Types of Business Transactions and
Documentation
1. Types of Business Transactions
Business transactions refer to financial activities that involve the exchange of goods, services, or
money between two or more entities. These transactions impact the financial statements of a
business and require proper recording.
a) Types of Business Transactions
i) Sales
Definition: A sale occurs when a business provides goods or services to a customer in exchange
for money or a promise to pay. Sales transactions can be cash or credit-based.
Process:
1. The seller issues a sales invoice detailing the goods or services provided.
2. If it is a credit sale, terms of payment (e.g., 30 days) are specified.
3. The buyer either pays immediately (cash sale) or within the agreed period (credit sale).
4. The seller records the transaction in the sales ledger.
Example: A retail store sells a laptop for $1,000 to a customer who pays in cash. This is a cash
sale. If the customer pays later, it is a credit sale.
Past Paper MCQ: What document is issued by the seller to request payment from a buyer for
goods sold? A) Credit note B) Sales invoice C) Debit note D) Remittance advice
Answer Explanation: A sales invoice is the official document that records a sale transaction and
requests payment from the buyer. It includes details such as quantity, price, and total amount.
ii) Purchases
Definition: A purchase is the acquisition of goods or services by a business for its operations.
Purchases can be cash or credit-based.
Process:
1. The buyer places an order with a supplier.
2. The supplier issues a purchase invoice to request payment.
3. The buyer either pays immediately (cash purchase) or within the agreed terms (credit
purchase).
4. The buyer records the transaction in the purchase ledger.
Example: A clothing retailer buys 100 shirts from a supplier at $20 each for resale. This purchase
may be on cash or credit terms.
Past Paper MCQ: What document does a supplier send to a customer requesting payment for
goods supplied? A) Sales invoice B) Purchase invoice ✅ C) Delivery note D) Credit note
Answer Explanation: A purchase invoice is issued by the supplier to inform the buyer about the
amount payable for the goods/services supplied.
iii) Receipts
Definition: A receipt refers to money received by a business from a customer, usually for goods
or services sold.
Process:
1. The business receives payment from the customer.
2. A receipt is issued as proof of payment.
3. The transaction is recorded in the cash book and sales ledger.
Example: A gym receives $500 as a monthly membership fee from a client.
Past Paper MCQ: Which of the following is issued as proof of payment received? A) Purchase
invoice B) Receipt ✅ C) Credit note D) Debit note
Answer Explanation: A receipt confirms that payment has been made, acting as proof of a
completed transaction.
iv) Payments
Definition: Payments involve the transfer of money from a business to a supplier or service
provider.
Process:
1. The business verifies the invoice received from the supplier.
2. Payment is processed through cash, cheque, bank transfer, or digital payment.
3. A remittance advice is sent along with the payment.
4. The transaction is recorded in the cash book and purchase ledger.
Example: A company pays $2,000 for office rent.
Past Paper MCQ: What document is often sent along with a payment to inform the supplier
about the invoices being settled? A) Sales invoice B) Remittance advice ✅ C) Credit note D)
Delivery note
Answer Explanation: A remittance advice helps suppliers match the payment received to the
corresponding invoices.
v) Petty Cash
Definition: Petty cash is a small amount of money kept on hand for minor expenses.
Process:
1. A petty cash fund is established.
2. Employees request cash using a petty cash voucher.
3. The cashier approves and disburses cash.
4. The transaction is recorded in the petty cash book.
5. The petty cash fund is replenished when it reaches a minimum level.
Example: A receptionist at an office uses petty cash to buy $10 worth of stationery.
Past Paper MCQ: Which document is used to record minor cash expenses? A) Purchase invoice
B) Petty cash voucher ✅ C) Credit note D) Remittance advice
Answer Explanation: A petty cash voucher records small business expenses and ensures
accountability.
vi) Payroll
Definition: Payroll transactions involve payments made to employees as salaries and wages.
