FIA FA1 Recording Financial Transactions
Chapter 1 Business transactions and documentation What is a business? Business transactions Discounts Sales tax Storage of information
What is a business? Business The purpose of a business is to make a profit for its owner(s) Profit = income less expenditure A business is a separate entity from its owner Every financial transaction has a dual effect Double entry bookkeeping accounts for the dual aspect of financial transactions Slide 3
Business transactions Wherever property changes hands there has been a business transaction. A cash transaction is where the buyer pays cash to seller when goods are transferred. A credit transaction is a sale or purchase which occurs earlier than cash is received or paid. Slide 4
Business transactions Business transactions are recorded on documents. These are the source of information in accounts and include: Letter of enquiry Quotation Sales/purchase order Delivery note Inventory list Supplier list Staff timesheet Goods received note Invoice Credit note Till receipt Cheque Slide 5
Business transactions Invoices and credit notes are important documents which must contain specific information. An invoice is a demand for payment A credit note is used by a seller to cancel part or all of previously issued invoice(s) If it helps, think of a credit note as a negative invoice. The accounting system records, summarises and presents the information contained in the documentation generated by the transactions. Slide 6
Discounts A discount is a reduction in the price of goods below the amount at which those goods would normally be sold to other customers of the supplier. There are two types of discount: Trade discount Cash discount Slide 7
Discounts Trade discount A reduction in the amount of money demanded from a customer Usually results from buying goods in bulk Given on supplier s invoice No separate accounting required Slide 8
Discounts Cash discount An optional reduction in the amount of money payable by a customer Given for immediate or very prompt payment financing decision Needs to be recorded separately in the books of account Slide 9
Sales tax Sales tax Is an indirect tax levied on the sale of goods and services Administered by tax authorities Can have a number of rates, eg standard rate, reduced rate Slide 10
Sales tax Output sales tax Sales tax charged by the business on goods/services Input sales tax Sales tax on purchases made by the business Slide 11
Sales tax Output tax is greater than input tax? Pay difference to tax authorities Input tax is greater than output tax? Refund due to business Slide 12
Storage of information Storage of information Paperwork must be properly handled to ensure security and availability of information. A retention policy sets down for how long different kinds of information are retained. Files of data may be temporary, permanent, active and non-active. Information no longer needed on a daily basis is electronically scanned for long-term storage, archived or securely destroyed. Slide 13
Storage of information Storage of information Information stored about individuals is regulated by Data Protection legislation. Slide 14
Chapter 2 Assets, liabilities and the accounting equation The accounting equation Accounts receivable and payable Double entry Capital and revenue expenditure
The accounting equation The accounting equation says: Assets = Capital + Liabilities Slide 16
The accounting equation Asset something which a business owns or has the use of Liability something which the business owes to someone else Capital investment of funds to earn a return. Capital is owed to the owner Drawings are amounts of money taken out of a business by its owner Slide 17
Accounts receivable and payable Trade account receivable An account receivable is a person to whom the business has sold items and by whom the business is owed money. A receivable is an asset of a business (the right to receive payment is owned by the business). Slide 18
Accounts receivable and payable Trade account payable An account payable is a person from whom a business has purchased items and to whom a business owes money. An account payable is a liability of the business. Slide 19
Double entry Basic principles Double entry bookkeeping is based on the same idea as the accounting equation. Every accounting transaction has two equal but opposite effects. Equality of assets and liabilities is preserved. Therefore, in a system of double entry bookkeeping, every accounting event must be entered in ledger accounts both as a debit and as an equal but opposite credit. Slide 20
Double entry A debit is one of the following: An increase in an asset An increase in an expense A decrease in a liability (or capital) Slide 21
Double entry A credit is one of the following: An increase in a liability (or capital) An increase in income A decrease in an asset Slide 22
Capital and revenue expenditure Capital expenditure Expenditure which results in the acquisition of noncurrent assets, or an improvement in their earning capacity. Capital expenditure on non-current assets results in the appearance of a non-current asset in the accounts of the business. The total amount of capital expenditure is not deducted from income in calculating the profit for an accounting period. It is deemed to be expenditure that brings benefits to the business over more than one accounting period. Slide 23
Capital and revenue expenditure Revenue expenditure is expenditure which is incurred either: for the purpose of the trade of the business, including expenditure classified as selling and distribution expenses, administration expenses and finance charges; or to maintain the existing earning capacity of noncurrent assets, eg repairs to non-current assets. Slide 24
