FIA FA1

Recording
Financial
Transactions
Chapter 1

Business transactions
and documentation

What is a business?
Business transactions
Discounts
Sales tax
Storage of information
What is a business?
Business
• The purpose of a business is to make a profit for its
owner(s)
• Profit = income less expenditure
• A business is a separate entity from its owner
• Every financial transaction has a dual effect
• Double entry bookkeeping accounts for the dual aspect
of financial transactions

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Business transactions
• Wherever property changes hands there has been a
business transaction.

• A cash transaction is where the buyer pays cash to seller

when goods are transferred.

• A credit transaction is a sale or purchase which occurs

earlier than cash is received or paid.

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Business transactions
Business transactions are recorded on documents. These
are the source of information in accounts and include:
• Letter of enquiry • Goods received note
• Quotation • Invoice
• Sales/purchase order • Credit note
• Delivery note • Till receipt
• Inventory list • Cheque
• Supplier list
• Staff timesheet

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Business transactions
• Invoices and credit notes are important documents which
must contain specific information.
• An invoice is a demand for payment
• A credit note is used by a seller to cancel part or all of
previously issued invoice(s) If it helps, think of a credit note
as a negative invoice.
• The accounting system records, summarises and
presents the information contained in the documentation
generated by the transactions.

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Discounts
• A discount is a reduction in the price of goods below
the amount at which those goods would normally be sold
to other customers of the supplier.

There are two types of discount:

• Trade discount
• Cash discount

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Discounts
Trade discount
• A reduction in the amount of money demanded from a
customer
• Usually results from buying goods in bulk
• Given on supplier’s invoice
• No separate accounting required

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Discounts
Cash discount
• An optional reduction in the amount of money payable by a
customer
• Given for immediate or very prompt payment financing
decision
• Needs to be recorded separately in the books of account

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Sales tax
Sales tax
• Is an indirect tax levied on the sale of goods and services

• Administered by tax authorities

• Can have a number of rates, eg standard rate, reduced

rate

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Sales tax
Output sales tax
• Sales tax charged by the business on goods/services

Input sales tax

• Sales tax on purchases made by the business

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Sales tax
Output tax is greater than input tax?
• Pay difference to tax authorities

Input tax is greater than output tax?

• Refund due to business

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Storage of information
Storage of information
• Paperwork must be properly handled to ensure security
and availability of information.
• A retention policy sets down for how long different kinds
of information are retained.
• Files of data may be temporary, permanent, active and
non-active.
• Information no longer needed on a daily basis is
electronically scanned for long-term storage, archived or
securely destroyed.

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Storage of information
Storage of information
• Information stored about individuals is regulated by Data
Protection legislation.

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Chapter 2

Assets, liabilities and

the accounting
equation

The accounting equation

Accounts receivable and payable
Double entry
Capital and revenue expenditure
The accounting equation
• The accounting equation says:

Assets = Capital + Liabilities

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The accounting equation
• Asset – something which a business owns or has the use
of

• Liability – something which the business owes to

someone else

• Capital – investment of funds to earn a return. Capital is

owed to the owner

• Drawings – are amounts of money taken out of a business

by its owner

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Accounts receivable and payable
Trade account receivable

• An account receivable is a person to whom the business

has sold items and by whom the business is owed money.

• A receivable is an asset of a business (the right to receive

payment is owned by the business).

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Accounts receivable and payable
Trade account payable

• An account payable is a person from whom a business

has purchased items and to whom a business owes
money.

• An account payable is a liability of the business.

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Double entry
Basic principles
• Double entry bookkeeping is based on the same idea as
the accounting equation.
• Every accounting transaction has two equal but opposite
effects.
• Equality of assets and liabilities is preserved.
• Therefore, in a system of double entry bookkeeping, every
accounting event must be entered in ledger accounts
both as a debit and as an equal but opposite credit.

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Double entry
A debit is one of the following:

• An increase in an asset

• An increase in an expense

• A decrease in a liability (or capital)

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Double entry
A credit is one of the following:

• An increase in a liability (or capital)

• An increase in income

• A decrease in an asset

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Capital and revenue expenditure
Capital expenditure
• Expenditure which results in the acquisition of non-
current assets, or an improvement in their earning
capacity.
• Capital expenditure on non-current assets results in the
appearance of a non-current asset in the accounts of the
business.
• The total amount of capital expenditure is not deducted
from income in calculating the profit for an accounting
period.
• It is deemed to be expenditure that brings benefits to the
business over more than one accounting period.

