1. Financial Documents

2. Lesson 1 Revision What is the accounting equation?
What different types of accounts are there?
What is a book of prime entry?
What is a creditor?
Are they are debit or credit entry & why?
What is the double entry for buying £15 of stationery from with business debit card?

3. Aims of the Session Use of business documentation.
Calculation of totals and discounts.
Bookkeeping for sales and discount allowed.
Calculating VAT.
Coding documents.
Checking & authorising documents.

4. Types of Financial Documents
Quotation Purchase order Delivery note Invoice Returns note Credit note Statement

5. Flow of Documents Seller Buyer Price quotation Quotation sent
Order received
Goods or services supplied
Request for payment
Credit note authorised
Buyer
Decision to buy
Order placed
Goods received & checked
Any returns?
Amount owing less any reductions
Payments
Price quotation
Purchase order
Delivery note
Invoice
Returns note
Credit note
Statements

6. Purchase Orders Have a specific reference number.
Will contain a product reference code.
Will state the quantity required.
Give a description of the item.
May include a price.
Signed and dated by person ordering.

7. Delivery Note Has a unique reference.
Method of delivery may be stated.
Contains purchase order number.
Describes goods.
Needs to be checked and signed by recipient of goods.

8. Goods Received Note
Used internally by businesses – not all businesses.
Has name of supplier.
Quantity and details of the goods ordered.
Purchase order number.
Name of carrier and any other references.

9. Invoices Contains address of supplier and customer. An invoice number.
Date.
Product codes/references.
Product price, quantity, net amount.
Any discounts.
VAT amount.
Gross – total.
Terms of payment.

10. Credit Note Issued when goods are returned to supplier or,
when goods are lost in transit/missing – shortages.
Contains invoice number of original consignment.
Reason for issue.
Otherwise same as an invoice.

11. Statement Sent at the end of the month.
Totals all invoice and credit notes sent.
Shows all payments received.
Gives a running balance and when payments are due.

12. All financial documents must be kept for a minimum of 6 years.

13. Discounts
Trade/bulk discount.
Cash (early settlement) discount.

14. Trade Discount
Given to bulk orders or trade customers. Calculated as follows: For a 10% discount on 100 items costing £2.36 each
Step One
Calculate price before discount
100 x 2.36 = £236
Step Two
Calculate the trade discount
236 x 10% (10/100) = £23.60
Step Three
Calculate the net price before VAT
236 – 23.6 = £212.40
Step Four
Calculate the VAT
212.4 x 20% (20/100) = £42.48
Step Five
Calculate the total invoice price
= £254.88

15. Settlement Discounts
Offered to encourage prompt payment.

16. Settlement Discounts
For a 10% bulk discount and a 2.5% cash discount on 100 items costing £2.36 each
Step One
Calculate price before discount
100 x 2.36 = £236
Step Two
Calculate the trade discount
236 x 10% (10/100) = £23.60
Step Three
Calculate the net price before VAT
236 – 23.6 = £212.40
Step Four
NOW calculate the settlement discount
x 2.5% (2.5/100) = £5.31
Step Five
Calculate the reduced total
212.4 – 5.31 = £207.09
The discount is not deducted from the invoice total as it is up to customer whether
they take advantage of it. Adjustments are carried out once the invoice has been paid.

17. Bookkeeping for Sales
A business receives and process an order for £200 worth of goods (ex VAT) from Molly Munchkins Treats.
Sales Ledger Control Account
money the business is owed an asset
Sales Account
an income account Dr Cr Dr Cr
Sales & VAT £240
SLCA £200
Double entry
VAT Account
a liability entry
Sales Ledger (not double entry) Dr Cr
Sales Ledger
Money owed a from individuals asset
Molly Munchkins Treats Dr Cr
Sales & VAT £240
SLCA £40

18. Bookkeeping for Discount Allowed
Molly Munchkin has settled the invoice taking advantage of 2% discount for prompt payment.
Sales Ledger Control Account
money the business
is owed an asset Dr Cr
Sales & VAT £240
Bank £235.20
Discount Allowed £4.80
Bank Account
an asset entry Dr Cr
SLCA £235.20
Molly’s discount on 200 is x 0.02 = £4.
The VAT is then calculated on the reduced amount £196 x 0.2 = £39.20
It was originally worked out at £40, so VAT account needs to be debited by 80p reduce the liability.
The Molly’s Sales ledger would also be credited with the amount to remove the debt.
VAT Account
a liability entry Dr
SLCA £0.80 Cr
Discount Allowed an
expense account Dr Cr
SLCA £4.00
SLCA £40

19. VAT Sales tax paid by the end consumer.
Businesses must keep accurate VAT records.
Documents must be kept for a minimum of 6 years.
VAT Exclusive Amounts
VAT Inclusive Amounts
Amount x 20 = VAT payable
100
Amount = VAT
100 + VAT amount
120 x 20 = £24
X 20 = £24
120

20. VAT Calculations VAT Exclusive Amounts VAT Inclusive Amounts
Amount x 20 = VAT payable
100
Amount x VAT Amount = VAT
100 + VAT amount
120 x 20 = £24
X 20 = £24
120

21. Pauline’s Pens Pauline’s Pens sells gel pens and has a special offer.
A box of ten pens normally sells for £8 (ex VAT), but Pauline is offering a 20% bulk discount for orders of ten boxes or more.
One morning she receives the following orders:
a. 20 boxes ordered from Tubbs.
b. 50 boxes ordered by Mickey.
c. 5 boxes ordered by Babs Cabs.
d boxes ordered by Ross from the Jobcentre.
Answers:
a. 160
b. 400
c. 40
d. 8000
The discount amounts 32 80
Nil
1600
Cost after discount
128
320 40
6400
VAT
25.6 64 8
1280
Total Cost
153.6
384 48
7680
Calculate the total cost before the discount, the discount, cost after discount, VAT at current rate, total cost.

22. Authorising and Checking Invoices
Credit limits – maximum amount a customer can owe at any one time.
Authorisation required if customers go above the credit limit.
Invoices need to be checked as for mistakes such as:
Different delivery address
Correct goods
Correct prices
Correct unit
Correct discount
Correct calculations.

23. Other Reasons to Check Invoices?
Something more sinister.
Bribery
Inducements
Fraud
In March 2016 a hotel manager was sentenced to prison for generating fake invoices.
AAT has ethical principles so it’s your responsibility to not allow/report such behaviour.
ICEPOP in particular integrity and objectivity here.

24. Coding Documents Instant and accurate way of referencing customers.
Efficient filing.
Alphabetic
Numeric
Alpha-numeric

25. Retention of Documents
Businesses should have a retention policy.
Normally 6 years, plus the current year.
Taxation law requires 6 years.
Principle of limitation of action.
Destruction – shredded, wiped after 6 years.

26. Questions

27. Exercises