1 Computerised accounting systems

Section overview

• T h e majority of businesses record t h e i r financial transactions u s i n g a c o m p u t e r i s e d a c c o u n t i n g system.

• C o m p u t e r i s e d a c c o u n t i n g systems r a n g e from simple, off-the-shelf a c c o u n t i n g software packages u s e d
by small businesses for r e c o r d i n g day-to-day transactions, to b e s p o k e systems t h a t fully integrate w i t h
o t h e r business systems i n place i n large a n d c o m p l e x businesses.
• T h e d e v e l o p m e n t of c l o u d a c c o u n t i n g software i n recent years has c h a n g e d h o w c o m p u t e r i s e d
a c c o u n t i n g systems are u s e d a n d accessed.

1 .1 Accounting system
A n a c c o u n t i n g system is t h e system i n p l a c e w i t h i n a business to allow it to record, process a n d store
financial information. An a c c o u n t i n g system enables a business to satisfy t h e r e q u i r e m e n t for businesses to
maintain records of t h e i r financial transactions a n d allows it to p r o d u c e relevant a n d reliable i n f o r m a t i o n for
stakeholders.
Historically, a c c o u n t i n g systems consisted of several l a r g e b o o k s i n w h i c h t h e b o o k k e e p e r w o u l d e n t e r each
transaction by h a n d . A l o t of t h e l a n g u a g e still u s e d i n accounting, such as b o o k k e e p e r , o r referring to t h e
' b o o k s ' of a c o m p a n y , stem from t h i s way of maintaining a c c o u n t i n g records. In Accounting, we refer to this
traditional way of r e c o r d i n g transactions, u s i n g b o o k s a n d pencils, as a manual accounting system.
T h e vast m a j o r i t y of a c c o u n t i n g systems are n o w computerised. However, accountants still n e e d to
u n d e r s t a n d t h e a c c o u n t i n g principles a n d processes t h a t lie w i t h i n a c o m p u t e r i s e d system. As such,
a l t h o u g h we will assume t h e use of c o m p u t e r i s e d a c c o u n t i n g systems t h r o u g h o u t this W o r k b o o k , we will
use s o m e aspects of a m a n u a l a c c o u n t i n g system to illustrate t h e a c c o u n t i n g requirements relating to t h e
r e c o r d i n g , processing, summarising a n d r e p o r t i n g of financial information.
At a basic level, c o m p u t e r i s e d a c c o u n t i n g systems, like all systems, have inputs, processes a n d o u t p u t s :

I n p u t s ------------------ ► Processes -------- Outputs

J
t
• Source d o c u m e n t s
It
• Ledgers
"T"
• Reports
• Standing d a t a • Journals • Trial balance
• Calculations • Financial statements
• Record k e e p i n g

Figure 3.1 : A c c o u n t i n g System

These t e r m s will b e e x p l a i n e d i n detail as we progress t h r o u g h t h e W o r k b o o k .

1 .2 Accounting software packages

A c c o u n t i n g software packages are c o m m o n l y u s e d c o m p u t e r i s e d a c c o u n t i n g systems. A c c o u n t i n g software
packages r a n g e from s i m p l e 'off-the-shelf' p r o g r a m m e s t h a t m e e t t h e requirements of a small business, to
systems t h a t are fully i n t e g r a t e d with businesses o t h e r systems such as inventory m a n a g e m e n t a n d h u m a n
resource m a n a g e m e n t systems t h a t are u s e d i n large a n d c o m p l e x organisations. T h e largest organisations
are likely to use b e s p o k e a c c o u n t i n g software t h a t has b e e n d e v e l o p e d specifically f o r t h e m .
In this W o r k b o o k , we will assume t h a t t h e c o m p u t e r i s e d a c c o u n t i n g system is a software p a c k a g e w h i c h
contains several different m o d u l e s such as for payroll, for m a n a g i n g balances o w e d by c r e d i t customers o r
for m a i n t a i n i n g a record of non-current assets. O n e of t h e m o d u l e s will b e t h e m a i n a c c o u n t i n g record of
t h e business. T h e m o d u l e s interact w i t h each o t h e r i n such a way t h a t i n f o r m a t i o n e n t e r e d i n t o o n e m o d u l e
will automatically u p d a t e o t h e r relevant m o d u l e s , for e x a m p l e , r e c o r d i n g a c r e d i t sale will u p d a t e b o t h t h e
sales m o d u l e a n d t h e m o d u l e t h a t m a n a g e s t h e balances o w e d by c r e d i t customers.
1.3 General points
It is i m p o r t a n t t h a t y o u u n d e r s t a n d t h e f o l l o w i n g p o i n t s r e g a r d i n g c o m p u t e r i s e d a c c o u n t i n g systems t h a t
will be assumed t h r o u g h o u t t h e Accounting course:
Standing data - s t a n d i n g data is reference data t h a t d o e s n o t regularly c h a n g e , such as t h e n a m e a n d
registered address of t h e business, p a y m e n t t e r m s for g o o d s s o l d o n credit, t h e VAT registration n u m b e r
a n d relevant VAT rates, w a g e rates f o r payroll p u r p o s e s etc. I t is i m p o r t a n t t h a t access to, a n d maintenance
of, s t a n d i n g data is t i g h t l y c o n t r o l l e d as m a n y different transactions rely o n t h e accuracy of this u n d e r l y i n g
data. We will assume t h r o u g h o u t this W o r k b o o k t h a t relevant s t a n d i n g data has already b e e n e n t e r e d i n t o
t h e c o m p u t e r i s e d a c c o u n t i n g system.
Account codes - Each of t h e m o d u l e s i n t h e software p a c k a g e is s u b - d i v i d e d i n t o accounts a n d each
a c c o u n t will have a u n i q u e c o d e w h i c h makes it easier to i n p u t a n d process a c c o u n t i n g information. We will
discuss account c o d e s w i t h i n t h e m a i n a c c o u n t i n g r e c o r d i n m o r e detail i n C h a p t e r 4.
Processing - transactions t h a t are u n d e r t a k e n by t h e business n e e d to b e e n t e r e d i n t o t h e system. T h e
r e c o r d i n g m a y b e real-time o r batch processing:
• Real-time processing - real-time processing m e a n s t h a t transactions are e n t e r e d i n t o t h e system a n d
relevant m o d u l e s a n d accounts are u p d a t e d at the point at which the transaction takes place. We will
assume t h a t real-time processing is u s e d t h r o u g h o u t this W o r k b o o k .
• Batch processing - b a t c h processing involves processing a n u m b e r of transactions t o g e t h e r i n a g r o u p ,
o r batch, usually at t h e e n d of e a c h d a y o r each w e e k .
Controls - we will assume t h r o u g h o u t this W o r k b o o k t h a t t h e r e are a d e q u a t e controls i n p l a c e i n t h e system
to ensure t h e c o n t i n u e d reliability of t h e systems. Such controls i n c l u d e t h a t t h e system is o p e r a t e d by
t r a i n e d a n d qualified staff, t h a t access to t h e system is restricted to authorised users a n d t h a t t h e r e are
a d e q u a t e levels of a p p r o v a l a n d review of transactions t h a t are i n p u t i n t o t h e system.

