Documentation
Chapter 1
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
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
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
Other business
transactions
• Payment of wages
• Borrowing money
• Lending money
• Offering a discount
• Receiving a discount
Documenting business
transactions
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
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
Purchase order vs. sales
order
Pur
cha
se
or
der
Sale
s
or
der
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
Illustration
How
much
is the
pa
yable
?
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
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.
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
No long needed info and
data
• Will you throw it away???
• Ways to deal:
– Microfilmed or microfiched
– Stored elsewhere (archiving)
– Securely destroyed
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,
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.
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.
Chapter 2
Assets, Liabilities and the
Accounting Equation
Contents
Illustration
The accounting equation Liabilities
Assets
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.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.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.
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.
Liabilities
Liabilities
Something which is owed to somebody else.
Non-current Liabilities Text Current Liabilities Text
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.
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
Accounting equation 2
Capital
introduc
ed +
earned
profit
-drawing
s
Assets
=
+
Liabiliti
es
A Business
Accounting equation 3
Capital
introduced
+ profit
retained in
previous
periods+
profit
earned in
current
period
-drawings
Assets
=
+
Liabiliti
es
A Business
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
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
=
+
-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 supplierA sale or a purchase which
occurs some time earlier than
Double entry
bookkeeping
Debit: •Increases assets •Decreases liabilities •Decreases capital •Decreases income •Increases expensesMeans 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 expensesMeans right hand
Chapter 3
Statement of financial position and income
statement
Contents
Users of accounts
Organisational structure The income statement
Statement of financial position Introduction to financial statements
Introduction to financial
statements
The statement of financial position
The income statement
The cash flow statement
Basic
accounting
statements
Statement of financial
position
ASSETS CAPITAL LIABILITIE SA statement of the assets,
liabilities and capital of a
business
'as at'
a particular
date.
EQUAL
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
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 yearExample
Text Non-current assets •Land •Office building •Factory •Machinery •Office equipment •Etc. Assets Current assets •Cash •Inventor y •Receivab les •Etc.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
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
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
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
Capital
Text Amounts invested by the owner(s) in the businessBusiness capital account
Profit earned and retained by the business.
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
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).Capital expenditure vs. revenue
expenditure
Capital expenditure Results in: •The acquisition of non-current assets; or •An improvement in their earning capacity. Revenue expenditureBalance 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
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 businessProfit/loss apprears on IS Appears on income statement
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
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
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
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
Chapter 4
Recording and summarising
transactions
Contents
Recording business transaction
1
Recording Sales
2
Recording purchases
3
The cash book
4
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 ledgerRecording business
transactions
TextTo record
Source
documents
Books of
prime
entry
Source documents
– Invoices
– Credit notes
– Petty cash vouchers
– Cheques received
– Cheque stubs (for cheques
paid out)
– Wages, salary and employee
tax records
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
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
Summarising source
documents
Recording Sales
Sales invoices Sales credit notes Cheques received Sales day book Bank accountSales tax control account Cash book
Receivables ledger control account
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.
Recording Purchases
Purchase invoices Purchase credit invoices Cheques paid Purchase day book Bank accountSales tax control account Cash book
Payables ledger control account Payables ledger
Purchase day book
The purchase from Cook Co for $315 is
also recorded on page 31 of the
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 kThe 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
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
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
The bank statement
Text To reconcileBank
statement
received
from bank
Weekly/monhtly basis Investigate differencesCash book
(internally
generated)
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.
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
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
Example
For example: Profit and Loss accounts
Note: No b/f or c/f for profit and losses
accounts
Example
For example: Balance sheet accounts
Note: There are always b/f or c/f for profit and
losses accounts for balance sheet accounts
The Principles
• Every transaction has a two fold
effect!!!
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.
Posting from the day
books
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
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
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
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
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
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)
Chapter 5
Contents
• The journal
• The trial balance
• Methods of coding data
• Manual and computerized
systems
• Batch processing and control
totals
• Accounting systems
• Accounting modules
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
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
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
The trial balance
• List of ledger balances shown in
debit and credit columns
• The debit should equal credit
balances
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
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
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
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)
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
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
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
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
Example
• A nominal ledger has the following
codes.
State what type of code this is. Explain
your answer
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.
Computerized systems
• Perform the same tasks as
manual systems
• Differences:
– How information is stored
– How tasks are performed
– How some package do things
'automatically'
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
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
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.
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.
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
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
Chapter 6
Receiving and
checking money
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
Control over receipts
• Ensure a good cash flow
– Banking (performed promptly and
correctly)
– Security (avoiding loss or theft)
Remittance advices
• Trade customers usually send a remittance
advice with their payment
• A remittance advice shows which invoices a
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
Evidence of payment
other than in cash
Receipt from customers
• Main types
– Cash
– Cheque
– Credit or
debit card
• Other types
– Standing
order
– Direct
debit
transfer
and
telegraphi
c transfer
– Automate
d credit
services
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
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
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
Cheques: physical security
• Customers are asked to keep
cheque books and cards separate
• The number of cheques in a book
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
Credit cards
• Credit card payment involves 3
transactions
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.
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
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.'
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
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.’
Chapter 7
Banking monies
received
Contents
• The banking system
• The banker/customer relationship
• Procedures for banking cash
• Procedures for banking cheques
• Procedures for banking plastic
card transactions
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
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.
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
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.
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
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.
Queries arising from card
transactions
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
Chapter 8
Recording monies
received
Contents
• Controls over recording receipts
• Cash registers
• Cash received sheets (remittance
lists)
• Posting cash receipts to the
general ledger
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
• ?
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
Cash received sheets
(remittance lists)
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
Chapter 9
Authorizing and making
payments
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
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
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