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Chapter 1:
Types of Business
Transactions and
Documentation
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What you will
learn?
 Types of business transactions
 Types of business documentation
 Coding systems and methods of coding
 Discounts and Sales tax
 The functions and benefits of a
computerized
accounting system
 Accounting documents and
management reports produced
 Risks to data
 Document and record retention policies
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Types of business
Definition of an organization
transactions
A social arrangement
Pursuing collective goals
An
Organization
Controlling its own performance
Separating it from its environment
Including business such as
company, partnership, club,
charity, government department,
hospital, school, etc...
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Types of business
Types of business transactions
transactions
All organizations will have business
transactions:
Purchas
es
Sale
s
Other
transactio
ns



Purchasing goods and materials
Purchasing services
Purchase of non-current assets
(can be cash purchases or credit
purchases)

Selling good or providing services
(can be cash sales or credit sales)


Paying wages or salaries
Raising finance and paying rewards
to the suppliers of finance
Accounting for and paying tax
Movements of cash and money in
the bank account


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Types of business
Types of business transactions
transactions
All to business transactions are summarized at the
end of
accounting periods into two statements:
1
Statement of Financial
Position
2
Income Statement
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Types of business
Types of business transactions
transactions
Statement of Financial Position
Assets
(amount owned)
Liabilities
(amount owed)
Non
–
current
assets: kept long
term
in
the
business
E.g: equipment, land,
premises,…
Current
liabilities:
have to be settled
within 12 months
E.g: trade payables,…
Current assets:
being cash or will
become cash
within 12 months
E.g: inventory, AR,…
Long-term liabilities:
don’t have to be
settled until at least
12 months time
E.g : long-term
loans,…
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Types of business
Types of business transactions
transactions
Income Statement
Income
Expenses
Increases in
economic benefits
during the
accounting period
E.g: sales, other
income,…
Decreases in
economic benefits
during the
accounting period
E.g: rent, wages,
electricity, materials,…


Income > Expenses: the entity has a profit
Income < Expenses: the entity has a loss
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Types of business
The purpose of business documentation
documentation
Each type of business transaction has its own
set of documentation. The documentation is
needed to:
Control the progress of the transaction
Record the transaction
Provide a history of how the transaction proceeded.
This is sometimes known as an ‘audit trail’
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Types of business
Types of business documentation
documentation
Types
Purchase
requisitio
n
Comments
A document used by a department to request
that
the
purchasing
department
order
materials or merchandise
Purchase order
A business orders from another business
goods or services, such as materials supplies
Delivery note
A document that is included with a shipment of
goods sent out to a customer
Goods received
note
A list of goods that a business has received
from supplier and usually prepared by the
business’s own warehouse or goods receiving
area
Sales invoices
A demand for payment
Sale orders
A customer writes out and signs an order for
goods and services he requires
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Types of business
Types of business documentation
documentation
Types
Comments
Good dispatch
notes
A list of goods that a business has sent out
to a customer
Statements
of account
A document sent out by a supplier or
business in order to set out the amounts still
owed by business or customer
Remittance
advices
A document sent with a payment, detailing
which invoices are being paid and which credit
notes offset.
Credit note
Be used by a seller to cancel part or all of
previously issued invoice
Receipt
A written confirmation that money has been paid
Cheque
A cheque received from a customer to pay for
his outstanding debt (cheque received) or
issued to pay to supplier to clear a business’s
debt (cheque stubs)
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Types of business
Types of business documentation
documentation
Types
Petty
cash
voucher
Time records
Comments
A voucher raised on a payment from or receipt
into petty cash
A document record the amount of time
which
employees work (likes clock card)
Wage or
salary slip
A document show employees’ pay and any
deduction for tax
Share
A document is issued in exchange for new
share capital
Loan
agreemen
t
A document setting out the term of the
business’s loan.
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Types of business
Types of business documentation
documentation
Types
Purchases day-book
Comments
The book of prime entry for
credit purchases
Payable ledgers
A ledger for supplier’s personal
accounts
Sales day-book
The book of prime entry for credit sales
Receivables ledger
A
ledger for customer’s
personal accounts
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Types of business
documentation
Examples of business documentation
Sales
Invoice
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Types of business
documentation
Examples of business documentation
Credit note
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Types of business
documentation
Examples of business documentation
Statement
of
account
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Types of business
documentation
Examples of business documentation
Petty
cash
voucher
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Coding systems and methods of
coding
Coding systems

In accounting systems, coding systems are used to
refer to
customers, suppliers, accounts and employees.

The advantage of using codes:
• Concise: quicker to write or type
• Precise: ensure that products and people are
referred to uniquely
• Automatic processing: help in processing
transactions as information is changed into codes
• Checking: can carry out simple or sophisticated
checks on the structure off the code
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Coding systems and methods of
coding Requirements of the codes
Codes should
be:
1. Simple to use
3. Concise
2. Understandable
4. Precise
5. Expandable
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Coding systems and methods of
coding
Methods of coding
Sequential
codes
 Products or customers are simply allocated
numbers in


sequence:
0001 Abraham
s
0002 Adkins
….
…..
Advantage:
•
Simple
•
Concise
Disadvantage:
•
There is no relationship at all between the
code
and the item/person being encoded
•
Expansion might be difficult
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Coding systems and methods of
coding
Methods of coding
Hierarchical or significant digit
codes
 Hierarchical codes could be used to code the accounts
in the
general ledger
E.g: Code 3113 is interpreted as the Machinery Cost Account
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1
1 = expense 1 = non-current
asset
2 = income
2 = current assets
3 = assets
4 = liabilities

Advantage:
•
1
3
1 = cost
1= property
2 = accumulated 2 = office
depreciation
equipment
3 = machinery
4 = motor
vehicles
Structure of type of code provides information
both to human users and to computers
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Coding systems and methods of
coding
Methods of coding
Block codes

This method lie somewhere between simple sequence
codes
and the full, detailed hierarchical codes.
They start off giving
some
information
but
then lose enthusiasm.

