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(1)

Documentation

Chapter 1

(2)

Contents overview

• Types of business transaction

• Documenting business

transactions

• Invoices and credit notes

• Discounts, rebates and

allowances

• Sales tax

• Contract law

• Storage of information

• Data protection

(3)

Types of business

transaction

• What is a business?

– Uses economic resources to create

goods or services which customers

will buy

– Provides jobs for people to work in

– Invests money in resources in order

to make even more money for its

owners

• Business transactions?

– Property changes hands

– Two main types: sales and

(4)

By cash or on credit

• Sales

– By cash: goods or services given in

exchange for immediate payment

(in notes, coins, cheques)

– On credit: cash received later

• Purchases:

– For cash: payment made

immediately

(5)

Other business

transactions

• Payment of wages

• Borrowing money

• Lending money

• Offering a discount

• Receiving a discount

(6)

Documenting business

transactions

(7)

Discussion

• Documentation to expect

(i) You buy a CD from a shop, paying

cash

(1) A receipt

(ii) You have air-conditioning system

installed

(1) A letter of enquiry

(2) A quotation

(3) An order

(4) An order acknowledgement

(5) A delivery note

(6) An invoice

(7) A credit note

(8)

More documents

• Inventory lists: check availability of all

the parts

• Supplier lists: where to buy parts

• Staff schedules: plan for human

resource

• Timesheet: record the actual hours staff

spent

• Goods received notes

• Expense claims: Employees may incur

expenses which need to be reimbursed

Accounting system: records, summarizes

and presents the information contained

in these documents

(9)

Purchase order vs. sales

order

Pur

cha

se

or

der

Sale

s

or

der

(10)

Invoice vs. credit note vs.

debit note

• Invoice

– A demand for

payment

– Settled

immediately in

cash: receipt

– Paid on receipt of

goods: cash on

delivery (COD)

invoice

– Paid later: credit

invoice

Invoice illustration

– How many copies

needed?

• Credit note

– Negative invoice:

cancel part or all of

previously issued

invoice

– Amount payable:

unpaid invoice’s

value minus the

credit note’s

• Debit note

– Customer to

supplier requesting

a credit note

– Supplier to

customer to adjust

upwards the

amount of issued

invoice

(11)

Illustration

How

much

is the

pa

yable

?

(12)

Discounts, rebates and

allowances

Trade discount

• $1 per unit, but

95p for 100 units

or more

• Given on invoice

• Permanent

Cash discount

• 10% 0 days, 5% 7

days, net 30 days

• Financing matter

A reduction in the

bills for the

following year

A cheque for the

calculated rebate

amount

Buy 1 get 1 free

(13)

Sales Tax

Many business transactions involve sales tax, and most invoices show sales tax charged separately.

Input and Output sales tax

 Output sales tax is charged on sales  Input sales tax is incurred on purchases

Usually output sales tax (on sales) exceeds input sales tax (on purchases). The excess is paid over to the government. If Output sales tax is less than input sales tax in a period, the government will refund the difference to the business.

In other Words, if a business pays out more in sales tax than it receives from customers it will be paid back the difference.

(14)

Retention policy

• Sets down how long different

kinds of information are retained

– Master files and reference files:

charter agreement, legal documents

– Temporary or transitory files

– Active files: invoices, GRNs files

– Non-active file: purchase invoices of

previous years

(15)

No long needed info and

data

• Will you throw it away???

• Ways to deal:

– Microfilmed or microfiched

– Stored elsewhere (archiving)

– Securely destroyed

(16)

Retention Policy

Files of data may be permanent, temporary, active and non-active.

Permanent

Master files and reference files are usually permanent, which means that they are never thrown away or scrapped. They will be updated from time to time, and so the information on the file might change, but the file itself will continue to exist.

Temporary

A temporary or transitory file is one that is eventually scrapped. Many transaction files are held for a very short time, until the

transaction records have been processed, but are then thrown away. Other transaction files are permanent e.g. Cashbook, or are held for a considerable length of time before being scrapped.

Active

An active file is one that is frequently used, for example, sales invoice files relating to the current FY, or correspondence files relating to current customers and suppliers.

Non-Active

A non-active file is one that is no longer used on a day-to-day basis. For example, files that contain information relating to customers and suppliers who are no longer current, and purchase invoices relating to previous financial periods.

Semi-active files are those that contain information that is still active,

(17)

nears completion, it will not be used so frequently, but should be kept on hand for reference is so needed.

Data Protection

Information stored about Individuals is regulated by DPL

Without adequate data protection policies, risks include: Access to personal information by unauthorized parties Using data for other purposes than originally intended.

(18)

 Automatic data entry such as scanning.  Well-designed forms that are easy to read  Using tick boxes or drop-down lists

 Avoid long sequences of numerical character  Validation technique

 Verification by entering the data twice and checking for inconsistencies

 Well-designed forms that are easy to read Validation Techniques

Validation of data ensures that it is reasonable and possible but not that it is necessarily correct.

