FIA Paper FA1
RECORDING FINANCIAL TRANSACTIONS
Chapter 1 – Business Transactions and Documentation
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Introduction
Introduction to Accounting
Accounting is the process of:
 Identification
 Recording
 Classification
 Summarization &
 Presentation
of financial information of an entity to the users.
The presentation of financial information in the form of financial statements is called
Financial Reporting.
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Introduction
Types of Business Transactions
Most business transactions are:1. Sale: goods/services are given in exchange for money/other consideration
2. Purchase: buying goods/services
These can be;
Cash: payment made/ received immediately for purchase or sale
Credit: payment made/received later than the time of purchase or sale
Basis of Accounting; There are two basis of accounting;
Cash basis accounting
The cash basis of accounting recognizes revenues when cash is received, and expenses when they are paid.
This method does not recognize accounts receivable or accounts payable.
Accrual basis accounting
Under the accrual basis, revenues and expenses are recorded when they are earned an d incurred,
regardless of when the money is actually received or paid.
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Introduction
Other Terms
Receipt: money received usually from sale or loan
Payment: money paid usually for purchases
Methods of Receipt/Payment
cash check debit card credit card direct debit
standing order
Petty Cash: small amount of money kept in office for every day small expense e.g. taxi fare, tea
Payroll: list of employees and their wages or salaries
Income: more general term than sale and includes other receipts e.g. rent, interest
Expense: Running cost, cost of services e.g. telephone, electricity
Profit: The excess of income over expenses
Expenditure: more general term than expense and includes purchase of goods and fixed assets.
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Introduction
Types of Entity and Separate Entity Concept
Business:
Any dealing between two persons/parties for the purpose of profit is called business.
An organization or economic system where goods and services are exchanged for one another or for money.
An organization with the aim of profit.
 Profit is excess of income over expenses.
Types of business entity
There are three main types of business entity.
1.
Sole trader
2.
Companies
3.
Partnership
Separate entity concept/Accounting convention:
Separate business entity concept, means that the business and their owners are separate personalities,
further divided into legal and accounting views.
 Entity – most general terms, every organization
 Business – also general term but not as wide as entity, e.g it doesn’t include charity or local authority
 Company – entity constituted in a particular legal form, usually limited liability for its members
 Firm – much vaguer term , some says it is a business or a company, some restrict its meaning to
unincorporated business, example may be partnership
The dual/double effect of financial transactions:
The double entry accounting system, means every transaction must record in two sides Debit and Credit.
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Introduction
Documenting business transactions
Business can be evidenced by internal & external documentation.
Here are some:
Purchase requisition:
 A purchase requisition is prepared by the person who identifies a need for the goods to be bought,
and then it must be authorized by a responsible authoritative person.
 The purchase requisition is then passed to the purchasing department who will decide on the most
appropriate supplier.
 If appropriate supplier is not already used by buying department then they may send out a letter of
enquiry to several supplier for quotations/estimates.
Quotation/estimates:
 The supplier may then provide a quotation/estimates which may include either trade or cash
discounts.
 Different suppliers might respond with a catalogue and price list ( for standard goods), a quotation (for
non-standard goods). For services an estimate will usually be provided.
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Introduction
Documenting business transactions
Purchase order:
The purchasing department will then send a purchase order to the selected supplier. Copies of the order are send to
the following:
i.
Supplier- to ask for the goods
ii.
Accounts department- for checking against invoice when it arrives
iii.
Stores section- for updating the inventory records
iv.
Goods received section- so that they expect the goods
Credit note:
A document sent by a supplier to a customer in respect of goods returned or overpayment made by the customer. It is
a negative invoice.
Debit note:
A document sent by a customer to a supplier in respect of goods returned or overpayment made. It is a formal request
for the supplier to issue a credit note.
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Introduction
Other Documents
Beside the ones mentioned there will be several other documents;
Inventory Lists – To check that all the needed items are available, each item will be identified by a code number
Supplier Lists – To trace (using code numbers) that which supplier manufactures which parts
Staff Schedules, timesheet – Staff may need to work on different jobs so to make sure right mix of staff available for
each.
Goods Received Note (GRN)
Invoices
Cheques
Expense Claims – Employees may incur expenses which need to be reimbursed
Are there other documents as well? Yes, Plenty;
Receivables List – List of who it owes money
Payables List – To whom it owes money
Also need to make sure that;
it has Cash at right times to pay bills, salaries….
Profit
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Invoices and Credit Notes
Invoice:
 An invoice is primarily a demand for payment.
 An invoice relates to a sale order or purchase order:
When a business sells goods or services on credit to a customer, it sends out an invoice. The details on the invoice should
match the details on sale order.
When a business buys goods or services on credit it receives an invoice from the supplier. The details on the invoice should
match the details on purchase order.
