ACCA FA1
RECORDING FINANCIAL
TRANSACTIONS
COMPLETE NOTES
BY VERTEX LEARNING SOLUTIONS
VALID UNTIL DEC 2024
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1
TABLE OF CONTENTS
CHAPTER
TOPIC
PAGE NO.
1
Business Transactions and Documentation
3
2
Assets, Liabilities, and the accounting equation
13
3
Recording, Summarizing and Posting Transactions
23
4
Completing Ledger Accounts and Financial statements
35
5
Receiving and Checking Money
50
6
Banking Monies Received
60
7
Recording Monies Received
73
8
Authorizing and making Payments
76
9
Recording payments
87
10
Maintaining Petty cash Records
92
11
Bank Reconciliations
99
12
Sales and Sales Returns Daybooks
109
13
The Receivables Ledger
118
14
Purchase and Purchase Returns Daybooks
125
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Chapter 1
Business Transactions and Documentation
Business
It is a commercial organization, large or small, which exists to make money or
profits for its owners. It may make this money by manufacturing and/or selling
goods or services.
Business Transactions
Business transactions occur in all organizations. Usually, these include:
▪
Purchasing goods and materials. Purchases can be for cash or credit.
▪
Purchasing services, such as equipment repairs, advertising, and printing.
▪
Sales. Shop sales are paid immediately in cash. Credit sales are paid for
after some time.
▪
Paying wages and salaries.
▪
Purchasing non-current assets.
▪
Raising finance and paying rewards to the suppliers of finance. For
example, owners investing or banks’ lending. Business owners expect a
share of the profit, while banks expect interest.
▪
Accounting for and paying tax.
▪
Bank account transactions.
Two statements summarize all transactions at the end of accounting periods:
▪
Statement of financial position -Assets (owned amounts) and Liabilities
(amounts owed).
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▪
Income statement -Income (such as sales) less expenses (such as rent,
wages, electricity, raw materials). If income is greater than expenses, a
profit will result.
Assets are split into:
▪
Non-current assets like equipment, buildings, and cars. Business retains
these.
▪
Current assets like cash, inventory, or receivables. These are cash or will be
cash within a year.
Liabilities are split into:
▪
Current liabilities like supplier payments (trade payables).Liabilities must be
settled within 12 months.
▪
Long-term debt These do not have to be settled for 12 months.
Types of Business Documentation
Each business transaction has its own documentation. The documentation is
needed to:
▪
Control transaction progress.
▪
Record the transaction.
▪
Provide a history of how the transaction proceeded. This is sometimes
known as a ‘audit trail.
Documentation can be internal or external. Many business transactions now use
computerized records, so "documentation" no longer means paper documents.
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Documents for Purchase of Goods and Materials
1. Purchase Requisition
A warehouse or factory worker who sees that more materials are needed will
submit a purchase requisition to the buyer's department.
2. Purchase Order
Buyers place a purchase order with the best supplier.
3. Supplier’s Delivery Note
Goods, accompanied by the supplier’s delivery note, will be received in the
warehouse.
4. Goods Received Note
The warehouse will receive goods and issue a goods received note. To ensure
correct delivery, these must be compared to the purchase order.
5. Invoice
Invoices from suppliers will be received and recorded by the accounting
department in a purchase daybook and the payables ledger.
6. Statements of Account
Suppliers send statements of accounts with outstanding balances. Statements are
reminders.
7. Remittance Advice
The customer will pay the invoices and send a remittance advice to show which
invoices have been paid.
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8. Credit Note
If goods are returned to suppliers, then buyers will ask for a credit note. This acts
like a negative invoice
9. Debit Note
A supplier might also issue a debit note instead of an invoice in order to adjust
upwards the amount of an invoice already issued.
Documents for Purchasing Services
1. An invoice will be received. These are usually recurring items like rent, electricity,
phone, and insurance and will be invoiced. They may be one-time expenses like
newspaper ads or equipment repairs.
2. Purchase orders are required for these services. The accounting department
will review invoices to ensure that expenses are reasonable compared to previous
amounts or that services were ordered and received.
Documents For Sales
1. Receipt (Cash Sales)
In a retail business, customers will start the sales process in a store or on the
internet. Most of the time, the customer pays right away and gets a receipt from
the cash register. The cash register system also keeps a record of the sales.
2. Sales Order
When a business sells, it is the job of the sales representatives (salesmen and
saleswomen) to get customers to place sales orders.
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3. Goods Dispatched Note
Once orders are received, goods dispatch notes should be made, which give the
warehouse permission to ship the goods.
4. Sales Invoice
GDN gives permission to the accounting department to make sales invoices and
send them to customers.
The accounting department will also write down each invoice in a sales daybook,
and in the receivable’s ledger.