1. Field presence – Essential fields cannot be left blank e.g. the name of a customer

2. Field length – Data has the correct number of characters (Min/Max) Data must be a Min of 6 char

3. Range – Data value is within a predetermined range eg months of the year must be btwn 1 and 12

4. Format – Individual characters are valid eg Acc num must be in a certain for AAA/999 (three letters and three numbers)

5. Batch Header – Where batch processing is used, the computer calculates totals that can be matched to the totals of the

documents in the batch.

6. Check Digit – Code numbers such as bank acc numbers are prone to data entry errors. Check digits are extra digits in a code,

calculated by the computer using an algorithm to check that the other digits in the code are correct.

(19)

Chapter 2

Assets, Liabilities and the

Accounting Equation

(20)

Contents

Illustration

The accounting equation Liabilities

Assets

(21)

Business definition

• A business owns assets and owes

liabilities.

1

An organization which uses economic resources to create goods or services which customers will buy.

2

A business is an organization providing jobs for people to work in.

3

Invests money in resources (eg it buys buildings, machinery etc; it pays employees) in order to make even more money for its owners.

(22)

A business from different

perspectives

Legal:

•Separate legal entity •No distinction with its owners.

Business

Accounting

:

•Must always be treated as a separate entity from its owners.

(23)

Assets

Assets

Something valuable which a business owns or has the use of.

Non-current assets Text Current assets Text

Items belonging to a business and used in the running of the business.

(24)

Assets classification

Non-current assets

•Held and used in operations for a long time, normally more than 1 years. •E.g.: factories, office building, plant and machinery, cars, etc. Current assets

•Held for only a shorter time. •E.g.: Cash and banks,

inventories, receivables, etc.

(25)

Liabilities

Liabilities

Something which is owed to somebody else.

Non-current Liabilities Text Current Liabilities Text

(26)

Liabilities classification

Non-current liabilities

•Payable in a long time,

normally more than one year. •E.g.: long term loans or borrowings from banks, etc. Current liabilities •Payable in a shorter time. •E.g.: short term borrowings from banks, overdrafts, payables to suppliers, etc.

(27)

The accounting equation

• Very simple equation to keep in mind

Capital

(Owners’ equity Retained earnings)

Assets

(Cash Receivables Buildings Cars)

Liabilit

ies

(Bank loans, Trade payables Tax payables)

=

+

A Business

(28)

Accounting equation 2

Capital

introduc

ed +

earned

profit

-drawing

s

Assets

=

+

Liabiliti

es

A Business

(29)

Accounting equation 3

Capital

introduced

+ profit

retained in

previous

periods+

profit

earned in

current

period

-drawings

Assets

=

+

Liabiliti

es

A Business

(30)

Accounting equation 4

Capital introduced

in previous

periods

+ Profit retained

in previous

periods

+ Profit earned in

current period

+ Capital

introduced in

current period

– Drawings in

current period

Assets

=

+

Liabiliti

es

A Business

(31)

The business

equation

Profit

earned

in

current

period

Drawings

in current

period

Increase/d

ecrease in

net assets

in current

period

Capital

introduce

d in

current

period

=

+

(32)

-Credit transactions

Credit sales •Creates an account receivable •Settled when cash is received from customer Purchases on credit •Creates an account payable •Settled when cash is paid to supplier

A sale or a purchase which

occurs some time earlier than

(33)

Double entry

bookkeeping

Debit: •Increases assets •Decreases liabilities •Decreases capital •Decreases income •Increases expenses

Means left hand

side

A business

Duality: Every transaction has two accounting entries,

a debit and a credit.

Credit:

•Decreases assets •Increases liabilities •Increases capital •Increases income •Decreases expenses

Means right hand

(34)

Chapter 3

Statement of financial position and income

statement

(35)

Contents

Users of accounts

Organisational structure The income statement

Statement of financial position Introduction to financial statements

(36)

Introduction to financial

statements

The statement of financial position

The income statement

The cash flow statement

Basic

accounting

statements

(37)

Statement of financial

position

ASSETS CAPITAL LIABILITIE S

A statement of the assets,

liabilities and capital of a

business

'as at'

a particular

date.

EQUAL

(38)

Typical statement of

financial position

BUSINESS NAME

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X8

$ $

Non-current assets

Land and buildings X

Plant and machinery X

Fixtures and fittings X

X Current assets

Inventory X

Receivables X

Cash at bank and in hand X

X X Capital Proprietor's capital X Retained profits X X Non-current liabilities Loan X Current liabilities Bank overdraft X Payables X X X

(39)

Assets

Text Non-current assets •Acquired for long-term use within the business •Strictly, more than one accounting period Assets Text Current assets •Expected to be converted into cash within one year

(40)

Example

Text Non-current assets •Land •Office building •Factory •Machinery •Office equipment •Etc. Assets Current assets •Cash •Inventor y •Receivab les •Etc.

(41)

Discussion

• Current or non-current?