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Capital and revenue expenditure
Revenue expenditure
• is expenditure which is incurred either:

– for the purpose of the trade of the business, including

expenditure classified as selling and distribution
expenses, administration expenses and finance charges;
or

– to maintain the existing earning capacity of non-

current assets, eg repairs to non-current assets.

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Chapter 3

Recordings,
summarising and
posting transactions

Overview
Sales and purchase day books
Cash book
General ledger and double entry
Posting from the day books
Accounting processes
Overview

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Sales and purchases day books
Sales day book
• Used to keep a list of all invoices sent out to customers
each day.

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Sales and purchases day books
Purchase day book
• Used to keep a record of invoices which a business
receives.

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Sales and purchases day books
The sales returns day book
• When customers return goods for some reason, the
returns are recorded in the sales returns day book.

The purchase returns day book

• Kept to record credit notes received in respect of goods
which the business sends back to its suppliers.

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Cash book
The cash book
• The cash book is a book of prime entry, used to keep a
cumulative record of money received and money paid out
by the business via its bank account.

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Cash book
The cash book
• Cash receipts are recorded as follows, with the total
column analysed into its component parts.

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Cash book
The cash book

• Discounts allowed are shown in a memorandum column

• Cash payments are recorded in a similar way

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General ledger and double entry
General ledger
• The general ledger is the accounting record which
summarises the financial affairs of a business.
• It contains details of assets, liabilities and capital,
income and expenditure.
• It consists of a large number of different ledger accounts,
each account having its own purpose or 'name' and an
identity or code.
• Another name for the general ledger is the nominal
ledger.

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General ledger and double entry
Accounts within the general ledger include the following:

• Plant and machinery (non-current asset)

• Rent (expense)
• Inventories (current asset)
• Total payables (current liability)
• Sales revenue (income)

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General ledger and double entry
A ledger account or 'T' account looks like this.

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General ledger and double entry
Double entry
• Remember:
• Every accounting transaction has two equal but opposite
effects
• Equality of assets and liabilities is preserved

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General ledger and double entry
Debit
• Increase in expense
• Increase in asset
• Decrease in liability / capital

Credit
• Increase in income
• Increase in liability / capital
• Decrease in asset

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General ledger and double entry
• The cash book is a good starting point for understanding
double entry.

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General ledger and double entry

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General ledger and double entry

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General ledger and double entry

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Posting from the day books
Posting from the day books
• Note that day books are often analysed as in the following
extract (date, customer name and reference not shown).

Total invoiced CD revenue DVD revenue

$ $ $
340 160 180
120 70 50
600 350 250
1060 580 480

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Posting from the day books
• To identify revenue by product, total revenue would be
entered (‘posted’) as follows.
$ $
DEBIT Receivables a/c 1,060
CREDIT Revenue: CDs 580
Revenue: DVDs 480

• Other books of prime entry are analysed and posted in a

similar way

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Posting from the day books
Receivables and payables ledgers
• To keep track of individual customer and supplier balances
it is common to maintain subsidiary ledgers called the
– receivables ledger and
– the payables ledger

• Each account in these ledgers represents the balance

owed by or to an individual customer or supplier.

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Posting from the day books
Entries to the receivables ledger are made as follows.
• On sending out an invoice, when making an entry in the
sales day book, an entry is then made on the debit side of
the customer's account in the receivables ledger.

• When cash is received and an entry made in the cash

book, an entry is also made on the credit side of the
customer's account in the receivables ledger.

• The payables ledger operates in much the same way.

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Posting from the day books
Important
• Remember that these receivables and payables ledgers
are kept purely for reference and are therefore known as
memorandum records. They do not normally form part of
the double entry system.

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Posting from the day books
Control accounts
• Control accounts are part of the double entry system
• A receivables control account is posted with totals from
the sales day book and the cash book
• A payables control account is posted with totals from
the purchases day book and the cash book
• The control accounts should agree with the total of the
individual balances and act as a check on the recording
of transactions
• The control account balances appear in the final
accounts

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Posting from the day books
Accounting for sales tax
• Records of sales and purchases should not include sales
tax

• It is recorded separately in the analysis columns of the day

books or cash book and posted to the sales tax account

• The tax paid to or recovered from the authorities each

quarter is the balance on the sales tax account

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Accounting processes
Accounting process overview

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Accounting processes
Computerised accounting
• The principles of a computerised system are exactly the
same as for manual accounting but the records or files
are held in electronic formats
• Computer activity is divided into input, processing and
output
• Batch processing is where similar transactions are
gathered into batches, then each batch is sorted and
processed by computer
• Control totals are used to make sure there have been no
errors when the batch is input

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