Process:
1. Employee attendance and work hours are recorded.
2. Salaries and wages are calculated, including deductions and taxes.
3. Payroll is processed through bank transfer or cheque.
4. Payslips are issued to employees.
5. Payroll expenses are recorded in the accounts.
Example: A company pays $5,000 in salaries to its employees at the end of the month.
Past Paper MCQ: What document is given to employees as proof of salary payment? A) Payroll
report B) Payslip ✅ C) Receipt D) Petty cash voucher
Answer Explanation: A payslip provides details about salary, deductions, and net pay received
by the employee.
2. Types of Business Documentation
Proper documentation ensures transparency and accuracy in financial transactions.
a) Purpose and Content of Business Documents
i) Sales Invoice
Definition: A sales invoice is issued by a seller to request payment from a customer.
Process:
1. The invoice is created with details of goods/services, quantity, price, tax, and total
amount.
2. It is sent to the customer.
3. The customer makes the payment based on the invoice.
4. The seller records the invoice in the sales ledger.
Past Paper MCQ: Which document is issued by a business to request payment from a
customer? A) Credit note B) Sales invoice ✅ C) Debit note D) Remittance advice
Answer Explanation: A sales invoice serves as an official request for payment from the
customer.
Process of Recording Business Transactions
within the Accounting System
3.1 Characteristics of Accounting Data and Sources of
Accounting Records
a) Characteristics of Accounting Data
Accounting data should meet the following characteristics to ensure accuracy and reliability:
1. Relevance – Must be useful for decision-making.
2. Reliability – Should be accurate and verifiable.
3. Comparability – Must be consistent across time and entities.
4. Understandability – Should be clear to intended users.
5. Completeness – Must include all necessary financial details.
b) Sources of Accounting Records
Common sources of accounting records include:
1. Sales Invoices – Documents sales transactions.
2. Purchase Invoices – Records goods/services bought.
3. Receipts – Evidence of payments received.
4. Bank Statements – Reconciliation of cash transactions.
5. Petty Cash Vouchers – Tracks minor cash expenses.
6. Payroll Records – Documents employee wages and deductions.
Example: If a company purchases raw materials, the supplier's invoice serves as the source
document, which is then recorded in the purchase ledger.
Past Paper MCQ: What is the primary source document for recording a credit sale? A) Receipt
B) Sales invoice C) Bank statement D) Petty cash voucher
Answer: B) Sales invoice
Explanation: A sales invoice provides details of a credit sale, including date, amount, and
payment terms.
3.2 Features of a Computerised Accounting System
a) Key Features:
1. Data Entry Automation – Reduces manual errors.
2. Real-time Processing – Transactions are updated instantly.
3. Cloud Storage – Data is stored securely online, accessible from anywhere.
4. Integration with Banking Systems – Facilitates payments and reconciliations.
5. Reporting Tools – Generates financial statements automatically.
Example: QuickBooks, SAP, and Xero are popular computerised accounting systems that enable
businesses to manage their finances digitally.
Past Paper MCQ: Which feature of a computerised accounting system helps in reducing data
loss? A) Cloud storage B) Manual entry C) Paper-based records D) Single-entry bookkeeping
Answer: A) Cloud storage
Explanation: Cloud storage ensures that financial data is securely backed up and accessible from
multiple locations.
3.3 Locating, Displaying, and Checking Accounting Data
a) How Users Locate Data
1. Search Functionality – Most systems have search tools.
2. Chart of Accounts – Organises financial data systematically.
3. Filtering Options – Allows users to view specific transactions.
b) Displaying Accounting Data
1. Dashboards – Summarises key financial data.
2. Financial Reports – Displays balance sheets, income statements, etc.
c) Checking and Correcting Errors
1. Trial Balance Review – Identifies discrepancies.
2. Audit Trails – Tracks changes in data.
3. Error Logs – Highlights incorrect entries.
Past Paper MCQ: What tool in a computerised accounting system helps in tracking errors and
changes in financial records? A) Audit trail B) Payroll system C) Bank reconciliation statement D)
Cash book
Answer: A) Audit trail
Explanation: An audit trail records all changes made to accounting data, helping to identify
errors and fraudulent activities.