Asset

Business

Current or

non-current

Van

Delivery

firm

Cement

mixer

Builder

Car

Car trader

Laptop

Audit firm

Laptop

Laptop

trader

42 Non-current Non-current Non-current Current Current

(42)

Liabilities

Text Non-current liabilities •Debts not payable within the 'short term •E.g: long-term bank loans. Liabilities Text Current liabilities •Debts payable within one year. •E.g.: short-term loans, bank overdrafts , trade payables, etc.

Long-term loan is split to: -Amount due within one year -Amount due beyond one year

(43)

Discussion

• Classification:

(a) PC used in the accounts department

of a retail store

Non-current asset

(b) A PC on sale in an office equipment

shop

Current asset

(c) Wages due to be paid to staff at the

end of the week

(44)

Discussion

• Classification:

(d) A van for sale in a motor dealer's

showroom

Current asset

(e) A delivery van used in a grocer's

business

Non-current asset

(f) An amount owing to a bank for a loan

for the acquisition of a van, to be

repaid in 9 months

Current liabilities

(45)

Capital

Text Amounts invested by the owner(s) in the business

Business capital account

Profit earned and retained by the business.

(46)

The income statement

BUSINESS NAME INCOME STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 20X8

$ $ Sales X Cost of sales X Gross profit X Selling costs X Distribution costs X Administration expenses X X

Profit for the year X

(47)

Income statement

breakdown

Text Gross profit: Compares revenue with cost of goods sold (direct costs) Income statement Net profit: Different between gross profit and total overheads (indirect costs).

(48)

Capital expenditure vs. revenue

expenditure

Capital expenditure Results in: •The acquisition of non-current assets; or •An improvement in their earning capacity. Revenue expenditure

Balance sheet items Income statement items

Incurred in: •For the purpose of the trade of the business. •To maintain the existing earning capacity of non-current assets.

Exam focus

(49)

Capital and revenue

income

Capital income • Proceeds from the sale of non-trading assets. Revenue income • The sale of trading assets • Rent, interest and dividends received from non-current assets held by the business

Profit/loss apprears on IS Appears on income statement

(50)

Users of accounts

Employees

of the

business

Owners

of the

business

Trade

contacts

Users of

accounts

Managers

of the

business

Providers

of finance

to the

business

Tax

authorities

(51)

What’s what?

(a) Freehold property

Non-current asset

(b) Payment of wages for a director with

a two year service contract

Expense

(c) Payments into a pension fund

Expense

(52)

What’s what?

(d) A trade receivable who will pay in 18

months time

Non-current asset

(e) An irrecoverable debt written off

Expense

(f) A patent

Non-current asset

(g) A company car

(53)

What’s what?

(h) Interest on a bank overdraft

Expense

(i) A bank loan repayable in five years

Non-current liability

(j) Petty cash of $25

Current asset

(k) The portion of local taxes paid covering the

period after the reporting date

Current asset: prepayment

(54)

Chapter 4

Recording and summarising

transactions

(55)

Contents

Recording business transaction

1

Recording Sales

2

Recording purchases

3

The cash book

4

(56)

Contents

Cash registers and cash received sheets

5

The general ledger

6

Discounts, rebates and allowances

7

Sales tax

8

Posting cash receipts to the general ledger

9

Posting cash receipts to the general ledger

(57)

Recording business

transactions

Text

To record

Source

documents

Books of

prime

entry

(58)

Source documents

– Invoices

– Credit notes

– Petty cash vouchers

– Cheques received

– Cheque stubs (for cheques

paid out)

– Wages, salary and employee

tax records

(59)
(60)

Discussion

Which of books of prime entry is

used if:

• Your business pays a supplier

$5,000?

– Cash book

• You send a customer an invoice

for $1,320?

– Sales day book

• You receive an invoice from J

Sunderland for $1,750

– Purchase day book

(61)

Discussion

• You pay Hall & Co $1,000

– Cash book

• Sarti (a customer) returns goods

to the value of $100

– Sales returns day book

• You return goods to Elphick & Co

to the value of $2,400

– Purchase returns day

book

(62)

Summarising source

documents

(63)
(64)

Recording Sales

Sales invoices Sales credit notes Cheques received Sales day book Bank account

Sales tax control account Cash book

Receivables ledger control account

(65)

Sales day book

• The sale to Jones Co for $105 is also recorded

on page 14 of the receivables ledger.

• Invoice number is unique generated by the

business's sales system.

