade Creditor: the supplier to whom the business owes money for trade goods bought on credit (Supplier or Accounts Payable). Creditors Ledger (Accounts Payable Ledger): contains all details of suppliers from whom the business has purchased goods, services on credit. Trade Debtor: the customer to whom the business has sold trade goods on credit (Customer or Accounts Receivable). Debtors Ledger (Accounts Receivable Ledger): contains all details of customers to whom the business has sold goods, services on credit. Trade Discount: a monetary reduction or deduction in the catalogue or listed price of goods given by the seller to customer who will be using a product within their line of work eg Marathon Tyres could give a Shell Garage a trade discount on tyres to be used in its line of work. TAFE NSW, Newcastle V1. 2/ of 14

6 Accounting Conventions A convention is a traditionally accepted way of doing things. Historical Record Convention: transactions are recorded at their original cost at the time of transaction. Accounting Monetary Convention: transactions are recorded at a money value (not a quantity measure). Continuity of Activity Convention: all decisions are based on the premise that the business is an ongoing concern. Accounting Period Convention: the life of a business is divided into time periods. A business is required to report to interested parties at the end of each financial year. Therefore, the accounting period of most businesses is twelve months. However, management will request financial reports more regularly than this. Accounting Entity Convention: for recording purposes, the owner of the business and the business are separate entities. Only the transactions of the business are recorded. The personal financial dealings of the proprietor (owner) are completely separate. The Accounting Entity Convention gives us a starting point. We can link it with the accounting equation. The Accounting Equation Convention: is a formula used in double-entry accounting systems which shows the relationship between proprietorship, assets and liabilities. Proprietorship (capital) is the difference between the total value of assets and the total value of external liabilities. There are three different forms of the Accounting Equation: Assets = Proprietorship + Liabilities Liabilities = Assets - Proprietorship Proprietorship = Assets - Liabilities The whole of the accounting process is based on the accounting equation. TAFE NSW, Newcastle V1. 2/ of 14

7 CHART OF ACCOUNTS 1 ASSET ACCOUNTS 4 REVENUE ACCOUNTS Current Assets 4.1 Sales 1.1 Cash at Bank 4.2 (Sales Returns) 1.2 Petty Cash 4.3 Discount Received 1.3 Accounts Receivable Control 4.4 Interest Revenue 1.4 Inventory 4.5 Rent Revenue 1.5 Sundry Debtor 4.6 Commission Revenue Prepayments Provision for Doubtful Debts Freight and Insurance Collected Dividends/Interest on Investments 4.9 Late Fees Collected Non-current Assets 1.10 Land 1.11 Buildings 1.12 Plant and Equipment 1.13 Shop Fittings (Fixtures & Fittings) 6 EXPENSE ACCOUNTS 1.13A Shop Fittings Accumulated Depreciation 1.14 Motor Vehicles 6.1 Purchases 1.14A Motor Vehicles Accumulated Depreciation 6.2 (Purchases Returns) 1.15 Office Equipment 6.3 Discount Allowed 1.15A Office Equipment Accumulated Depreciation 6.4 Advertising 1.16 Office Furniture 6.5 Bad Debts 1.16A Office Furniture Accumulated Depreciation 6.6 Bank Charges 6.7 Electricity 2 LIABILITY ACCOUNTS 6.8 General Expenses Current Liabilities 6.9 Insurance 2.1 Accounts Payable Control 6.10 Interest Expense 2.2 Bank Overdraft 6.11 Postage 2.3 Group Taxation 6.12 Rent Expense 2.4 Medical Insurance 6.13 Repairs and Maintenance 2.5 Superannuation 6.14 Stationery/Office Supplies 2.6 Sundry Creditor 6.15 Telephone 2.7 Accrued Expenses 6.16 Travel Expenses 6.17 Wages and Salaries GST Liability 6.18 Freight and Insurance Paid 2.10 GST Collected 6.19 Donations 2.11 (GST Outlaid [Paid]) 6.20 Depreciation 6.21 Printing Long-term Liabilities 6.22 Cleaning 2.15 Mortgage of an Asset 6.23 Rates 2.16 Bank Loans 6.24 Interest on Overdraft 6.25 Gas 6.26 Late Fees Paid 6.27 Other Employer Expenses 3 PROPRIETORSHIP (OWNER S EQUITY) 6.28 Doubtful Debts 3.1 Capital (Drawings) 6.30 TAFE NSW, Newcastle V1. 2/ of 14

8 THE PRINCIPLE OF DOUBLE ENTRY For every DEBIT entry recorded there must be a CREDIT entry recorded to exactly the same value. THE PROCEDURE FOR DOUBLE ENTRY ASSETS - DR Balance to increase to decrease DR CR LIABILITIES - CR Balance to increase to decrease CR DR PROPRIETORSHIP - CR Balance to increase to decrease CR DR EXPENSES - DR amounts REVENUES - CR amounts The above procedures are based on the ACCOUNTING EQUATION: ASSETS = LIABILITIES + PROPRIETORSHIP (Owner s Equity) TAFE NSW, Newcastle V1. 2/ of 14