3.4 Tools and Techniques for Processing Transactions
and Period-End Routines
a) Processing Transactions
1. Double-Entry System – Ensures every transaction is recorded with equal debit and credit
entries.
2. Bank Reconciliation – Matches records with bank statements.
3. Adjusting Entries – Ensures revenue and expenses are correctly allocated.
b) Period-End Routines
1. Closing Ledgers – Ensures no further changes can be made.
2. Generating Financial Statements – Summarises performance.
3. Tax Reporting – Prepares tax filings based on recorded transactions.
Past Paper MCQ: Why is bank reconciliation important in accounting? A) To prepare financial
statements B) To verify cash transactions and bank records C) To issue invoices D) To record
petty cash expenses
Answer: B) To verify cash transactions and bank records
Explanation: Bank reconciliation ensures that company records match the bank’s records,
identifying any discrepancies.
3.5 Risks to Data Security and Data Protection
Procedures
a) Risks to Data Security
1. Unauthorised Access – Risk of data breaches.
2. Data Loss – Due to cyberattacks or system failures.
3. Fraudulent Transactions – Altered records can lead to financial loss.
b) Data Protection Measures
1. Encryption – Protects sensitive data.
2. Access Controls – Restricts unauthorised entry.
3. Regular Backups – Ensures data recovery in case of loss.
Past Paper MCQ: Which of the following is a common method to prevent unauthorised access
to accounting data? A) Keeping paper records B) Using encryption and access controls C)
Allowing unrestricted access to employees D) Avoiding backup of data
Answer: B) Using encryption and access controls
Explanation: Encryption secures data, while access controls restrict who can view or modify
records.
3.6 Principles of Coding in Accounting Transactions
a) Need for a Coding System
1. Efficient Data Retrieval – Helps in quick identification.
2. Standardisation – Ensures uniformity in records.
3. Minimises Errors – Reduces misclassification.
b) Use of Coding in Accounting
1. Account Codes – Unique identifiers for accounts.
2. Transaction Codes – Categorises sales, expenses, etc.
3. Departmental Codes – Assigns costs to specific departments.
Example: A sales transaction might be coded as ‘SA1001’ to indicate it belongs to the sales
account.
Past Paper MCQ: Why are transaction codes used in accounting systems? A) To increase manual
work B) To categorise and simplify transactions C) To eliminate the need for records D) To
increase errors in financial reports
Answer: B) To categorise and simplify transactions
Explanation: Transaction codes help in organising financial records, making data retrieval and
reporting easier.
3.7 Coding Sales Invoices, Supplier Invoices, and Credit
Notes
a) Coding Sales Invoices
1. Assign an invoice number.
2. Link to the customer account.
3. Categorise by product or service type.
b) Coding Supplier Invoices
1. Match with purchase orders.
2. Assign expense account codes.
3. Include tax classification.
c) Coding Credit Notes
1. Reference the original sales invoice.
2. Assign a return or discount code.
3. Update accounts receivable.
4. Example: A credit note might be coded as ‘CRN2001’ to indicate it is a credit transaction
for customer refunds.
Past Paper MCQ: Which document is referenced when coding a credit note? A) Petty cash
voucher B) Original sales invoice C) Payroll statement D) Delivery note
Answer: B) Original sales invoice
Explanation: A credit note is issued in response to an original sales invoice, usually for returned
goods or price adjustments.
Accounting Documents and Management
Reports in Computerised Accounting Systems
3.8 Accounting Documents and Management Reports
a) Accounting Documents Produced by Computerised Accounting
Systems
Computerised accounting systems automate the generation of various financial documents
essential for business operations. These documents include:
1. Sales Invoices – A document issued to customers for goods or services sold on credit. It
includes details such as the buyer's name, invoice date, description of goods/services,
quantity, price, and total amount due.
o
Example: A retail company sells electronics to a customer on credit and issues a
sales invoice specifying the purchase details and the due date for payment.