(66)

Recording Purchases

Purchase invoices Purchase credit invoices Cheques paid Purchase day book Bank account

Sales tax control account Cash book

Payables ledger control account Payables ledger

(67)

Purchase day book

The purchase from Cook Co for $315 is

also recorded on page 31 of the

(68)

The cash book

C a s h c o n t r o l a c c o u n t i n G / L C a s h r e c e i p t s d a y b o o k C a s h b o o k C a s h p a y m e n t b o o k / C h e q u e p a y m e n t d a y b o o k

(69)

The cash receipts book

J Bloggs – Cash receipts

Date Narrative Total

Cash sales Capital introduced Cash from debtors $ $ $ $ 1.10 Capital injection 1,000 - 1,000 - 3.10 Cash sales 90 90 - - 8.10 Cash sales 50 50 - - 11.10 A Smith 200 - - 200 12.10 Capital injection 500 - 500 - 13.10 B Brown 300 - - 300 Total 2,140 140 1,500 500

(70)

The cash payments book

J Bloggs – Cash payments

Date Narrative Total

Cash purchases Cash to creditors Telephone $ $ $ $ 1.10 BT 100 - - 100 12.10 C Jones 1,200 - 1,200 - 18.10 D Davies 300 - 300 - 20.10 Cash purchases 200 200 - - 26.10 Cash purchases 50 50 - - 29.10 Cash purchases 100 100 - 30.10 BT 140 - - 140 Total 2,090 350 1,500 240

(71)

Question

Which of the following will not be entered in the cash book? (a) Cheque received

(b) Payment to receivables ledger customers (c) Supplier's invoice

(d) Credit note (e) Debit note

(f) Bank charges debited to the bank account

(g) Overdraft interest debited to the bank account

(h) Payment for a non-current asset purchased on credit (i) Refund received from a supplier

(j) Depreciation Answer: CDEJ

(72)

The bank statement

Text To reconcile

Bank

statement

received

from bank

Weekly/monhtly basis Investigate differences

Cash book

(internally

generated)

(73)

The petty cash book

• The book of prime entry

which keeps a cumulative

record of the small amounts

of cash received into and paid

out of the cash float

• There are usually more

payments than receipts, and

petty cash must be

‘topped-up' from time to time with

cash from the business bank

account.

(74)

The general ledger

The general ledger is the accounting

record which summarizes the financial

affairs of a business.

It contains details of assets, liabilities

and capital, income and expenditure

and so profit and loss.

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

(75)
(76)

The ‘T’ format

The 'T' format accounts:

On top of the account is its name

Left hand side called debit side

Right hand side called credit side

(77)

Example

For example: Profit and Loss accounts

Note: No b/f or c/f for profit and losses

accounts

(78)

Example

For example: Balance sheet accounts

Note: There are always b/f or c/f for profit and

losses accounts for balance sheet accounts

(79)
(80)

The Principles

• Every transaction has a two fold

effect!!!

(81)

Example – Cash

transactions

In the cash book of a business, the following

transactions have been recorded.

(a) A cash sale (ie a receipt) of $2

(b) Payment of a rent bill totalling $150

(c) Buying some goods for cash at $100

(d) Buying some shelves for cash at $200

How would these four transactions be posted to

the ledger accounts? For that matter, which

ledger accounts should they be posted to?

Don't forget that each transaction will be

posted twice, in accordance with the rule of

double entry.

(82)
(83)
(84)
(85)

Posting from the day

books

(86)

Posting cash receipts

J Bloggs – Cash receipts

Date Narrative Total sales Cash introduced Capital Cash from debtors

$ $ $ $ 1.10 Capital injection 1,000 - 1,000 - 3.10 Cash sales 90 90 - - 8.10 Cash sales 50 50 - - 11.10 A Smith 200 - - 200 12.10 Capital injection 500 - 500 - 13.10 B Brown 300 - - 300 Total 2,140 140 1,500 500 Dr Cash Account 2,140 Cr Sales 140 Cr Capital Account 1,500

Cr Debtors Control Account 500

(87)

Impersonal vs. personal

account

• Impersonal accounts: Accounts in the general

ledger

• Personal accounts:

– Include details of transactions which have

already been summarized in ledger

accounts.

– Do not form part of the double entry

system

– Memorandum accounts only.

• Control accounts:

– Used chiefly for receivables and payables.

– Should agree with the total of the

(88)

Accounting for sales tax

If a business sells goods for $600 + $105 sales

tax, ie for $705 gross price, the sales

account should only record the $600

excluding sales tax.

DEBIT Cash or AR

$705

CREDIT Sales

$600

CREDIT Sales tax account (output)

$105

(89)

Accounting for sales tax

If a business purchases goods on credit for

$400 + tax $70

Tax is recoverable

DEBIT Purchases

$400

DEBIT Sales tax account (input tax)

$70

CREDIT Trade AP

$470

Tax is not recoverable

DEBIT Purchases

$470

CREDIT Trade accounts payable

$470

(90)

When is sales tax

accounted for?