1xxx
=
For general ledger
codes
you might have:
expenses
2xxx = income
3xxx = assets
4xxx = liabilities

Accounting
systems
bookkeeping so
rely
on
entry
before transactions are
recorded in the system, they should
attached codes.
double
be
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Discounts and Sales tax
Discounts
Type of discount
A trade
discount
(quantity or
bulk
discount)
This is a reduction
in the price of the
goods E.g:
10%
might be offered if
at least 10 units
are ordered and
20% if at least 100
units are ordered
A cash discount
(settlement
discount)
This is offered on
the condition that
payment is
received quickly
enough
E.g: 5% discount is
offered if payment is
received in less than
30 days
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Discounts and Sales tax
Sales tax
What is sales tax?






Many countries have a sales tax where an
amount is
added to goods sold
In the UK, the sales tax is called VAT (value added
tax)
Sales tax must later be paid over to the Government
Net amount: the amount of the sales before the
tax is
added
Gross amount: the amount of the sales after the
tax is
added
If there are bulk or quantity discounts, the VAT
is
calculated on the amount after the
discount
Example:
Net amount =
100 Sale tax is
at 20%
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Discounts and Sales tax
Sales tax
Type of sales tax
Output sales tax

Input sales tax
A tax on
 A tax on
goods
goods
leaving the
coming into
business
the
 The amount of
business
sales tax
 The amount of
charged
on
sales tax
sales
suffered
on
At the end of each tax accountingpurchases
period, the net of
the sales output and input tax has is paid to or
received from the government
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Computerized accounting
Benefits of a computerized accounting system
system

Faster provision of information

Easily available provision of information

Once the system is set up, cheaper information

More accurate information because arithmetic and
certain
other errors will be eliminated
However, sometimes things go wrong and systems can be
broken down or incorrect information is produced
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Computerized accounting
Functions of a computerized accounting system
system

The computerized accounting system processes and
changes
input of data into output of information

A computerized accounting system can be represented
as:
Input of
data
Processin
g
data
Compute
r files
Output of
information
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Computerized accounting
Functions of a computerized accounting system
system
Type of processing
Real-time, online
processing
Batch processing


Transactions
are
accumulated
into
batches and
then
all
processed
together
The information
held in the
system
is
generally out-ofdate because the


‘Real-time’
means
that
files are
updated as
transactions
happen
‘On-line’
means
that the files
are
permanently
accessible to
be
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Accounting documents and management
reports
Accounting documents and management reports

Routine accounting documents and reports can be:
invoices,
statements, sales analyses, monthly
sets of financial
statements

Exception reporting is the concept of directing
managers’
attention to areas of operations which
seem to be performing
either
exceptionally
badly
or
exceptionally
well.
However,
managers should concentrate their efforts where
operations
seem to be diverging from what is expected

Exception reports include:
•
Slow-paying customers
•
Slow-moving stock
•
Expenses much greater than expected
•
Failed password attempts at accessing data
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Risks to data
Risks to data
In large organizations, it is very easy for:

Errors to be made

Unauthorized transactions to take place

Fraud to be carried out

Successfully recorded data to be lost, especially in
computerbased
accounting
systems
where
overwrite or erase
information
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Risks to data
Internal control
Because of risks to data, it is necessary to design a system
which called internal control to control all transactions. All
transaction should be:

Authorized

Completely recorded

Accurately recorded

Safeguarded
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Risks to data
Internal control
Types of internal control:

Segregation of duties: transactions are broken down
into
different stages with a different person
being responsible for
each stage. This control
have many advantages:
•
It will be more difficult for unauthorized
transaction to slip through
•
Each person to some extent checks up on what
the
previous one has done
•
Fraudulent transactions can be eliminated
because they require co-operation between all
the parties

Signatures to authorize amounts

Control totals to ensure all transactions have been
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Risks to data
Internal control
To reduce risks, businesses set some safeguards with
accounting
data:

If ledgers are maintained manually, they should be locked
each
night in a fireproof safe

If ledgers are computer-based, the back-up copies
should be
taken regularly, ideally daily

Using password and equipping virus checkers and
firewalls to
prevent improper access to data over the internet
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Document and record retention
policies
Purpose of keeping documentation and record
Documents and records should be kept for some time in
order to:

Answer queries
E.g: What were the sales over the last 4 years to a
certain customer?

Defend legal actions
E.g: A customer alleges some years later that faulty goods
had
been supplied

Comply with legislation
E.g: Tax legislation in case an enquiry is launched by the
tax
authorities
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Document and record retention
policies
Retention policies

Typically documents have to be retained for around 5
– 10
years depending on local rules

The documents do not have to be kept on the
business
premises

Scanning documents and keeping computerized
images is
becoming common rather than originals
because it is cheap
and not bulky to store