5. Statement of Account
Most companies send customers account statements with outstanding balances.
Statements remind customers of what needs to be paid and let them verify the
seller's account.
6. Remittance Advice
Payments by credit customers should be accompanied by remittance advice
which detail what is being paid.
7. Debit Note
A debit note is issued by a customer to a supplier as a means of formally
requesting a credit note.
8. Credit Note
If a customer sends back goods , the customer will ask for a credit note. This acts
like a negative invoice.
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Documents for Paying Employees
Large companies have a wages and salaries department that calculates
payments, handles terminations, and hires.
1. Time Record
Payments may vary weekly or monthly depending on time records (such as clock
cards).
2. Wage/Salary Slip
Employees will receive a wage or salary slip showing their pay and tax deductions.
Documents for Purchase of Non-Current Assets
1. Purchase Requisition
The purchase of assets will often begin with an employee raising a purchase
requisition which is then authorized by a manager or by the company
accountant.
2. Purchase Order
Purchase requisition
is then authorized by a manager or by the company
accountant and purchase order is made.
3. Invoice
When the invoice is received, someone needs to ensure that the asset has been
received and that it is working properly. These payments are handled in a similar
way to purchases of goods and raw materials.
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Documenting Cash and Bank Account
Documenting cash and bank account movements is important.
▪
Cash payments are small and supported by petty cash vouchers.
▪
Payments from bank accounts will be by cheque or credit transfer.
Discounts
Customers can receive two discounts:
Trade discount (also known as a quantity or bulk discount). This lowers product
prices. For instance, 10% is offered for 10 units and 20% for 100 units.
Cash discount If paid quickly, this is offered. For instance, terms may offer a 5%
discount for payment within 30 days. This discount promotes prompt payment.
Sales Tax (VAT)
Many countries charge a sales tax that must be paid to the government. UK sales
tax is VAT (value added tax).
Sales are called net before tax and gross after tax. Most purchases include
supplier-charged sales tax. Cost structures help calculate gross, net, and tax
amounts. The VAT is calculated on the amount after bulk or quantity discounts.
Sales tax on sales( goods leaving the business) is called output tax.
Suppliers charge sales tax on purchases, so businesses pay sales tax called input
tax (tax on goods coming into the business).
The government receives or pays the net of sales output and input taxes at the
end of each tax accounting period.
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Illustration
If sales tax is at 20%, then the cost structure would be:
Net amount + sales tax = Gross amount
100
20
120
Once that is established then you can easily move between any of the sales figures
using proportions.
1. Net amount = 280: therefore
Net amount + sales tax = Gross amount
100
20
120
280
?
?
sales tax = 280 x 20/100 = 56
gross amount = 280 x 120/100 = 336
2. Tax = 40: therefore
Net amount + sales tax = Gross amount
100
20
120
?
40
?
net amount = 40 x 100/20 = 200
gross amount = 40x 120/20 = 240
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3. Gross amount = 840: therefore
Net amount + sales tax = Gross amount
100
20
120
?
40
?
sales tax = 840 x 20/120 = 140
net amount = 840 x 100/120 = 700
Data Protection
In large organizations with thousands of transactions, errors, unauthorized
transactions, and fraud are common. In computer-based accounting systems, it's
easy to overwrite or delete data, so even after it's been recorded, it can be lost.
Thus, transaction control is essential. The system used to control transactions is
called "internal control." Transactions should be authorized, completely recorded,
accurately recorded, and protected.
Segregation of duties is crucial to internal control. This means transactions have
multiple stages with different people in charge of each stage. Thus, one person
should order the goods, another receive and check them, and a third pay for
them.
Since several people engage in the transaction, it will be harder for an
unauthorized transaction to occur, and each person checks on the previous one.
A fraudulent transaction requires all parties to cooperate, which can be risky for
the fraudster.
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Other controls include signatures to authorize amounts, control totals to ensure all
transactions have been processed, and sequential documents to check for
errors.
Accounting Data Needs Protection:
▪
If ledgers are manually maintained, lock them in a fireproof safe each night.
▪
Computer ledgers should be backed up daily.
▪
Passwords , virus checkers and firewalls should also be used to prevent
unauthorized data access.
Retention Policies
Documents and records should be kept for a long time so that you can:
▪
Answer questions (for example, what were the sales to a certain customer
over the last four years?).
▪
Defend legal actions (for example, if a customer claims years later that
faulty goods were sold).
▪
Follow the law (like tax law in case the tax authorities start an investigation).
Usually, documents have to be kept for between 5 and 10 years, depending on
the rules in the area.
The documents don't have to be kept at the business, and it's becoming more
common to scan them and keep the digital copies instead of the originals, which
can be bulky and expensive to store.