•Sales tax is accounted for when it

first arises:

– when recording credit

purchases/sales in credit transactions

– and when recording cash received or

paid in cash transactions

(91)

Sales tax account

Purchase day book

xxx

(input sales tax)

Bank

xxx

(input sales tax on cash

purchase)

C/f:

xxx

B/f:

xxx

Sales day book

xxx

(out put sales tax

invoiced)

Bank

xxx

(out put sales tax on cash

sales)

(92)

Chapter 5

(93)

Contents

• The journal

• The trial balance

• Methods of coding data

• Manual and computerized

systems

• Batch processing and control

totals

• Accounting systems

• Accounting modules

(94)

The journal

• One of the books of prime entry

• Record of (not arise from the other

books of prime entry) unusual

movement between accounts

Date

$

$

DEBIT

Account name

X

CREDIT

Account name

X

(95)

Example: Journal entries

• 1 January

Put in cash of $2,000 as capital DEBIT Cash

2,000

CREDIT Paul Brown – capital account 2,000

Initial capital introduced

Purchased brushes and combs for cash of $50 DEBIT Brushes and combs account

50

CREDIT Cash 50

The purchase for cash of brushes and combs as non-current assets

Purchased hair driers from Z on credit for $150 DEBIT Hair dryer account

150

CREDIT Sundry payables account * 150

(96)

Example: Journal entries

• 30 January

Paid three months rent to 31 March of $300

DEBIT Rent account 300

CREDIT Cash 300

The payment of rent to 31 March Collected and paid in takings of $600

DEBIT Cash 600

CREDIT Sales (or takings account) 600

Cash takings • 31 January

Gave Mrs X a perm, highlights etc on credit $80.

DEBIT Receivables account 80

CREDIT Sales account (or takings account) 80

(97)

The trial balance

• List of ledger balances shown in

debit and credit columns

• The debit should equal credit

balances

(98)
(99)

TB not balance – Why

(a) The complete omission of a

transaction, because neither a debit nor

a credit is made

(b) Posting a debit or credit to the correct

side of the ledger, but to a wrong

account (an error of commission)

(c) Compensating errors (eg debit error of

$100 is exactly cancelled by credit $100

error elsewhere)

(d) Errors of principle (eg cash received

from customers being debited to the

total receivables account and credited

to cash instead of the other way round)

(e) Errors of transposition (eg $11,729

(100)

Errors in detail

Errors of transposition

• Two digits in an amount are

accidentally recorded the wrong

way round

• Detect: the difference can be

divided exactly by 9

Errors of omission

• Fail to record a transaction at all

• Making a debit or credit entry, but not

the corresponding double entry

Compensating errors

Errors which are, coincidentally,

equal and opposite to one

(101)

Errors in detail

Errors of principle

• Accounting entry breaks the 'rules' of

an accounting principle or concept

• E.g.:

– Capital expenditure treated as revenue

expenditure

– Drawings treated as expenses

Errors of commission

• Bookkeeper makes a mistake

• E.g.:

– Putting a debit entry or a credit entry in

the wrong account

(102)

Correction of errors

Journal entries

• Requires a debit and an equal credit entry

• Total debits equal total credits before a journal

entry is made

• They will still be equal after the journal entry is

made

Suspense account

• Why have?

– A trial balance is drawn up which does not

balance

– Knows where to post the credit side of a

transaction, but does not know where to

post the debit (or vice versa)

(103)

Example - JE

Suppose a bookkeeper accidentally

posts a bill for $200 to the gas

account instead of to the business

rates account. A trial balance is

drawn up, and total debits are

$100,000 and total credits are

$100,000.

Journal entries

DEBIT Business rates account $200

CREDIT Gas account $200

To correct a misposting of $200 from

the rates account to electricity

(104)

Coding

Each account in an accounting system has a unique code which is What will be used to identify the correct account for posting.

Coding saves time because they are shorter than description. They also save space.

In accounting systems, the most obvious examples of codes are as follows:

 Customer account numbers  Supplier account numbers

 General Ledger account numbers  Employee reference numbers  Inventory Item Codes

External codes include Bank account numbers and bank sort codes.

Significant Code

The Account code incorporate some digits which describe the item being coded.

Data Entry Errors

 Source documents can be damaged or destroyed.  Poor handwriting can make forms difficult to read  Malicious intent

 Poorly skilled staff

 Details can be omitted or incorrect in the source doc  Transcription error eg enetering 45 istead of 54

(105)

Reducing Data Entry Errors

 Properly trained and experienced staff  Automatic data entry such as scanning.  Well-designed forms that are easy to read  Using tick boxes or drop-down lists

 Avoid long sequences of numerical character  Validation technique

 Verification by entering the data twice and checking for inconsistencies

(106)

Methods of coding data

• Each account has a unique code

for posting

• Why need?

– Used to identify the correct account

for a posting

– Saves time

(107)

Example

• A nominal ledger has the following

codes.

State what type of code this is. Explain

your answer

(108)

Solution

• This is a significant digit code.

• The digits are part of the

description of the item being

coded.

• '1' in 100000 clearly represents

non-current assets

• '2' in 100200 represents plant and

machinery etc.