9 THE NATURE OF TRANSACTIONS In any business, a transaction the exchange of money for money s worth of goods or services has two sides. That is, there is always someone who gives value and someone who receives value. At all times the transaction must be seen from the viewpoint of the business is the business buying or selling goods/services. The whole of the accounting process is based on the link between the accounting equation and the accounting entity convention (traditional way of doing things). The accounting entity convention (one of five used in accounting see above) states that, for the purposes of accounting, the functions and records of the business are absolutely and entirely distinct from any personal (domestic) financial dealings of the owner of the business. The accounting equation is the relationship of proprietorship (capital) to assets and liabilities based on the concept of TOTAL DEBITS = TOTAL CREDITS. Proprietorship (capital, owner s equity, net worth) is the difference between the total value of the assets and the total value of external liabilities (the debts incurred by the business, distinct from the owner s investment which is considered to be an internal liability). There are three different simple mathematical forms of the accounting equation: Proprietorship = Assets Liabilities (P = A L) or (C = A L) or Assets = Proprietorship + Liabilities (A = P + L) or (A = C + L) or Liabilities = Assets Proprietorship (L = A P) or (L = A C) TASK ONE Apply the accounting equation to the following transactions showing which two accounts are involved (based on the principle of double entry) and that A = P + L. Jane Keilar invests $180,000 in the bank under the name of her business Jane s Treasure Chest. She purchases shop premises for $120,000 cash. She buys stock for her business for $30,000 cash. She buys a delivery van for the business for $15,000 on credit. She sells $3,000 stock for cash. She buys a cash register and counters for the business for $8,000 cash. She applies to the bank and is given a mortgage of $60,000 on her shop. She sells $10,000 stock to debtors (customers) on credit. She purchases further stock for her business for $5,000 on credit. TAFE NSW, Newcastle V1. 2/ of 14

10 JANE S TREASURE CHEST (Transaction Sheet) ASSETS PROPRIETORSHIP + LIABILITIES TAFE NSW, Newcastle V1. 2/ of 14

11 TASK TWO Calculate the value of the missing items in the following accounting equations: Assets = Capital + Liabilities a $10,000? $2,000 b? $5,000 $10,000 c $15,995 $5,685? d? $11,900 $35,655 e $428,950? $300,000 f $5,675 $4,387? g $54,561 $42,312? h? $65,123 $34,510 i $5,612,312? $3,413,567 j $8,417? $1,695 TASK THREE Classify the items in the following list as either assets, liability or proprietorship: Cash at Bank... Office Furniture... A Trader (owner)... Bank Overdraft... GST Collected... Land and Premises... Barry Jones (debtor)... Stock on hand... Loan to C Chip... Ray Charles (creditor)... Motor Vehicle... Loan from D Dale... Investments... Mortgage of Premises... Premises... Petty Cash... TAFE NSW, Newcastle V1. 2/ of 14

12 TASK FOUR Complete the following transaction analysis chart: JANE S TREASURE CHEST (analysis chart) Transaction Accounts affected Amount ALPER Jane Keilar invests $180,000 in the bank account under the name of her business, Jane s Treasure Chest Jane purchases shop premises for $132,000 cash GST inclusive Increase/ Decrease DR/CR She buys stock for her business for $33,000 cash GST inclusive She buys a delivery van for the business for $16,500 on credit GST inclusive She sells $3,300 stock for cash GST inclusive She buys a cash register and counters for the business for $8,800 cash GST inclusive She applies to the bank and is given a mortgage of $60,000 on her shop She sells $11,000 stock to debtors (customers) on credit GST inclusive She purchases further stock for her business for $5,500 on credit GST inclusive TAFE NSW, Newcastle V1. 2/ of 14

13 TASK FIVE Complete the following transaction analysis chart: ALEXANDER S RAG TIME BAND (analysis chart) Transaction Accounts affected Amount ALPER Alexander invests $50,000 in the bank account under the name of his business, Alexander s Rag Time Band Alex rents shop premises for $440 cash per month GST inclusive Increase/ Decrease DR/CR He buys stock for his business for $8,800 cash GST inclusive Alex buys a motor vehicle for the business for $12,100 on credit GST inclusive He sells $3,300 stock for cash GST inclusive Alex pays wages $1000 He buys a display cabinet for the business for $1,100 cash GST inclusive He pays: (GST inclusive) Advertising $550 Insurance 220 He sells $4,400 stock to debtors (customers) on credit GST inclusive Alex purchases further stock for his business for $5,500 on credit GST inclusive TAFE NSW, Newcastle V1. 2/ of 14

14 THE JOURNAL FRAMEWORK All transactions are evidenced by some sort of written document. We call these documents source documents. The source document provides us with the necessary information to write up the journals (books of original entry). Only pertinent information is taken from the source documents for entry into the journals. Journals have three main functions: a classifying sorting documents of a like nature together, b summarising consolidating relevant information, and c means of transfer posting the information into a ledger. In the ledger we keep accounts. An account is a means of recording all relevant data relating to a particular person or thing. (See Chart of accounts for accounts listing.) The journals in a typical retail business are summarised below. Event Source document Record in Journal Post to ledger cards Sale of trade goods and assets on credit Tax Invoice issued (duplicate) Sales Return inwards of trade goods and allowances on credit Adjustment Note issued (duplicate) Sales Returns and Allowances Receipt of money (cash, cheques, credit card, eftpos) ALL OTHER TRANSACTIONS: Opening Entry Interest Receivable Interest Payable Bad Debts Correction of errors Reversal entries Omission of entries Purchase of Asset Sale of Asset Purchase of trade goods or assets on credit (Tax) Receipt (duplicate) cash register listing, bank statement VARIOUS: Tax Invoices Statements Memos Tax Invoice received (original) Cash Receipts GENERAL Purchases ACCOUNTS RECEIVBLE LEDGER (DEBTORS OR CUSTOMERS) ACCOUNTS PAYABLE LEDGER (CREDITORS OR SUPPLIERS) G E N E R A L L E D G E R Return outwards of trade goods and allowances on credit Adjustment Note received (original) Purchases Returns and Allowances All cash payments (cheque) made from the business Cheque butt Cash Payments TAFE NSW, Newcastle V1. 2/ of 14

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