1 .4 Cloud accounting
Definitions
Cloud computing: C l o u d c o m p u t i n g is o n - d e m a n d access, via t h e internet, to c o m p u t i n g resources -
applications, servers (physical servers a n d virtual servers), data storage, d e v e l o p m e n t tools, n e t w o r k i n g
capabilities, a n d m o r e - h o s t e d at a r e m o t e data centre m a n a g e d by a c l o u d services p r o v i d e r ( o r CSP).
Cloud accounting: C l o u d accounting refers to p e r f o r m i n g a c c o u n t i n g tasks u s i n g c l o u d c o m p u t i n g
software, often d e l i v e r e d i n a software-as-a-service (SaaS) m o d e l .

C l o u d c o m p u t i n g is a service t h a t p r o v i d e s a business with access to software a n d data storage via t h e

internet. Instead of b e i n g h e l d locally o n t h e user's c o m p u t e r , t h e software a n d data are h e l d i n ’the c l o u d ' ,
w h i c h m e a n s t h e y are h e l d r e m o t e l y o n t h e c o m p u t e r servers of t h e software service provider. Examples of
c l o u d c o m p u t i n g i n c l u d e A m a z o n W e b Services (AWS) w h i c h offers storage, c o m p u t e r p o w e r a n d
n e t w o r k i n g services o r Microsoft O n e D r i v e , w h i c h offers storage services.
C l o u d c o m p u t i n g t e c h n o l o g i e s have c h a n g e d t h e ways i n w h i c h organisations store a n d m a n a g e t h e i r data.
A n increasing a m o u n t of organisational data is n o w h e l d i n servers o p e r a t e d by c l o u d - b a s e d service
providers. In effect, c l o u d c o m p u t i n g is t h e access to business services t h r o u g h t h e internet.
There c o u l d take t h e form of:
• Software as a service - e g , anti-virus software. T h e software is h o s t e d i n t h e c l o u d , b u t a p p e a r s o n users'
devices w i t h full functionality. This type of c l o u d service is t h e most c o m m o n , a n d is often a i m e d directly
at t h e e n d user ( e g , H o t m a i l ; Gmail).
• Platform as a service - e g , W i n d o w s Azure. For a fee, t h e c l o u d p r o v i d e r offers virtual space i n w h i c h
customers can host a n d d e v e l o p t h e i r o w n applications.
• Infrastructure as a service - e g , data storage a n d back-up. C l o u d storage can h a n d l e all k i n d s of
structured a n d unstructured data.
C l o u d a c c o u n t i n g is a n application of c l o u d c o m p u t i n g . A c c o u n t i n g software is p r o v i d e d i n t h e c l o u d by a
service provider. T h e user accesses this software to process t h e i r a c c o u n t i n g transactions a n d r u n reports as
t h e y w o u l d if t h e software was installed o n t h e i r o w n c o m p u t e r . T h e use of c l o u d a c c o u n t i n g d o e s n o t
c h a n g e t h e r e q u i r e m e n t for source d o c u m e n t s to b e i n p u t i n t o t h e system, which, d e p e n d i n g o n t h e type of
a c c o u n t i n g software p a c k a g e used, m a y b e d o n e by a b o o k k e e p e r o r m a y b e a u t o m a t e d . T h e processing of
transactions takes p l a c e i n t h e software w i t h i n t h e c l o u d a n d o u t p u t s i n t h e f o r m of reports, o r financial
statements, w h i c h are extracted from t h e c l o u d .
 A b e n e f i t of c l o u d a c c o u n t i n g is t h a t a business can access its a c c o u n t i n g records from any c o m p u t e r ( o r
t a b l e t o r p h o n e ) t h a t has a n internet connection. Additionally, because most of t h e processing a n d data
storage is d o n e o n t h e service p r o v i d e r ' s servers, a n d n o t t h e business’s c o m p u t e r s , t h e business d o e s n o t
n e e d to purchase expensive, sophisticated IT e q u i p m e n t i n o r d e r to r u n specialised software o r store large
a m o u n t s of data. As t h e software is m a i n t a i n e d by t h e service provider, t h e business m a y also b e a b l e to
r e d u c e IT s u p p o r t costs w i t h i n its o w n business.
A n o t h e r b e n e f i t of c l o u d a c c o u n t i n g is t h e ability to collaborate w i t h advisors a n d o t h e r professionals. For
e x a m p l e , t h e a c c o u n t i n g t e a m c o u l d w o r k r e m o t e l y with t h e i r auditors o r tax advisors a n d all parties have
access to t h e live data at t h e same t i m e .
Whilst it has m a n y advantages, c l o u d a c c o u n t i n g d o e s have its drawbacks. C l o u d a c c o u n t i n g requires
access to t h e internet. If a business's i n t e r n e t c o n n e c t i o n is unreliable, accessing its a c c o u n t i n g records h e l d
i n t h e c l o u d will b e difficult. There m a y be server o u t a g e s o n t h e c l o u d t h a t w o u l d m e a n t h a t t h e r e w e r e
t e m p o r a r y restrictions o n t h e ability to access data. There are also p o t e n t i a l data security issues, such as a n
increased risk of data b e i n g h a c k e d a n d loss o r d a m a g e to data. T h e business d o e s n o t retain b a c k - u p
c o p i e s of its data o n its local c o m p u t e r , a n d therefore is reliant o n t h e service p r o v i d e r to p r o v i d e a d e q u a t e
security.