(109)

Computerized systems

• Perform the same tasks as

manual systems

• Differences:

– How information is stored

– How tasks are performed

– How some package do things

'automatically'

(110)

Computerized systems

• Input: Entering data from original

documents

• Processing: Entering up books

and ledgers and generally sorting

the input information

• Output: Producing any report

desired by the managers of the

business, including financial

(111)

Batch processing and

control totals

• Batch processing

– Similar transactions are gathered into batches,

and then each batch is sorted and processed by

the computer

• Control totals

– Used to make sure that there have been no errors

when the batch is input

– Make sure that the total value of transactions

input is the same as that previously calculated

• E.g.

– A batch of 30 sales invoices with total value of

$42,378.47.

– When the batch is input, the computer adds up

the total value of the invoices input and produces

a total of $42,378.47.

– The control totals agree

(112)

Validation Techniques

Validation of data ensures that it is reasonable and possible but not that it is necessarily correct.

1. Field presence – Essential fields cannot be left blank e.g. the name of a customer

2. Field length – Data has the correct number of characters (Min/Max) Data must be a Min of 6 char

3. Range – Data value is within a predetermined range eg months of the year must be btwn 1 and 12

4. Format – Individual characters are valid eg Acc num must be in a certain for AAA/999 (three letters and three numbers)

5. Batch Header – Where batch processing is used, the computer calculates totals that can be matched to the totals of the

documents in the batch.

6. Check Digit – Code numbers such as bank acc numbers are prone to data entry errors. Check digits are extra digits in a code,

calculated by the computer using an algorithm to check that the other digits in the code are correct.

(113)

Accounting packages

Advantages

(a) The packages can be used by non-specialists.

(b) A large amount of data can be processed very

quickly.

(c) More accurate than manual

(d) Handling and processing large volumes of data.

Disadvantages

(a) Initial time and costs involved

(b) Need for security checks

(c) The necessity to develop a system of coding (see

below) and checking.

(d) Lack of 'audit trail'. It is not always easy to see

where a mistake has been made.

(e) Possible resistance on the part of staff to the

introduction of the system.

(114)

Modules

• Program which deals with one particular part of a

business accounting system

• Modules may be integrated with the others

• Invoicing

• Inventory

• Receivables ledger

• Payables ledger

• Nominal ledger

• Payroll

• Cash book

• Job costing

• Non-current asset register

• Report generator

(115)

QB 9

A credit balance of $917 brought

down on Y Co's account in the

books of X Co means that

A X owes Y $917

B Y owes X $917

C X has paid Y $917

D X is owed $917 by Y

(116)

Chapter 6

Receiving and

checking money

(117)

Contents

• Control over receipts

• Remittance advices

• Receipts given to customers

• Ways in which customers pay

• Cash: physical security

considerations

• Cheques

• Receipt of cheque payments

• Receipt of card payments

• EFTPOS

(118)

Control over receipts

• Ensure a good cash flow

– Banking (performed promptly and

correctly)

– Security (avoiding loss or theft)

(119)

Remittance advices

• Trade customers usually send a remittance

advice with their payment

• A remittance advice shows which invoices a

(120)

Receipts given to

customers

• Till receipts

– Issued by

a cash

registers

or 'tills‘

• Written

receipts

– Or typed

may be

used if no

cash

register is

used

Cash Register

operation

Store price info

on all stocks

Record the value

of the sale of

each item and

total

Calculate the

required change

to customer

Issue a till receipt

showing the

entire transaction

Sum up the

transactions of

the day at closing

time

(121)

Evidence of payment

other than in cash

(122)

Receipt from customers

• Main types

– Cash

– Cheque

– Credit or

debit card

• Other types

– Standing

order

– Direct

debit

– Mail

transfer

and

telegraphi

c transfer

– Automate

d credit

services

(123)

Cash: physical security

Problem

• Forgery

• Theft

How to deal

 Careful examination

 Cash register

security, Safes

 Protective glass

('bandit screen')

 Frequent banking

 Never be sent by

post

(124)

Cheques

Definition

• A cheque is 'an

unconditional order

in writing

addressed by a

person to a bank,

signed by the

person giving it,

requiring the bank

to pay on demand a

sum certain in

money to or to the

order of a specified

person or bearer

New related words

• Dishonored

• Cheque guarantee

cards

(125)

Cheque: procedures

1. Ensure details are correct (date,

payee, amount)

2. Signature: on the cheque vs.

guarantee card

3. Check the details on the cheque

guarantee card.

– 'Expires end' date

– Amount of the guarantee

– Name agrees with that on the cheque

– Other details

4. Copy GC details on to the cheque’s

back

(126)

Cheques: physical security

• Customers are asked to keep

cheque books and cards separate

• The number of cheques in a book

(127)

Plastic card

• Most retail

outlets

which

accept

PLASTIC

cards now

use an

electronic

system

known in

the UK as

EFTPOS

(Electronic

Funds

Transfer at

Point of

Sale).

• CREDIT vs.

DEBIT cards

(128)

Credit cards

• Credit card payment involves 3

transactions

(129)

EFTPOS

• Electronic Funds Transfer at Point

of Sale: makes possible the

automatic transfer of funds from

a customer's bank account to a

retail organization at the point in

time when the customer

purchases goods (or services)

from it.