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Chapter 2
Assets, Liabilities, and the Accounting Equation
Assets are items belonging to a business and used in the running of the business.
▪
Non-current assets are assets and property owned by a business that are
not easily converted to cash within a year. They may also be called longterm assets. Non-current assets are for long-term use by the business and
are expected to help generate income.
Examples of noncurrent assets include long-term investments, land, property,
plant, and equipment (PP&E), and trademarks.
▪
Current Asset is a short-term asset that a company expects to use up,
convert into cash, or sell within one fiscal year or operating cycle.
Liabilities are sums of money owed by a business to outsiders such as a bank or a
trade account payable.
▪
Non-Current Liabilities definition refers to any debts or other financial
obligations that can be paid after a year. e g. long-term debt.
▪
Current Liabilities (also called short-term liabilities) are debts a company
must pay within a normal operating cycle, usually less than 12 months.
A business owns assets and owes liabilities.
The transactions of the business are separate from those of its owners. Every
transaction gives rise to two effects (or two entries). One entry is known as a credit
entry and the other a debit entry.
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The double entries are often displayed in ‘T’ accounts:
Account Name
Debit (DR) side
Credit (CR) side
Means:
Means:
Increase in an asset
Decrease in an asset.
Increase in an expense
Decrease in an expense.
Decrease in a liability (an amount
owed)
Increase in a liability (an amount
owed)
Decrease in income
Increase in income.
Here are some simple, common transactions. The amounts of debits must equal
the amounts of credits.
Purchase of Office Stationery for Cash
A Cash Sale
Dr. Office stationery (increase in an expense)
Dr. Cash (increase in an asset)
Cr. Cash (decrease in an asset)
Cr. Sales (increase in income)
A Credit Sale
Payment by a Customer of an
Amount Owing:
Dr. Receivables (increase in an asset)
Dr. Cash (increase in an asset)
Cr. Sales (increase in income)
Cr. Receivables (decrease in an asset)
Purchases of Materials
Payment of Payables
Dr. Materials control
Dr. Payables
Cr. Bank/payables
Cr. Bank
Payment of Wages
Payments of Expenses or Overheads
Dr. Wages expense
Dr. Expenses/overheads
Cr. Bank
Cr. Bank/payables
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If the double entry is done correctly, the debit entries should always equal the
credit entries. This should be checked regularly by making a "trial balance,"
which is just a list of all the accounts with their debits and credits and their totals.
Totals should always match.
A basic accounting rule states that a company's assets and liabilities must always
equal (the accounting equation).
The Accounting Equation
Assets = Capital + Liabilities
Starting a Business and its Initial Transactions
1. The owner starts up the business on 1/1/2023 by putting $10,000 of cash in
as capital.
From the business’s point of view, its cash has increased by $10,000 and its
capital has increased by $10,000. Cash is an asset (something owned), and
the capital is the amount owed by the business back to its owner. The
double entry would be:
Dr. Cash
10,000
Cr. Capital
Dr
Cash A/c
1/1/23 Capital 10,000
10,000
Cr
Dr
Capital A/c
Cr
1/1/23 Cash 10,000
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Accounting Equation
Things owned, cash $10,000 = Things owed, capital $10,000
Notice the cross-referencing between accounts. The Cash account entry is
"Capital," indicating where the cash came from, while the Capital account
entry is "Cash," indicating the nature of the capital injected.
2. The business buys some equipment for $2,000 cash on 3/1/2023.
Cash has decreased $2,000 and the cost of equipment has increased by
$2,000.The double entry would be:
Dr. Equipment
2,000
Cr. Cash
Dr
2,000
Cash A/c
Cr Dr
Equipment
Cr
1/1/23 Capital 10,000 3/1/23 Equipment 2,000 3/1/23 Cash 2,000
Dr
Capital A/c
1/1/23
Cr
Cash
10,000
Accounting Equation
Things owned, cash $8,000 + equipment $2,000 = Things owed, capital $10,000
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3. On 10/1/2023, the business purchases goods for resale for $5,000 on credit.
The asset of inventory increases and the liability to suppliers increases. The
double entry would be:
Dr. Inventory A/c
5000
Cr. Account payable
Dr
Inventory A/c
5000
Cr
10/1/23 A/c Payable 5,000
Dr
Cash A/c
Cr
1/1/23 Capital 10,000 3/1/23 Equipment 2,000
Dr
Dr
Cr
Accounts Payable
Dr
Equipment
3/1/23 Cash 2,000
Cr
Capital A/c
1/1/23
Cr
10/1/2023 Inventory 5000
Cr
Cr
Cr
Cr
Cash
10,000
Accounting Equation
Things owned, cash $8,000 + equipment $2,000 + inventory $5,000 = Things owed,
capital $10,000 + suppliers $5,000
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4. On 15/1/2023, sold half the goods for $4,000 credit.