1 .5 Artificial intelligence
Definition
Artificial intelligence: Artificial Intelligence involves t h e creation a n d use of a d v a n c e d c o m p u t e r systems to
p e r f o r m tasks t h a t traditionally r e q u i r e h u m a n intelligence. This includes: learning from data; reasoning a n d
p r o b l e m - s o l v i n g ; sensory u n d e r s t a n d i n g ; l a n g u a g e processing; a n d r e c o g n i s i n g patterns. A l systems are
characterised by t h e i r ability to a d a p t to n e w i n f o r m a t i o n o r environments, o p e r a t e w i t h a d e g r e e of
a u t o n o m y , a n d m a k e i n f o r m e d decisions. A l often, b u t n o t always, involves u s i n g M a c h i n e Learning.

A l is u s e d i n m a n y aspects of life now, streaming p l a t f o r m s such as Netflix analyse users watch history to
s u g g e s t films o r shows t a i l o r e d to t h a t individual's preferences, e n h a n c i n g user e n g a g e m e n t a n d , hopefully,
satisfaction.
A l is also increasingly u s e d by accountants as it is a p o w e r f u l t o o l w h i c h can save t i m e a n d increase accuracy
of postings. A l can assist b o o k k e e p e r s w i t h t h e r e c o r d i n g of transactions b y :
• Automating data entry: A significant a m o u n t of t i m e is s p e n t e n t e r i n g data from receipts, invoices a n d
b a n k statements. If these d o c u m e n t s are digital, A l c a n a u t o m a t e this process by extracting relevant
i n f o r m a t i o n a n d r e c o r d i n g it i n t h e a c c o u n t i n g software. This will significantly r e d u c e m a n u a l w o r k a n d
h e l p r e d u c e errors.
• Categorisation of expenses: Transactions n e e d to b e classified, f o r e x a m p l e a n invoice m i g h t n e e d to b e
r e c o r d e d as a p a y m e n t of insurance, stationery, o r g o o d s f o r resale (purchases). This can b e t i m e
c o n s u m i n g . Often t h e same suppliers are u s e d regularly for t h e s a m e types of expenses, f o r e x a m p l e a
business m i g h t use EE for its m o b i l e p h o n e a n d every m o n t h a n invoice f r o m EE will n e e d to b e c o d e d to
" P h o n e expenses". A l can learn t h a t invoices from EE s h o u l d always b e c o d e d i n this way a n d
automatically categorise t h e expense. A l can also categorise n e w transactions by learning from past data
entry. This will save b o o k k e e p e r s t i m e a n d r e d u c e t h e chance of errors.
• Reconciliations: All t h e transactions w h i c h are r e c o r d e d i n t h e b a n k statement w i l l also b e r e c o r d e d i n t h e
a c c o u n t i n g software. To ensure t h a t all transactions have b e e n r e c o r d e d correctly, a n d t h e b a n k balance
i n t h e a c c o u n t i n g records is r e c o n c i l e d to t h e balance o n t h e b a n k statement p r o v i d e d by t h e b a n k . This
can b e a l e n g t h y process. Al can streamline this task by automatically m a t c h i n g transactions between
b a n k statements a n d t h e b a n k balance i n t h e a c c o u n t i n g records, h i g h l i g h t i n g discrepancies for review.
M o r e i n f o r m a t i o n o n b a n k reconciliations is i n C h a p t e r 6 .
• Fraud and errors: A l can analyse transactions for unusual patterns o r unusual amounts, w h i c h m a y
indicate f r a u d o r error. For e x a m p l e , A l m i g h t alert users if a sale is r e c o r d e d for o v e r £1 0 0 , 0 0 0 w h e n t h e
average sale is o n l y £50,000. This can h e l p identify a n d therefore correct issues early.
• Generating reports: Al can assist i n g e n e r a t i n g r o u t i n e financial reports freeing u p bookkeepers' t i m e for
m o r e c o m p l e x analysis.
• Customer service chatbots: A l - p o w e r e d c h a t b o t s can answer basic client questions a b o u t t h e i r accounts,
r e d u c i n g t h e administrative b u r d e n o n b o o k k e e p e r s .
There are, however, s o m e disadvantages of using A l to assist w i t h b o o k k e e p i n g :
• High initial cost: Setting u p a n d i m p l e m e n t i n g A l t e c h n o l o g y requires a significant initial investment i n
software a n d training. This m a y b e cost-prohibitive for s o m e businesses.
 • Non-standard transactions: W h i l e Al excels at d e a l i n g w i t h r o u t i n e transactions, it m a y misinterpret m o r e
c o m p l e x items, i n c l u d i n g items w h e r e j u d g e m e n t is n e e d e d , a n d record t h e m incorrectly. These errors
may not be identified a n d corrected.
• Data dependence: A l is reliant o n t h e data it is t r a i n e d o n . Inaccurate o r i n c o m p l e t e data can l e a d to
errors. B o o k k e e p e r s m u s t verify A l - g e n e r a t e d results a n d correct any errors.
• Security risks: A l systems will have access to confidential financial data. Robust security measures are
t h e r e f o r e vital to protect this data from breaches o r unauthorised access.
A l can e m p o w e r b o o k k e e p e r s to b e c o m e m o r e efficient a n d f o c u s o n higher-value tasks, instead of b e i n g
b o g g e d d o w n by repetitive data entry. However, m a n u a l checks will still n e e d to b e p e r f o r m e d to ensure t h e
accuracy of any tasks carried o u t by A l , i n t h e same w a y checks are d o n e of w o r k p e r f o r m e d by humans.