2. Purchase Invoices – A document received from suppliers detailing the goods or services
purchased on credit, including item descriptions, quantities, unit prices, and total cost.
o
Example: A manufacturing company buys raw materials from a supplier and
receives a purchase invoice, which is recorded in the accounts payable system.
3. Credit Notes – A document issued by a seller to reduce the amount a buyer owes,
usually due to returned goods or an overcharge.
o
Example: A customer returns a defective laptop to an electronics store, and the
store issues a credit note to adjust the amount owed.
4. Debit Notes – A document sent by a buyer to a supplier requesting additional charges,
often for undercharged invoices or additional goods/services received.
o
Example: A company receives an invoice for 50 units but actually received 60
units. A debit note is issued to request a revised invoice.
5. Receipts – A document that serves as proof of payment received from a customer.
o
Example: A hotel issues a receipt to a guest after they pay for their stay.
6. Payment Vouchers – Used to record payments made to suppliers, employees, or other
parties, typically specifying payment details and authorization signatures.
o
Example: A business issues a payment voucher when paying rent to its landlord.
7. Bank Reconciliation Statements – A document that compares a company’s bank
statement with its accounting records to ensure all transactions match.
o
Example: A company checks its bank reconciliation statement to identify any
unrecorded transactions or errors.
8. Payroll Reports – Summarizes employee salaries, tax deductions, bonuses, and net pay
for a specific period.
o
Example: A company generates a payroll report for its employees at the end of
each month to ensure correct salary payments.
Past Paper MCQ: Which document is generated by an accounting system to request payment
from a customer? A) Credit note
B) Sales invoice
C) Debit note
D) Petty cash voucher
Answer: B) Sales invoice
Explanation: A sales invoice is a document issued to a customer, detailing the amount owed for
a sale.
b) Management Reports Produced by Computerised Accounting
Systems
Management reports provide insights for decision-making and financial planning. These include:
1. Profit and Loss Statement (Income Statement) – A report that shows a company's
revenues, expenses, and net profit over a period.
o
Example: A retail company reviews its profit and loss statement to assess how
much profit it made in the last quarter.
2. Balance Sheet – A financial statement that presents a company’s assets, liabilities, and
equity at a specific date.
o
Example: A business owner checks the balance sheet to understand the
company’s financial position before applying for a loan.
3. Cash Flow Statement – Shows the cash inflows and outflows of a business during a
period, divided into operating, investing, and financing activities.
o
Example: A startup reviews its cash flow statement to determine if it has enough
funds to cover expenses.
4. Aged Receivables Report – Lists outstanding customer debts categorized by age, such as
30, 60, or 90 days overdue.
o
Example: A company uses an aged receivables report to follow up on overdue
invoices from customers.
5. Aged Payables Report – Shows unpaid supplier invoices categorized by age, helping
businesses manage liabilities.
o
Example: A finance manager reviews the aged payables report to ensure
suppliers are paid on time.
6. Budget vs Actual Reports – Compares forecasted financial figures against actual
performance to identify variances.
o
Example: A company planned to spend $10,000 on marketing but the budget vs
actual report shows $12,000 was spent, requiring a review of expenses.
7. Tax Reports – Summarizes sales tax, VAT, or corporate tax liabilities for compliance and
reporting purposes.
o
Example: An accountant prepares a tax report to submit a company's VAT return
to tax authorities.
Past Paper MCQ: Which management report provides information on outstanding customer
balances? A) Balance sheet
B) Aged receivables report
C) Payroll report
D) Profit and loss statement
Answer: B) Aged receivables report
Explanation: The aged receivables report lists unpaid customer invoices and their due dates.
c) Link Between Accounting Systems and Other Business Systems
A computerised accounting system does not operate in isolation but integrates with other
business functions for efficiency. Key integrations include:
1. Sales and Customer Relationship Management (CRM) Systems
o
Automatically records sales transactions and customer payments.
o
Tracks customer credit limits and outstanding balances.
o
Example: A business using Salesforce integrates it with its accounting system to
automatically update customer invoices and payments.
