1. FIA FA1
Recording Financial Transactions

2. Business transactions and documentation
Chapter 1
Business transactions and documentation
What is a business?
Business transactions
Discounts
Sales tax
Storage of information

3. 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

4. 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.

5. 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

6. 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.

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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.

14. Storage of information
Information stored about individuals is regulated by Data Protection legislation.

15. Assets, liabilities and the accounting equation
Chapter 2
Assets, liabilities and the accounting equation
The accounting equation
Accounts receivable and payable
Double entry
Capital and revenue expenditure

16. The accounting equation
The accounting equation says:
Assets = Capital + Liabilities

17. 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

18. 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).

19. 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.

20. 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.

21. 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)

22. 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

23. Capital and revenue expenditure
Capital expenditure
Expenditure which results in the acquisition of non-current 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.

24. Capital and 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 non-current assets, eg repairs to non-current assets.

25. Recordings, summarising and posting transactions
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

26. Overview

27. Sales and purchases day books
Sales day book
Used to keep a list of all invoices sent out to customers each day.

28. Sales and purchases day books
Purchase day book
Used to keep a record of invoices which a business receives.

29. 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.

30. 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.

31. Cash book
The cash book
Cash receipts are recorded as follows, with the total column analysed into its component parts.

32. Cash book
The cash book
Discounts allowed are shown in a memorandum column
Cash payments are recorded in a similar way

33. General ledger and double entry
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.

34. 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)

35. General ledger and double entry
A ledger account or 'T' account looks like this.

36. General ledger and double entry
Remember:
Every accounting transaction has two equal but opposite effects
Equality of assets and liabilities is preserved

37. 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

38. General ledger and double entry
The cash book is a good starting point for understanding double entry.

39. General ledger and double entry

40. General ledger and double entry

41. General ledger and double entry

42. 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
$ $ $

43. 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
Revenue: DVDs
Other books of prime entry are analysed and posted in a similar way

44. 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.

45. 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.

46. 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.

47. 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

48. 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

49. Accounting processes
Accounting process overview

50. 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