W h i c h of t h e f o l l o w i n g statements r e g a r d i n g t h e use of A l to assist with processing transactions is TRUE?

A A l can c o m p l e t e l y replace h u m a n b o o k k e e p e r s i n transaction processing
B A l c a n n o t be u s e d to process b a n k transactions d u e to data security risk
C A l n e e d s to b e t r a i n e d o n every different transaction type to b e useful
D A l can identify unusual patterns i n transactions, w h i c h m i g h t indicate f r a u d o r e r r o r

2 Source documents for recording financial transactions

M Section overview

• C r e d i t sales m a k e use of sales orders, delivery n o t e s to t h e c u s t o m e r a n d sales invoices ( w h i c h is t h e

source d o c u m e n t t h a t is t h e n recorded).
• C r e d i t purchases m a k e use of purchase orders, g o o d s received n o t e s a n d purchase invoices (which is t h e
source d o c u m e n t recorded). T h e purchase invoice is received from t h e c r e d i t supplier.
• Invoices show, a m o n g o t h e r t h i n g s , w h a t has b e e n s o l d o r purchased a n d at w h a t price. Trade discounts,
VAT a n d any early-settlement (cash) discounts are also shown, so t h a t t h e total reflects t h e full a m o u n t
t h a t remains to b e p a i d .
• C r e d i t n o t e s are negative invoices.

2.1 Source documents

W h e n e v e r a business transaction takes p l a c e involving sales o r purchases, receiving o r p a y i n g m o n e y , o r
o w i n g o r b e i n g o w e d m o n e y , it is necessary for t h e transaction to b e e v i d e n c e d by a source d o c u m e n t . T h e
d o c u m e n t s m a y b e h a r d c o p y o r electronic a n d t h e s e d o c u m e n t s are often passed b e t w e e n organisations
entirely electronically f o r e x a m p l e via email. Source d o c u m e n t s are t h e d o c u m e n t s w h i c h are p r o d u c e d by,
o r i n p u t into, a business's a c c o u n t i n g system as t h e starting p o i n t to r e c o r d i n g t h e transactions of a business
for a c c o u n t i n g purposes.

2.2 Recording information from source documents

Financial i n f o r m a t i o n c o n t a i n e d i n t h e source d o c u m e n t s is r e c o r d e d i n t h e c o m p u t e r i s e d a c c o u n t i n g
system. I n respect of a c r e d i t sale m a d e , t h e business n e e d s to r e c o r d :
• t h e a m o u n t of t h e sale itself
• t h e a m o u n t o w e d by t h e c u s t o m e r (receivable)
• any VAT/discounts
• p a y m e n t s subsequently received
 In some sophisticated accounting software packages t h e system will use Artificial Intelligence (Al) to
correctly raise invoices to customers, a n d input a n d process invoices received. The use of A l i n accounting is
increasing with advances i n technology. Recent developments in A l have focused o n machine learning
techniques which use algorithms to identify patterns i n large data sets i n order to learn to classify, cluster o r
predict things.
Whilst t h e use of A l has reduced t h e n e e d f o r intervention from bookkeepers, as discussed above, it is
important f o r professional accountants to understand what information t h e system is recording and b e able
to confirm t h e accuracy of that information. The following sections include m o r e detailed information o n t h e
source documents used by businesses a n d t h e type of information those documents contain. Chapter 4 will
provide further explanation as to h o w t h e relevant information is recorded.