(130)

Other receipts

Banker’s draft

• Method of payment

available from

banks for a fee

• When a customer

needs a guarantee

that the payment

cannot be

dishonoured

Standing orders and

direct debits

• Regular payments

– Standing order can

only be changed by

the payer

– Direct debit can be

changed by the

receiver at will

(131)

Discussion

Business: electricity company

• 'I am a domestic customer, and receive a bill from

you each quarter. I want to continue to pay

quarterly, but I don't want to go the trouble of

writing out a cheque or making a special trip (for

example to a bank or your office) to pay the bill.

However, I do need to know how much the bill is

going to be before I am due to pay it. What

method of payment would you suggest?‘

• 'You can pay by quarterly direct debit. You need

to complete a direct debit mandate form which

authorises us to debit amounts from your bank

account. We will send you a bill in the usual way

each quarter, and the amount due will be debited

from your account 14 days after the date of the

bill, so you'll know how much is to be debited

well in advance. If an error is made, either the

bank or ourselves must put it right.'

(132)

Business: mail order company

• 'I want to place an order with

you. I don't have a bank account,

building society account or a

credit card, so I suppose that I'll

need to send you the amount due

by cash through the post. Is that

OK?‘

• 'We do not advise you to send

cash through the post, as we

cannot accept responsibility if it is

lost. We suggest that you pay by

postal order, obtained from your

post office. The post office will

(133)

Business: DIY retailer

• 'I want to call in to your store to buy

something costing $34 for a friend. I

understand that you accept cheques

supported by a cheque guarantee card.

My friend has made out and signed the

cheque and given me her cheque

guarantee card. I'd like to bring the

cheque and card in when I collect the

goods.‘

• 'In order to pay by a cheque supported

by a banker's card, it is necessary for

the person whose signature appears on

the card to sign and date the cheque in

the presence of the payee – in other

words, in our store. This rule is a

standard rule of all of the banks. Please

therefore ask your friend to call in to

make the payment herself, unless you

wish to pay by some other means, such

as cash.’

(134)

Chapter 7

Banking monies

received

(135)

Contents

• The banking system

• The banker/customer relationship

• Procedures for banking cash

• Procedures for banking cheques

• Procedures for banking plastic

card transactions

(136)

The banking system

• Central Bank: The Bank of England

-controls the banking industry

• Clearing or retail banks

– Barclays

– Lloyds – TSB

– HSBC

– NatWest

• Smaller retail banks

– Co-operative Bank

– Yorkshire Bank

– Abbey National

• Clearing is the mechanism for obtaining

payment for cheques

(137)

Clearing system principles

Step 1 Receiving bank branches stamp

their names and addresses in addition

to the crossings on the cheques

Step 2 Cheques from receiving bank

branches sent to the head office

Step 3 The head office delivers to the

Bankers Clearing House

Step 4 The Bankers Clearing House

distributes these cheques to the head

offices of the relevant paying banks.

Step 5 The paying banks' head offices

process the cheques using computers

and distribute the cheques to the

various branches of the banks on which

the cheques are drawn.

(138)

The banker/customer

relationship

Banker

• Put money and

cheques received

on a customer's

behalf into his

account.

• Take out all cheques

and orders paid

from the account by

the customer.

• Keep accounts on

the customer's

behalf.

Customer

• Bank opens an

account for him in

his name.

• Bank accepts his

instructions and

undertakes to

provide a service

(139)
(140)

Procedures for banking

cash

Procedures for preparing a

paying-in slip

Step 1 Count the cash

Step 2 Add up, on a separate piece of paper

Step 3 Compare: calculated total vs. cash

register

Step 4 Calculate any discrepancy

Step 5 Enter the total for each denomination

of note in the appropriate place on the

paying in slip.

Step 6 Add up the numbers again to check

the total and enter it in the 'total cash'

box.

(141)

Returned/dishonoured

cheques

• Insufficient funds: not be enough money in

the customer's account to cover the

cheque. Banks will honour a cheque in the

following circumstances

– Cheque amount lower than the cheque

guarantee card limit

– There is evidence that a check was made

between the cheque and the guarantee card

• Stolen cheques and cheque guarantee

cards:

– Invalid and worthless even if a cheque is

accepted with a cheque guarantee card and

all details appear to agree

• Wrongly completed or out of date cheques

Cheque returned to you marked

'refer to drawer‘ and You will return

the cheque to the drawer and

(142)

Procedures for banking

plastic card transactions

• The card issuers require the

business receiver of card

transactions to summarise all

transactions on a summary voucher.

The summary voucher consists of an

original or 'top copy' and two copies

with carbon paper in between. The

bottom copy is the processing copy,

on the back of it is a place to list the

vouchers.

• The summary voucher has to be

imprinted with the retailer's plastic

card.