2. Inventory Management Systems
o
Updates stock levels when sales and purchases occur.
o
Prevents stock shortages and overstocking.
o
Example: A supermarket chain integrates its inventory system with accounting
software to ensure product availability and cost tracking.
3. Payroll Systems
o
Automates salary payments and tax deductions.
o
Generates payroll reports and compliance filings.
o
Example: A company links its payroll system with accounting software to
calculate employee salaries and tax deductions automatically.
4. Banking and Payment Systems
o
Facilitates online transactions and reconciliations.
o
Detects fraudulent activities through automated checks.
o
Example: A company integrates its accounting software with online banking to
reconcile transactions daily.
5. Enterprise Resource Planning (ERP) Systems
o
Integrates financial, operational, and strategic planning processes.
o
Provides real-time data for business decision-making.
o
Example: A multinational corporation uses SAP ERP to manage finance, supply
chain, and operations from a single platform.
Past Paper MCQ: Which system integration helps update stock levels automatically when sales
occur? A) Payroll system
B) Inventory management system
C) CRM system
D) Banking system
Answer: B) Inventory management system
Explanation: The inventory management system ensures stock levels are adjusted in real-time
as sales and purchases are processed.
Duality of Transactions, Double-Entry
Bookkeeping, Banking System, and Payroll
Transactions
B. Duality of Transactions and Double-Entry Bookkeeping
1. Double-Entry Bookkeeping
a) Define the Accounting Equation
The accounting equation is the foundation of double-entry bookkeeping. It states that:
Assets = Liabilities + Equity
•
Assets: Resources owned by the business (e.g., cash, inventory, equipment).
•
Liabilities: Amounts owed to outsiders (e.g., loans, accounts payable).
•
Equity: Owner’s interest in the business (e.g., capital, retained earnings).
Example:
If a business starts with $10,000 cash (asset) from an owner’s investment (equity), the equation
is:
$10,000 (Assets) = $0 (Liabilities) + $10,000 (Equity)
b) Demonstrate the Use of the Accounting Equation
The equation ensures that every transaction affects at least two accounts to maintain balance.
Example:
A business buys equipment for $5,000 using cash:
Before Transaction:
•
Assets = $10,000 (Cash) + $0 (Equipment)
•
Liabilities = $0
•
Equity = $10,000
After Transaction:
•
Assets = $5,000 (Cash) + $5,000 (Equipment)
•
Liabilities = $0
•
Equity = $10,000
The equation remains balanced.
c) How the Accounting Equation Relates to Double-Entry Bookkeeping
•
Every transaction affects two or more accounts.
•
One account is debited, and another is credited.
Example:
A company borrows $3,000 from a bank.
•
Cash (Asset) increases → Debit $3,000
•
Loan Payable (Liability) increases → Credit $3,000
This keeps the accounting equation in balance.
d) Entering Transactions into the Accounting System
Transactions are recorded in a journal and then posted to ledger accounts.
Example: A company receives $1,500 from a customer for services provided:
•
Debit: Cash Account (+$1,500)
•
Credit: Revenue Account (+$1,500)
2. Journal Entries
a) Use of Journal Entries
Journal entries are used to:
1. Record business transactions in chronological order.
2. Provide an audit trail.
3. Correct errors through adjustment entries.
Example Format:
Date Account Debit ($) Credit ($)
01/03 Cash
1,500
01/03 Revenue
1,500
b) Prepare Journal Entries for Various Transactions
1. Purchasing Inventory on Credit:
o
Debit: Inventory ($5,000)
o
Credit: Accounts Payable ($5,000)
2. Paying Rent in Cash:
o
Debit: Rent Expense ($2,000)
o
Credit: Cash ($2,000)
3. Elements of Financial Statements
a) Define and Distinguish Elements of Financial Statements
1. Assets: Resources owned (e.g., cash, land, equipment).
2. Liabilities: Amounts owed (e.g., loans, accounts payable).
3. Equity: Owner’s capital and retained earnings.
4. Revenue: Income earned from operations.
5. Expenses: Costs incurred in business operations.
b) Identify Content of Financial Statements
1. Statement of Financial Position (Balance Sheet):
o
Shows assets, liabilities, and equity.
o
Snapshot of financial health.