Professional skills focus: Assimilating and using information

You should understand what information is provided in t h e source documents a n d what information is
relevant f o r t h e computerised accounting system to record. Remember that t h e accounting system is
interested i n t h e financial effect of transactions. O t h e r systems, such as inventory management, will b e
interested in, for example, t h e quantity of g o o d s purchased o r sold.

2.3 Sales system

Consider t h e following stages that arise when a business sells g o o d s o n credit to its customers.

When a customer places an order, a sales order is created detailing t h e

Customer goods o r services required and the agreed price. While sales orders are very
order important from a practical point of view, they are not treated as source
documents for recording financial transactions in the business accounts.

When t h e goods o r services are delivered to the customer, they are usually
accompanied by a delivery note prepared by the seller. This sets out the
goods/services delivered, the quantities delivered, the date of delivery and
Dispatch the delivery address. A delivery note is not a source document.
goods
The delivery note is most often prepared with reference to the sales order.
Once the delivery is complete the delivery note is used to provide information
for creating the sales invoice. The delivery note is not a source document for
credit transactions.

The seller will then prepare and send an invoice to the customer to request
Raise payment for the goods o r services delivered. Invoices are source documents
invoice and need to b e recorded in the accounting system. More detail is given in
section 2.5 below.

Receive The customer will then settle the invoice either by bank transfer or by cheque
payment o r cash. More detail is given in section 3 below.

Figure 3.2: Sales system

2.4 Purchases system

Consider t h e following stages that arise when a business purchases g o o d s o n credit from its suppliers.
 A business will identify t h e g o o d s it requires from its supplier a n d raise an
Purchase purchase order which is sent to t h e supplier. The supplier will generate a
order sales o r d e r (see sales system at 2.3 above) based o n t h e purchase o r d e r
received. A purchase o r d e r is not a source d o c u m e n t .

O n c e t h e g o o d s are received, a goods received note (GRN) is raised by t h e

Receive business to record t h e receipt of g o o d s . The accounts d e p a r t m e n t will often
goods ask to see t h e GRN to confirm t h e g o o d s were delivered before paying a
purchase invoice. A GRN is not a source d o c u m e n t .

Sometime later, t h e business will receive an invoice from t h e supplier to

Receive request p a y m e n t for t h e g o o d s delivered. Invoices are source d o c u m e n t s a n d
invoice n e e d to be r e c o r d e d i n t h e accounting system. M o r e detail is g i v e n i n
section 2.5 b e l o w .

Make T h e business will t h e n settle t h e invoice by transfer to t h e supplier's b a n k

payment account o r by c h e q u e o r cash. M o r e detail is i n c l u d e d i n section 3 b e l o w .

Figure 3.3: Purchase System

2.5 Invoices
Invoices are source documents for credit transactions.
Invoices are u s e d to record transactions w h i c h have b e e n m a d e o n credit. ' O n c r e d i t 1 m e a n s g o o d s o r
services are s u p p l i e d b u t p a y m e n t is n o t m a d e straight away as t h e r e is a ' p e r i o d of credit' b e f o r e p a y m e n t
is d u e .
• W h e n a business sells g o o d s o r services o n c r e d i t to a customer, it sends o u t a sales invoice. T h e invoice
details s h o u l d match t h e details o n t h e delivery n o t e . T h e invoice is a request f o r t h e c u s t o m e r to p a y
w h a t is o w e d . Sales invoices can b e manually p r e p a r e d a n d e n t e r e d i n t o t h e a c c o u n t i n g system by t h e
b o o k k e e p e r o r automatically g e n e r a t e d by t h e a c c o u n t i n g system. Invoices raised are sequentially
n u m b e r e d , so t h a t t h e business can k e e p track of all t h e sales invoices it sends o u t .
• W h e n a business buys g o o d s o r services o n c r e d i t it receives a purchase invoice from t h e supplier. T h e
details o n t h e invoice s h o u l d m a t c h t h e details o n t h e purchase o r d e r (to c o n f i r m g o o d s w e r e actually
o r d e r e d a n d at w h a t price) a n d t h e g o o d s received n o t e (to c o n f i r m t h e q u a n t i t y of g o o d s received). A
purchase invoice received by t h e c u s t o m e r is t h e same d o c u m e n t as t h e sales invoice raised by t h e
supplier.
Information usually s h o w n o n a n invoice includes t h e f o l l o w i n g :
• invoice n u m b e r
• n a m e a n d address of seller a n d purchaser
• sale d a t e
• product/service d e s c r i p t i o n
• quantity a n d u n i t p r i c e of w h a t has b e e n s o l d (eg, 2 0 pairs of shoes at £ 2 5 a pair)
• details of t r a d e o r b u l k discount, if any ( e g , 1 0 % r e d u c t i o n i n cost if b u y i n g over 1 0 0 pairs of shoes) a n d
any early settlement (cash) d i s c o u n t offered f o r p a y m e n t by a n a g r e e d date
• t o t a l invoice a m o u n t i n c l u d i n g VAT details, if a p p r o p r i a t e
• t h e d a t e by w h i c h p a y m e n t is d u e , a c c o u n t details for t h e transfer of f u n d s a n d o t h e r t e r m s of sale
• a remittance advice slip m a y also b e i n c l u d e d if settlement by c h e q u e is p e r m i t t e d . T h e c u s t o m e r will
i n c l u d e t h e remittance advice slip with t h e i r p a y m e n t so t h a t t h e seller can identify w h a t o u t s t a n d i n g
a m o u n t s are b e i n g settled by t h e p a y m e n t .