Different uses of invoices;
Transaction settled immediately in cash – Receipt
Paid on receipt of goods – Cash on delivery (CoD) invoice
Invoice is sent after good have delivered with request to pay within certain time – Credit invoice
Invoice Copies:
To Purchaser – Request to pay for goods
File Copy – Partly to keep records straight and partly so that business can prove it made out the invoice in first place
Delivery Note – With goods to sign as confirmation that goods are received
Advice Note – Same as DN but is left with purchaser
Statement:
A document sent out by a supplier to a customer listing the transactions on the customer’s account, including all invoices
& credit notes issued & all payments received from the customer.
Remittance advice:
A document sent by customer to supplier with payment, detailing which invoices are being paid. It
allows supplier to update the customer’s record to show which invoices have been paid & which are still outstanding.
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Discounts, Rebates & Allowance
Introduction
Sales tax/Value added tax (VAT)
Discount:
Any relief or reduction in the prices of goods and services, There are two type of discounts;
a)
A trade discount is given for large orders or special customers and will be shown as a deduction on the invoice.
b)
A cash discount/settlement discount is usually given for early payment. It can not be shown as a deduction
unless payment has been made.
Rebates – A rebate is where for example a gas company will lower it’s overall tariff for customers who use over a
certain number of units per year, the rebate will be given in one of the following forms;
 Reduction in bill for the following year
 A cheque for the calculated rebate amount
Allowance – An example of allowance is where, if certain number of units are ordered at one time, then few extra units
are given free of charge.
Sales tax/Value added tax (VAT) is an indirect tax levied on the sales of goods & services. It is usually administered by
the local tax authorities.
Sales tax on purchases is called input tax while sales tax on sales is called output tax.
Business that pay VAT on their purchases will recover VAT, by subtracting tax it pays (called input tax) from the tax it
receives (called output tax) from customer. The difference is either paid to or recovered from government.
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Storage of Information
Introduction
Why store information?
Large amount of paperwork, need proper handling to ensure security and availability of information.
Constant demand for the information from within the organization and may request;
 Records of past and current transactions – pending confirmations, later analysis
 Info about past trends and current operations – on which to base planning and decision making, e.g
raw materials consumption
 Routine transaction information – on which to base current operations and decisions, e.g info on
customer order dictates how many items, what sort of item need to be supplied and what delivery and
payment arrangement should be made
 Info about performance – to compare with plans, budgets and forecasts for purpose of control
(checking for and correcting errors and shortcomings)
People and groups outside the organization who are entitled to information;
 Others involved in the business’s transactions – customers, suppliers, sub-contractors, who require
instructions, requests, contracts and so on.
 Interested in financial performance – Owners (Share-holders), Investors, Accounts payable
 Outside agencies requiring info for surveys, or for their own activities – government bodies and tax
authorities
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Storage of Information
Introduction
Information exchanged on a more specific personal or interpersonal level may include the following;
 Details relevant to enquiries or complaints– from clients, customers, or other parties, including
introductions, explanations, apologies and answers to questions
 Info supplied to the org about an employee –
o Which they supply in an interview, CV and
o For the organization record
 Info supplied to employees about the org – it’s activities and methods, and about their own place in
the system e.g, training manual, a memorandum sent to staff, warning, encouragement, a staff
meeting
In an accounts dept, main types of info which require handling and storage;
 Incoming correspondence – letters, emails, memos, reports etc directed from people outside the org
and dept to those within, these need to be stored and managed for the purpose of action, analysis,
confirmation and so on
 Outgoing correspondence – similar messages generated by the dept and flowing outwards
 Financial Records –
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Retention policy
Introduction
Files of data may be temporary, permanent, active, and non-active;
 Permanent File – Files which are never thrown away, will be updated so the info on file may change but the file
itself will continue to exist. e.g Master Files and Reference Files
 Temporary or Transitory File – Files which is eventually scrapped. Many transaction files are for a very short time,
until transaction record is processed, and are then thrown away. Other transaction Files are permanent (like cash
book) or are held for a considerable length of time
 Active File – Files which are frequently used. e.g Sales Invoice file of current year
 Non-Active File – Files which are no longer used frequently. e.g Files of previous year customer and supplier which
are not current. Semi-Active Files are those which contain info which are still active but are becoming in-active
When info contained within files is no longer needed on daily basis, it is not automatically thrown away. It is generally
dealt in one of the following ways;
 Microfilmed or microfiched for long-tem storage
 Retained in it’s original form and stored somewhere else (known as archiving) for a certain period of time
 Securely destroyed
Info status can be changed in future.
A retention policy sets down rules for how long different kinds of information are retained.
Retention periods vary; under The Companies Act in the UK for example;
 Documents concerning legal establishment of org are kept permanently, as well the annual accounts
 Simple legal contracts are kept for 6 years, and more important ones for 12 years
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Data Protection
Information stored about individuals is regulated by Data Protection Legislation.
Without adequate data protection policies and procedures in place, following are some of the risks to which org may be exposed;
 Access to personal info by unauthorized parties
 Possibility that personal info could be used for purposes other than for which it was requested and disclosed
Data Protection legislation is an attempt to afford some measures of protection to the individuals. It covers data about individuals
and not corporate bodies.
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Data Protection
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