2. Statement of Profit or Loss:
o
Shows revenue, expenses, and profit over a period.
C. Banking System and Transactions
1. The Banking Process
a) Differences Between Banks and Other Financial Services
Feature
Banks Financial Services Companies
Accept Deposits
Yes
No
Issue Loans
Yes
Yes
Investment Services Limited Extensive
Money Transfers
Yes
Yes
b) How the Bank Clearing System Works
1. Cheques & Digital Payments go through clearing houses.
2. Funds are transferred between banks electronically.
3. Final settlement occurs at the central bank.
c) Different Forms of Payment
1. Cash – Immediate transaction.
2. Cheque – Delayed clearance.
3. Credit/Debit Card – Secure electronic payments.
4. Digital Payments – Online transactions (e.g., PayPal, bank transfers).
2. Documentation and Retention Policies
a) Importance of Document Retention
•
Ensures compliance with tax laws.
•
Prevents fraud.
•
Supports financial audits.
b) Categories of Documents for Retention
1. Financial Statements – 7+ years.
2. Invoices & Receipts – 5+ years.
3. Payroll Records – 6+ years.
4. Bank Statements – 3+ years.
D. Payroll
1. Process Payroll Transactions
a) Calculate and Prepare Payroll Entries
1. Gross Wages Calculation
o
Hourly Wage = Hours worked × Hourly rate.
o
Salary = Fixed monthly amount.
2. Payroll Journal Entry
o
Debit: Salaries Expense ($5,000)
o
Credit: Payroll Payable ($5,000)
b) Different Payment Methods
1. Cash – High risk, less common.
2. Cheque – Secure but slow.
3. Bank Transfer – Preferred method.
c) Importance of Payroll Security & Authorization
•
Prevents unauthorized payments.
•
Ensures confidentiality of employee data.
MCQs and Answers
1. Which document records a company's financial position at a specific date?
o
A) Profit and Loss Statement
o
B) Statement of Financial Position
o
C) Payroll Report
o
D) Bank Statement
Answer: B) Statement of Financial Position
Explanation: The statement of financial position (balance sheet) shows assets, liabilities, and
equity.
2. What is the purpose of a journal entry?
o
A) To correct errors only
o
B) To record transactions systematically
o
C) To store customer details
o
D) To track sales only
Answer: B) To record transactions systematically
Explanation: Journal entries provide a structured record of all financial transactions.
General Ledger, Cash & Bank, Sales & Credit
Transactions, and Purchases & Credit
Transactions
E. General Ledger Accounts
1. Preparing General Ledger Accounts
a) Recording Financial Transactions
General ledger accounts are the main records of financial transactions within an organization.
They summarize all transactions from journals and are categorized into different account types:
•
Assets (e.g., Cash, Accounts Receivable)
•
Liabilities (e.g., Accounts Payable, Loans)
•
Equity (e.g., Share Capital, Retained Earnings)
•
Revenue (e.g., Sales, Service Income)
•
Expenses (e.g., Rent, Utilities)
Example:
A company pays rent of $2,000 for the month:
Date Account
Debit Credit
01/03 Rent Expense 2,000
01/03 Cash
2,000
The balance carried forward is transferred to the next accounting period.
F. Cash and Bank
1. Maintaining Cash Records
a) Recording Cash Transactions
Cash transactions are recorded in the cash book, which includes:
1. Cash Receipts – Money received from customers.
2. Cash Payments – Money paid to suppliers/employees.
3. Discounts – Trade or cash discounts given/received.
4. Contra Entries – When cash is transferred between bank and cash accounts.
Example:
A business receives $1,500 from a customer for a previous sale:
Date Account
Debit Credit
02/03 Cash
1,500
02/03 Accounts Receivable
1,500
2. Maintaining a Petty Cash Record
Petty cash is used for small, day-to-day expenses and can be maintained using:
1. Imprest System – A fixed amount is given, and reimbursement is made when funds are
low.