2.6 Credit notes

S u p p o s e Creative Supplies sent o u t a sales invoice to a c u s t o m e r f o r 2 0 d i n n e r plates, b u t t h e b o o k k e e p e r
responsible for creating t h e invoice accidentally i n p u t i n a total of £1 62.1 0, instead of £62.1 0. T h e c u s t o m e r
has b e e n overcharged by £100. W h a t are Creative Supplies to d o ?
 A n o t h e r c u s t o m e r received 1 5 plates from Creative Supplies b u t f o u n d t h a t t h e y h a d all b e e n b r o k e n i n t h e
post. A l t h o u g h t h e customer has received a n invoice for, say, £45.60, it has n o i n t e n t i o n of p a y i n g it because
t h e plates w e r e substandard. A g a i n , w h a t is Creative Supplies to d o ?
T h e answer is t h a t Creative Supplies sends o u t credit notes to its customers. It will b e m a d e o u t i n t h e s a m e
way as a n invoice, b u t w i t h a 'credit n o t e n u m b e r 1 instead of a 'sales invoice n u m b e r 1.

Definition
Credit note: A d o c u m e n t issued to a c u s t o m e r relating to r e t u r n e d g o o d s , o r refunds w h e n a c u s t o m e r has
b e e n o v e r c h a r g e d f o r whatever reason. It can b e r e g a r d e d as a negative invoice. It is a source document for
credit transactions.

2.6.1 Debit notes

A debit note m i g h t b e issued to a s u p p l i e r as a means of formally r e q u e s t i n g a c r e d i t n o t e from t h a t
supplier. A d e b i t note is not a source document.

Interactive question 2: Credit note

Fill i n t h e blanks.

Creative Supplies sends o u t a to a c r e d i t c u s t o m e r i n o r d e r to correct a n e r r o r w h e r e a

c u s t o m e r has b e e n o v e r c h a r g e d o n a

2.7 VAT
Value a d d e d tax (VAT) is a sales tax a d d e d to m o s t sales invoices i n t h e UK. Details for calculating a n d
r e c o r d i n g VAT are discussed i n C h a p t e r 4. As well as t h e sale o r purchase a m o u n t , t h e business also
n o r m a l l y n e e d s to r e c o r d VAT o n each invoice o r c r e d i t n o t e . This a m o u n t will ultimately b e p a i d to o r
received f r o m HMRC.

2.8 Other source documents

So far, we have o n l y c o n s i d e r e d source d o c u m e n t s f o r sales a n d purchases o n credit, ie, sales a n d purchase
invoices a n d c r e d i t notes. O t h e r source d o c u m e n t s are also u s e d for transactions i n v o l v i n g settlement of
c r e d i t transactions ( b y d i g i t a l wallet, card p a y m e n t o r b a n k transfer), cash, w a g e s a n d o t h e r matters, as we
shall see.

Interactive question 3 : Source documents

Elephant s o l d g o o d s o n c r e d i t to Jackal f o r £860. Jackal r e t u r n e d £ 2 0 of t h e s e g o o d s as t h e y were of
substandard quality.

Requirement
W h a t are t h e source d o c u m e n t s t h a t p r o v i d e t h e i n f o r m a t i o n to be r e c o r d e d i n E l e p h a n t s a c c o u n t i n g
syste m ?
 3 Recording bank transactions
gM Section overview

• Businesses have constant a n d instant access to t h e i r b a n k accounts via electronic b a n k i n g . Electronic

b a n k i n g allows a business to create a transaction r e p o r t at any p o i n t i n t i m e . Transaction reports are
source d o c u m e n t s for transactions t h r o u g h t h e cash at b a n k account.
• S o m e businesses have a c c o u n t i n g software packages w h i c h are i n t e g r a t e d w i t h electronic b a n k i n g
systems, a l l o w i n g b a n k i n g transactions to b e r e c o r d e d directly i n t h e business's a c c o u n t i n g system.
• M a n y a c c o u n t i n g software packages use A l to automatically m a t c h receipts a n d p a y m e n t s o n t h e
transaction r e p o r t to i n f o r m a t i o n within t h e system r e g a r d i n g purchases, sales a n d o t h e r transactions,
a n d a c c o u n t for t h e receipt o r p a y m e n t accordingly.
• Less sophisticated software packages will r e q u i r e a transaction report to b e d o w n l o a d e d f r o m t h e
electronic b a n k i n g system w h i c h can t h e n b e u s e d by a b o o k k e e p e r to e n t e r transactions i n t o t h e
business's a c c o u n t i n g system.

