[FA1] Recording Financial Transactions
Chapter 1
1.1 Overview of Bookkeeping and Accounting
1.1 Bookkeeping and Accounting in Business
1.1.1 What is a Business?
- A business is an organization that aims to make a profit for its owner
- Profit = Income - Expenses
- Income comes mainly from a business’s sales of goods and services
- Expenses are the amounts that a business pays to operate
1.1.2 Ownership and Recording of Transactions
- Owner[s] introduce assets into the business as capital
- The business’s records should not include transaction concerning the owner’s personal expenses
- When a business is controlled by one person he is known as a sole trader
1.1.3 The Need for Accounting
- Bookkeeping is the act of recording financial transactions
- Accounting is the use of the information complied by the bookkeepers to prepare financial
statements
1.1.4 Accounting for Business Transactions
- Business Transactions: Such as sales and purchase
- Financial Documents: They provide evidence that a business transaction took place
- General Ledger Accounts: The amount classified into the relevant general ledger accounts using
double entry
- Trial Balance: Total balances from each general ledger accounts summarized and compiled in a
trial balance at the year end
- Financial Statements: Information is taken form the trial balance to prepare statement of profit or
loss / statement of financial position
1.1.5 Users of Financial Information
- Tax Authorities: To determine if the tax expense has been correctly calculated and paid
- Future Investors: To determine how well the business performs before investing money
- Bank Managers: To determine if the business is authorized to take a bank loan
- Suppliers: To determine whether they should give the business a credit account
1.2 Business Transactions
- A business transaction is an exchange of goods, services, or money between 2 or more parties
1.2.1 Types of Business Transactions
- Sales: Exchange of good or service for money
- Sale Returns: Faulty or incorrect goods returned from customers
- Purchases: Buying goods or services using money
- Purchase Returns: Faulty or incorrect goods sent back to the supplier
- Payments: Transfer of money to a third party
- Payment Receipts: Receiving money from a third party
- Petty Cash Payments: Paying for low value items using a small fund of cash
- Payroll Payments: Money paid to employees for wages and salaries
- All financial transactions must have a valid financial document with details of the transaction
1.3 Financial Documents
- Financial documents provide evidence of the existence of financial transactions
1.3.1 Types of Financial Documents
- Quotation: A document sent by the seller with details of the price for each item
- Purchase Order: A document completed by the customer and sent to the supplier
- Delivery Note: A document that accompanies the delivered goods
[FA1] Recording Financial Transactions
Chapter 1
- Goods Received Note: An internal document completed by the customer to ensure everything
ordered has been received
- Invoice: A document sent to customers with details of the items purchased on credit
- Credit Note: A document issued by the supplier to reduce the value of the previously issued
invoice due to faulty or damaged goods being supplied
- Debit Note: A document issued by the customer to the supplier to request a credit note
- Statement of Account: A document sent to a customer with details of all transactions between the
parties
- Remittance Advice: A document sent to the supplier to show that payment has been made
- Cheque: A written document authorizing the bank to transfer a stated amount from the drawee’s
account to the named account holder
- Petty Cash Voucher: A document slip that fits within the petty cash tin to record any payment
from the petty cash fund