2. Non-Imprest System – No fixed amount, expenses are recorded as they occur.
a) Petty Cash Example
A business pays $50 for office supplies using petty cash:
Date Description
Amount Balance
05/03 Office Supplies 50
450
The petty cash account is reconciled periodically to match actual cash in hand.
G. Sales and Credit Transactions
1. Recording Sales and Trade Receivables
a) Accounting for Sales Transactions
Sales transactions should consider:
1. Types of Discounts – Trade, cash, or bulk discounts.
2. Sales Tax – VAT or GST impact on invoice amount.
3. Impact on Sales Tax Ledger – Correct tax calculations.
Example:
A company sells goods worth $5,000 plus 10% sales tax on credit:
Date Account
Debit Credit
06/03 Accounts Receivable 5,500
06/03 Sales
5,000
06/03 Sales Tax Payable
500
b) Preparing Trade Receivables Ledger
A Trade Receivables ledger includes transactions for each credit customer.
Example:
Customer A owes $1,200 after a previous purchase. They pay $500 in cash.
Date
Details
Debit
01/03
Sales
1,200
07/03
Payment
Credit
Balance
1,200
500
700
H. Purchases and Credit Transactions
1. Recording Purchases and Trade Payables
a) Accounting for Purchase Transactions
Purchase transactions include:
1. Trade & Cash Discounts – Affect invoice price.
2. Sales Tax Impact – Recorded separately if applicable.
3. Impact on Sales Tax Ledger – Adjusted accordingly.
Example:
A business purchases goods worth $3,000 plus 8% sales tax on credit:
Date
Account
Debit
08/03
Inventory
3,240
08/03
Accounts Payable
Credit
3,240
b) Preparing Trade Payables Ledger
A Trade Payables ledger tracks supplier transactions.
Example:
Supplier B is owed $4,000. A payment of $2,000 is made.
Date Details
Debit Credit Balance
01/03 Purchases 4,000
09/03 Payment
4,000
2,000 2,000
MCQs and Answers
1. What is the purpose of a general ledger?
o
A) To record only cash transactions
o
B) To provide a summary of all accounts
o
C) To record only bank transactions
o
D) To track payroll records
Answer: B) To provide a summary of all accounts
Explanation: The general ledger is the main financial record summarizing all transactions.
2. What is a contra entry?
o
A) A transaction recorded in both cash and bank accounts
o
B) A payment to suppliers
o
C) A sales invoice issued to a customer
o
D) An adjustment for errors
Answer: A) A transaction recorded in both cash and bank accounts
Explanation: Contra entries occur when funds are moved between cash and bank accounts.
3. Which system is used to maintain petty cash?
o
A) Double-entry system
o
B) Imprest system
o
C) Bank reconciliation system
o
D) Cash flow system
Answer: B) Imprest system
Explanation: Under the imprest system, a fixed amount is given, and reimbursements are made
as needed.
Reconciliation and Preparing the Trial Balance
I. Reconciliation
1. Purpose of Reconciliations
a) Purpose of Reconciliations
Reconciliation is the process of matching internal financial records with external documents to
ensure accuracy and identify discrepancies. It acts as a key checking device that aids
management in:
•
Detecting errors or fraud.
•
Ensuring compliance with accounting standards.
•
Maintaining financial accuracy.
•
Supporting decision-making.
Example:
A company records a customer payment of $5,000 but the bank statement only shows $4,800
received. Reconciliation will help identify the missing amount and rectify the issue.
b) Importance of Regular Reconciliations
Regular reconciliation is important to:
•
Prevent and detect fraud – Identifies unauthorized transactions.
•
Ensure accurate financial reporting – Reduces errors before financial statements are
prepared.
•
Maintain good supplier and customer relationships – Avoids disputes over payments.
Professional Handling of Discrepancies:
•
Investigate missing payments.