(143)

Queries arising from card

transactions

(144)

Banking other receipts

• Direct debits

• Standing orders

• Automated

payments

• Telegraphic

transfers

• Banker's drafts

– same manner as

cheques

• Bank giro credits

– paid into a bank

account by the

customer of the

business, in which

case the amounts

will appear

automatically on

the business's bank

statement

Banking and

EFTPOS

• Credit, charge

or debit card

receipts via

EFTPOS are

credited

directly to the

retailer's bank

account. He can

agree the

amounts

received to the

'End of day'

reconciliation

produced by

the terminal

(145)

Chapter 8

Recording monies

received

(146)

Contents

• Controls over recording receipts

• Cash registers

• Cash received sheets (remittance

lists)

• Posting cash receipts to the

general ledger

(147)

Controls over recording

receipts

Segregation of duties

• Receiving and the

recording functions

are kept separate

– One person will

receive, count and

perhaps bank the

money

– Another person will

record the money

received.

• What for?

– Avoiding theft

– Collusion

Bank reconciliations

• Exam focus

• ?

(148)

Cash registers

What is it?

• To check the

amount of money

in the cash register

at the end of the

day against the

summary

• To record receipts

in the cash book

Security and controls

• Who can access

• Training

• Work observation

• The maximum

possible amount of

preset information

• Periodic info

analysis

(149)

Cash received sheets

(remittance lists)

(150)

Posting from cash book

• Suppose we wished to post

Warren Miles's cash received for

1 September 20X7 to his general

ledger. The relevant general

ledger accounts are as follows

(151)
(152)
(153)
(154)

Chapter 9

Authorizing and making

payments

(155)

Contents

• Controls over payments

• Cheque requisition forms

• Expenses claim forms

• The timing and methods of payments

• Payments by cash

• Payments by cheque

• Bank Giro credits (credit transfers)

• Payments by banker's draft (payable

order)

• Payments by standing order and direct

debit

(156)

Controls over payments

Suppose that a company buys

goods costing $5,000.

1. Invoice from the supplier: reason

for and amount of the payment

2. Authorization of the payment: by

the purchasing director

3. Payment made to the supplier: For

a payment of $5,000, perhaps only

the finance director or managing

director will be permitted

(157)
(158)

Cheque requisition forms

• A form requesting that a cheque should be drawn to make a payment • E.g.: – The advertising manager of ABC wants to put an advertisement into the local weekly newspaper. The newspaper wants payment of $470 ($400 + sales tax at 17½%) in advance, and has sent a fax letter

requesting this amount. A receipt will be sent later with confirmation that the advertisement has been inserted and paid for. – The advertising manager will fill in a cheque

(159)

Expenses claim forms

• Employees make payments by

their own pocket and then claim

back

• Proof should be given of the

existence and the amount of the

expense (attaching receipts,

invoices)

• Insufficient supporting evidence?

– Company may refuse to reimburse

the expense.

(160)

The timing of payments

When and whom?

• Things to consider?

– Credit terms

– Discounts

Who decides and

how?

• Senior person

• List of unpaid

invoices

– Overdue

– Outstanding

– Soon due to be

paid.

(161)

Methods of payment

Commonly used

• Cheques

• Automated transfers

(especially for

salaries and wages)

• Internet payments

Other

• Cash

• Banker's draft

• Standing order

• Direct debit

• Company credit

card or charge card

• Mail transfer and

telegraphic transfer

• Internet payments

(162)

Payments by cash

• For small payments out of petty

cash

• Sometimes for wages

• Pay large amounts? Not

recommended

– Rare

– Secure

– Dishonest dealers in backstreet or

underworld businesses

(163)

Payments by cheque

• Signatures on business cheques:

– Only certain specified individuals

– With names and signatures supplied

to the bank on a bank mandate

form

– Cheques above a certain value must

contain two authorized signatures

– Might consist of the chairman, all

the directors and the chief

(164)
(165)

Procedures for preparing

cheques

Step 1 Prepare list of payments

Step 2 Payments authorised,

sufficient funds available

Step 3 Check invoices to be paid

Step 4 Prepare the cheques

Step 5 Attach invoice to cheque,

sign

Step 6 Mark invoice PAID

Step 7 Send cheque off to payee

with remittance advice

(166)

Examine the cheque

(167)

Lost cheques

(168)

• Step 1

Telephone

your bank

saying that you

want the

cheque to be

stopped.

• Step 2 Confirm

this instruction

in writing.

(169)

Bank giro credits

• Filling in a bank giro credit

transfer form and handing this

together with the payment

(cheque or cash) over the counter

at a bank

– Telephone companies

– Electricity companies

– Water companies

(170)

Payments by banker's

draft

• Unlike company cheques, a

banker‘s draft cannot be stopped

or cancelled after it has been

issued

• And so when a supplier receives

the draft, payment is guaranteed

(171)

Standing orders

• To make

regular

payments

of a fixed

amount

• Arranged

by a

Standing

Order

Mandates

References

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