Chapter 3 Recordings, summarising and posting transactions Overview Sales and purchase day books Cash book General ledger and double entry Posting from the day books Accounting processes
Overview Slide 26
Sales and purchases day books Sales day book Used to keep a list of all invoices sent out to customers each day. Slide 27
Sales and purchases day books Purchase day book Used to keep a record of invoices which a business receives. Slide 28
Sales and purchases day books The sales returns day book When customers return goods for some reason, the returns are recorded in the sales returns day book. The purchase returns day book Kept to record credit notes received in respect of goods which the business sends back to its suppliers. Slide 29
Cash book The cash book The cash book is a book of prime entry, used to keep a cumulative record of money received and money paid out by the business via its bank account. Slide 30
Cash book The cash book Cash receipts are recorded as follows, with the total column analysed into its component parts. Slide 31
Cash book The cash book Discounts allowed are shown in a memorandum column Cash payments are recorded in a similar way Slide 32
General ledger and double entry General ledger The general ledger is the accounting record which summarises the financial affairs of a business. It contains details of assets, liabilities and capital, income and expenditure. It consists of a large number of different ledger accounts, each account having its own purpose or 'name' and an identity or code. Another name for the general ledger is the nominal ledger. Slide 33
General ledger and double entry Accounts within the general ledger include the following: Plant and machinery (non-current asset) Rent (expense) Inventories (current asset) Total payables (current liability) Sales revenue (income) Slide 34
General ledger and double entry A ledger account or 'T' account looks like this. Slide 35
General ledger and double entry Double entry Remember: Every accounting transaction has two equal but opposite effects Equality of assets and liabilities is preserved Slide 36
General ledger and double entry Debit Increase in expense Increase in asset Decrease in liability / capital Credit Increase in income Increase in liability / capital Decrease in asset Slide 37
General ledger and double entry The cash book is a good starting point for understanding double entry. Slide 38
General ledger and double entry Slide 39
General ledger and double entry Slide 40
General ledger and double entry Slide 41
Posting from the day books Posting from the day books Note that day books are often analysed as in the following extract (date, customer name and reference not shown). Total invoiced CD revenue DVD revenue $ $ $ 340 160 180 120 70 50 600 350 250 1060 580 480 Slide 42
Posting from the day books To identify revenue by product, total revenue would be entered ( posted ) as follows. $ $ DEBIT Receivables a/c 1,060 CREDIT Revenue: CDs 580 Revenue: DVDs 480 Other books of prime entry are analysed and posted in a similar way Slide 43
Posting from the day books Receivables and payables ledgers To keep track of individual customer and supplier balances it is common to maintain subsidiary ledgers called the receivables ledger and the payables ledger Each account in these ledgers represents the balance owed by or to an individual customer or supplier. Slide 44
Posting from the day books Entries to the receivables ledger are made as follows. On sending out an invoice, when making an entry in the sales day book, an entry is then made on the debit side of the customer's account in the receivables ledger. When cash is received and an entry made in the cash book, an entry is also made on the credit side of the customer's account in the receivables ledger. The payables ledger operates in much the same way. Slide 45
Posting from the day books Important Remember that these receivables and payables ledgers are kept purely for reference and are therefore known as memorandum records. They do not normally form part of the double entry system. Slide 46
Posting from the day books Control accounts Control accounts are part of the double entry system A receivables control account is posted with totals from the sales day book and the cash book A payables control account is posted with totals from the purchases day book and the cash book The control accounts should agree with the total of the individual balances and act as a check on the recording of transactions The control account balances appear in the final accounts Slide 47
Posting from the day books Accounting for sales tax Records of sales and purchases should not include sales tax It is recorded separately in the analysis columns of the day books or cash book and posted to the sales tax account The tax paid to or recovered from the authorities each quarter is the balance on the sales tax account Slide 48
Accounting processes Accounting process overview Slide 49
Accounting processes Computerised accounting The principles of a computerised system are exactly the same as for manual accounting but the records or files are held in electronic formats Computer activity is divided into input, processing and output Batch processing is where similar transactions are gathered into batches, then each batch is sorted and processed by computer Control totals are used to make sure there have been no errors when the batch is input Slide 50