3.1 Electronic banking

Electronic b a n k i n g has c h a n g e d h o w businesses record transactions t h r o u g h t h e b a n k . Traditionally, a
business' b o o k k e e p e r w o u l d maintain a separate cash b o o k i n w h i c h all b a n k a n d cash transactions w e r e
r e c o r d e d . At t h e e n d of each m o n t h , t h e b a n k w o u l d s e n d t h e business a b a n k statement. T h e b o o k k e e p e r
w o u l d t h e n use t h e b a n k statement to c h e c k t h e transactions w e r e correctly r e c o r d e d a n d t h a t n o
transactions w e r e o m i t t e d . Electronic b a n k i n g means businesses n o w have constant, real t i m e access to
t h e i r b a n k accounts a n d c a n use t h e i n f o r m a t i o n r e c o r d e d by t h e b a n k to u p d a t e t h e i r a c c o u n t i n g records
o n a regular basis.
Sophisticated a c c o u n t i n g software packages can b e i n t e g r a t e d w i t h t h e external b a n k i n g system i n such a
way t h a t b a n k transactions are automatically r e c o r d e d i n t h e relevant a c c o u n t c o d e s . Such systems use A l to
recognise ' k n o w n ' receipts a n d p a y m e n t s a n d m a t c h t h e m against t h e relevant transaction. I n such a case,
t h e b o o k k e e p e r will receive a transaction report w h i c h details transactions already m a t c h e d , a n d t h e r e f o r e
already r e c o r d e d , a n d o t h e r s w h i c h still n e e d to b e m a t c h e d . A n y ' u n k n o w n ' transactions are r e c o r d e d i n a
t e m p o r a r y a c c o u n t k n o w n as a 'suspense account' (see C h a p t e r 6 f o r m o r e detail) a n d will b e reported on
a n exception report, to b e investigated by t h e accountant. O n c e identified, t h e suspense a c c o u n t will b e
r e m o v e d a n d t h e transaction will b e r e c o r d e d i n t h e correct account within t h e a c c o u n t i n g system.
O t h e r software packages will n o t have d i r e c t access to t h e business' b a n k i n g system b u t can a c c e p t
i n f o r m a t i o n h e l d o n reports t h a t are extracted from t h e b a n k i n g system. O n a regular basis, t h e business will
d o w n l o a d a transaction report from t h e business' b a n k i n g system w h i c h shows all t h e receipts a n d
p a y m e n t s i n a g i v e n p e r i o d . T h e transaction report is t h e source document for transactions t h r o u g h t h e
business cash at b a n k account. T h e data o n t h e transaction report is t h e n uploaded i n t o t h e a c c o u n t i n g
software. M a n y software packages will use A l to p e r f o r m a m a t c h o n ' k n o w n ' transactions a n d process these
appropriately, i n m u c h t h e same way t h a t a system t h a t is i n t e g r a t e d w i t h t h e b a n k will. As was d e s c r i b e d
a b o v e , u n m a t c h e d transactions will a p p e a r o n a n e x c e p t i o n report for further investigation.

Transaction report Uploaded Accounting system Match Matches to transactions -

system can suggest o r
Withdrawals manual

Sales invoice 001

£650
customer ABC £650
O n c e matched, accounting
system processes
Purchase invoice
(£900)
supplier XYZ £900

Unmatched items require

investigation

Purchase invoice Accountant discovers that

(£1,220) p r o m p t payment discount
supplier JKL £1,300 taken hence amount p a i d is
less than invoice total

Figure 3.4: Electronic Banking m a t c h i n g

 Professional skills focus: Structuring problems and solutions

You may b e faced with t h e situation i n t h e Accounting exam i n which there is a p r o b l e m d u e to an

unmatched bank transaction. You will n e e d to work o u t h o w t h e transaction should have b e e n recorded,
what has o r has n o t b e e n recorded a n d therefore what correction is required.

3.2 Cash at bank account

In t h e accounting system, t h e cash at bank account is used to record all receipts a n d payments m a d e
t h r o u g h t h e business bank account. We will assume that most business transactions take place t h r o u g h t h e
electronic transfer of funds - either by payment card, digital wallet payment, direct bank transfer, standing
order o r direct debit. Bank interest a n d charges m a d e directly by t h e bank are also m a d e electronically.
These transactions will all be shown in t h e bank transaction report a n d are recorded in t h e accounting
records (in t h e cash at bank account) as described in t h e above section.
Businesses may also handle physical cash and cheques which must also b e recorded in t h e cash at bank
account. The total amounts of cash withdrawn o r p a i d into t h e bank will b e shown o n t h e transaction report
d o w n l o a d e d from t h e electronic banking system a n d are likely to b e identified as unmatched exceptions by
t h e accounting system. O n c e investigated and identified, these payments o r deposits will b e entered into
t h e accounting system, i n t h e cash at bank account, as described above.

3.3 Cheques
ft Definition
Cheques: A written order from an account holder to their bank directing t h e bank to pay a specified sum to
a particular individual o r organisation.

If a business receives a cheque from a customer, it should record t h e amount received i n t h e accounting
system. The business will then take t h e physical d o c u m e n t to t h e bank f o r processing or, if their online
banking system allows, submit t h e cheque to its bank electronically by scanning o r submitting a p h o t o of
t h e cheque.
O n c e t h e bank has received t h e cheque, it 'cashes' t h e cheque and t h e funds w o u l d show as received into
t h e business bank account. This process can take several days.
Cheques are still used by some smaller businesses a n d individuals, b u t they are b e c o m i n g less c o m m o n
with t h e increasing use of online banking.
Here is an example of a cheque. Blue Sky Tech Ltd is agreeing to pay £770.80 o u t of their Liberty Bank
account to Southfield Electrical. Blue Sky Tech Ltd will post o r hand this cheque to Southfield Electrical w h o
will take it to their bank w h o will cash it for them.