Half of the inventory balance will be credited. The sales will create a profit
of 4,000 – (5,000/2) = $1,500. The profit is owed to the owners and is a liability
of the business to its owners. The double entries would be:
Dr. Cost of goods sold
2500
Cr. Inventory
2500
Dr. Account Receivable
4000
Cr. Sales
Dr
4000
Inventory A/c
10/1/23 A/c Payable 5,000
Dr
Cr
Accounts Receivable
Dr
15/1/23 Cost of goods sold 2,500 Cr
15/1/2023 Sales 4000
Sales
Cr
15/1/23 A/c Receivable 4,000
Dr
1/1/23
Dr
Cash A/c
Capital
10,000
3/1/23
Equipment
Capital A/c
1/1/23
Cash
Cost of Goods Sold
Dr
Cr
15/1/2023
Inventory 2,500
Cr Dr
2,000
Cr
3/1/2023
Cr Dr
10,000 Cr
Equipment
Cash
2,000
Accounts Payable
Cr
Cr
Cr
Cr
Cr
Cr
Cr
10/1/2023 Inventory Cr
5,000
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Things Owned
cash $8,000 + equipment $2,000 + inventory $2,500 + due from customers $4,000
= $16,500
Things Owed
suppliers $5,000 + capital $10,000 + profit [4,000 – 2,500] = $16,500
5. On 31/1/2023, the suppliers are paid what they are owed and $100 is paid
for rent.
The rent is an expense and decreases the profit. Paying suppliers what is
owed to them has no effect on profits. The double entries would be:
Dr. Account payable
5000
Cr. Cash
5000
Dr. Rent
100
Cr. Cash
100
Dr
Rent A/c
31/1/23
Dr
Cash
Inventory A/c
10/1/23 A/c Payable 5,000
Cr
100
Cr
15/1/23 Cost of goods sold 2,500
Accounts Receivable
15/1/2023 Sales 4,000
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Cr
Cr
19
Cr
Dr
Sales
Cr
15/1/23 A/c Receivable 4,000
Dr
1/1/23
15/1/2023 Inventory 2,500
Dr
2,000 Cr3/1/23
Cash A/c
Capital
Cost of Goods Sold
Cr
Equipment
10,000 3/1/23
31/1/23 Accounts Payable 5,000
31/1/23
Rent
100
Dr
Capital A/c
1/1/23
Cr
Cash
10,000
Equipment
Cash
2,000
Cr
Cr
Accounts Payable
Dr
Cr
Cr
Cr
31/1/23 Cash 5,000 10/1/23 Inventory 5,000
Accounting Equation
Things Owned
cash $2,900 + equipment $2,000 + inventory $2,500 + due from customers $4,000
= $11,400
Things Owed
capital $10,000 + profit [4,000- 2,500 – 100 (rent)] = $11,400
Net assets = Total assets – Total liabilities
Assets - Liabilities = Capital
So,
Net assets = Capital
Increase in net assets = capital introduced + profit – drawings
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● The Accounting Equation 1
Assets = Capital + Liabilities
● The Accounting Equation 2
Assets = (Capital introduced + Retained profits) + Liabilities
● The Accounting Equation 3
Assets = Capital introduced + (Earned profit – Drawings) + Liabilities
Drawings are amounts of money taken out of a business by its owner for personal
use.
Question
On 1 January 2023 a business had net assets of $25,000 On 31 January 2013, net assets
amounted to £23,000. A loss of $7,000 had been made and the owner withdrew $1,000
to live on.
What additional capital was introduced to the business in January?
A. $8,000
B. $6,000
C. $7,000
D. $10,000
Answer: B
6000 = 23000-(25000-7000-1000)
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An important distinction is made between capital and revenue items. If these are
not identified correctly, then the resulting profit figure will be wrong and
misleading.
▪
Capital Expenditures
Capital Expenditure can be defined as expenditure on productive assets
e.g., non-current assets such as buildings, lifts, heating, machinery, vehicles,
and office equipment. This can be for expansion and/or to improve quality
for profitability purposes. Capital expenditure appears as a non-current
asset in the statement of financial position.
▪
Revenue Expenditure
This expenditure is on day-to-day items, i.e., where the benefit is received
short term. This includes salaries, telephone costs or rent. It is incurred for
the purpose of trade, i.e., for expenditure classified as selling and
distribution expenses, administration expenses and fixed charges or to
maintain the existing earning capacity of non-current assets. Revenue
expenditure is included as an expense in the period in which it is incurred.
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