•
Contact banks or suppliers for clarification.
•
Correct errors in the accounting system.
2. Reconcile the Cash Records
a) Reconcile Cash Records to a Bank Statement
Cash book records and bank statements may have differences due to:
•
Outstanding cheques.
•
Bank charges.
•
Direct deposits not recorded in books.
Steps to Perform a Bank Reconciliation:
1. Compare cash book and bank statement balances.
2. Identify unrecorded transactions (e.g., bank fees, interest earned).
3. Adjust the cash book for missing items.
4. Adjust for any errors or discrepancies.
5. Prepare a bank reconciliation statement.
Example:
If the cash book shows $10,000 and the bank statement shows $9,700 due to a $300 bank fee,
the company must record:
•
Debit: Bank Charges Expense ($300)
•
Credit: Cash ($300)
3. Reconcile Individual Supplier Accounts
a) Supplier Account Reconciliation
This process ensures that accounts payable balances match supplier statements.
Steps to Reconcile Supplier Accounts:
1. Compare supplier ledger balance with the supplier’s statement.
2. Identify missing invoices or unrecorded payments.
3. Investigate discrepancies such as duplicate payments.
4. Correct any errors.
Example:
A supplier statement shows a balance of $5,000, but company records show $4,500 due to an
unrecorded invoice. After adding the missing invoice, both records match.
J. Preparing the Trial Balance
1. Prepare the Trial Balance
a) Extracting an Initial Trial Balance
A trial balance lists all ledger accounts with their debit and credit balances to verify that debits
equal credits.
Steps to Prepare a Trial Balance:
1. List all general ledger accounts.
2. Record their debit or credit balances.
3. Ensure total debits equal total credits.
Example:
Account
Debit ($)
Cash
10,000
Revenue
Expenses
15,000
5,000
Capital
Total
Credit ($)
5,000
15,000
15,000
Since the totals match, there are no immediate errors.
2. Correcting Errors
a) Errors Revealed by a Trial Balance
1. Transposition errors (e.g., recording $3,210 as $3,120).
2. Unequal debits and credits (e.g., omitting an entry).
3. Incorrect account balance transfers.
b) Errors Not Revealed by a Trial Balance
1. Omission of a transaction.
2. Incorrect classification of accounts (e.g., recording an asset as an expense).
3. Compensating errors (one mistake cancels another).
c) Preparing Manual Journal Entries to Correct Errors
If rent expense was mistakenly recorded as $2,000 instead of $2,500:
•
Debit: Rent Expense ($500)
•
Credit: Suspense Account ($500)
d) Using a Suspense Account
A suspense account is a temporary holding account used when there are discrepancies in the
trial balance.
Example:
•
If debits total $25,000 and credits $24,500, a suspense account with $500 is created.
•
Once errors are identified, adjustments remove the suspense balance.
e) Redrafting the Trial Balance
After error correction, a new trial balance is prepared to ensure debits still equal credits.
MCQs and Answers
1. What is the main purpose of reconciliation?
o
A) To record daily transactions
o
B) To identify discrepancies and ensure accuracy
o
C) To calculate net profit
o
D) To prepare a trial balance
Answer: B) To identify discrepancies and ensure accuracy
Explanation: Reconciliation ensures that internal financial records match external documents.
2. Which error will NOT be revealed by extracting a trial balance?
o
A) A transposition error
o
B) A missing transaction
o
C) An unrecorded bank charge
o
D) A ledger account total mistake
Answer: B) A missing transaction
Explanation: A trial balance only checks that debits equal credits; it does not detect omitted
transactions.
3. What should be done if a supplier’s statement shows a higher balance than the
company’s ledger?
o
A) Ignore the discrepancy
o
B) Adjust the company records for missing invoices
o
C) Reduce the balance to match the supplier’s
o
D) Delete previous transactions
Answer: B) Adjust the company records for missing invoices
Explanation: The company should investigate and correct any missing transactions.
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ABBAS RAZA KHAN DAB
The End