17-54-18
liberty bank 00546 5489632

Date 2.0 Oci-obey 2.OXX I

32 Pines Road, London EC1 3LB

Pay

CD
(D

C
zs
o

I 1 80420
Cheque No. Sort Code Account No,

Blue Sky Tech Ltd

3.4 Petty cash

Some cash, i n notes a n d coins, m i g h t b e kept o n t h e business premises i n order to make occasional
payments for o d d items of expense. This cash is usually accounted for separately in a petty cash book. Petty
cash is n o t considered further o n this course.
 4 The payroll
Section overview

• T h e payroll is t h e r e c o r d of e m p l o y e e w a g e s a n d salaries a n d is t h e source d o c u m e n t for expenses

relating to e m p l o y e e s .
• T h e a m o u n t actually p a i d to e m p l o y e e s is c a l l e d n e t pay; this is less t h a n gross p a y since t h e e m p l o y e r
pays o v e r w h a t t h e e m p l o y e e o w e s directly to H M R C (for i n c o m e tax u n d e r PAYE, a n d e m p l o y e e s 1 N l )
a n d t h e p e n s i o n p l a n (for any e m p l o y e e p e n s i o n contribution).
• Gross payroll cost is m o r e t h a n e m p l o y e e s ' gross p a y since t h e e m p l o y e r has to p a y a d d i t i o n a l
e m p l o y m e n t tax ( e m p l o y e r ' s N l ) to H M R C p l u s it m a y m a k e a d d i t i o n a l e m p l o y e r p e n s i o n c o n t r i b u t i o n s to
the pension plan.

4.1 What is the payroll used for?

ftk Definition
Payroll: The r e c o r d of w a g e s a n d salaries costs.

T h e payroll records all t h e individual a m o u n t s t h a t a p p e a r o n e m p l o y e e s ' payslips, namely:

• gross p a y to e m p l o y e e s :
- PAYE i n c o m e tax
- e m p l o y e e ' s N l contributions
- employee's pension contributions
- n e t p a y (cash p a i d to e m p l o y e e s )
• a d d i t i o n a l costs f o r t h e e m p l o y e r :
- e m p l o y e r ' s N l contributions
- employer's pension contributions
Gross p a y is not t h e a m o u n t p a i d to t h e e m p l o y e e . T h e e m p l o y e r n e e d s to m a k e d e d u c t i o n s from gross p a y
before paying net pay to t h e employee.
T h e payroll is a source document as it contains i n f o r m a t i o n t h a t is e n t e r e d i n t o t h e a c c o u n t i n g system.

Professional skills focus: Structuring problems and solutions

Reporting i n f o r m a t i o n relating to tax, national insurance c o n t r i b u t i o n s a n d pensions is a key area i n w h i c h an

accountant c o m m u n i c a t e s w i t h external b o d i e s . Often t h a t i n f o r m a t i o n n e e d s to be i n a certain format o r
i n c l u d e specific details. Like all accounting, it is i m p o r t a n t for all i n f o r m a t i o n r e p o r t e d to external b o d i e s to
b e accurate.

Context example: Payroll

Sunny C l i m e s Ltd e m p l o y s t h r e e p e o p l e : Anja earns £36,000 a year; M a r k earns £33,000 a year; a n d D i p a k
earns £30,000 a year. T h e gross p a y i n S e p t e m b e r for e a c h e m p l o y e e is as follows:

Anja 3,000

Mark 2,750

Dipak 2,500

However, t h e s e are n o t t h e a m o u n t s t h a t each e m p l o y e e will receive. Sunny C l i m e s Ltd first of all has to
d e d u c t i n c o m e tax from gross p a y u n d e r t h e PAYE s c h e m e to b e p a i d to HMRC. It d e d u c t s National
Insurance (employees' N l ) f r o m gross pay, a g a i n to b e p a i d to HMRC. As it runs a p e n s i o n plan, it has to
d e d u c t each e m p l o y e e ' s p e n s i o n c o n t r i b u t i o n , to b e p a i d to t h e p e n s i o n plan.
 Deductions

PAYE Nl EE pens Net pay Gross pay

£ £ £ £ £
Anja 550 250 150 2,050 3,000
Mark 500 230 135 1,885 2,750
Dipak 460 210 125 1,705 2,500
1,510 690 410 5,640 8,250
Deductions + Net pay = Gross pay
The employees will receive the net pay.
The employer has deducted amounts the employees owe to other people from the gross pay the employer
owes to them. This is not the end of the story, however; the employer also owes additional Nl to HMRC, and
employer pension contributions to the pension plan, over and above the amount of gross pay. The final
payroll will be as follows:

Deductions

Total
EE ER
Gross payroll
PAYE Nl EE pens Net pay pay Nl ER pens cost

£ £ £ £ £ £ £ £

Anja 550 250 150 2,050 3,000 310 200 3,510

Mark 500 230 135 1,885 2,750 265 180 3,195
Dipak 460 210 125 1,705 2,500 230 165 2,895
1,510 690 410 5,640 8,250 805 545 9,600
Gross pay + Employer's Nl + Employer pension = Total payroll cost
The total payroll cost for Sunny Climes Ltd is £9,600. This is paid out as follows:

Employees (net pay) 5,640

HMRC: Income tax PAYE 1,510
HMRC: Employee and employer Nl (690 + 805) 1,495
Pension plan: Employee and employer pension (410 + 545) 955
Total payroll cost 9,600

Interactive q u e s t i o n 4 : Payroll
Fantab Ltd has 10 employees who had gross pay of £190,000 per annum between them in 20X4. In that
year, Fantab Ltd made net pay payments to employees of £129,200 and paid £20,900 to the pension plan.
Its total payroll cost was £220,400.
Requirement
How much did Fantab Ltd pay to HMRC in respect of Nl and PAYE?