Chapter 1

Business Transaction and Documentation

Business transaction are of two main types: cash and credit.

A business may be defined in various ways. Its purpose is to make a profit for its owner(s).

Profit is the excess of income over expenditure.

For accounting purposes it is important to keep business assets and liabilities separate from the
personal assets and liabilities of the properties(s).

Business transaction can be evidence by internal and external documentation.

Invoices and credit notes are important documents which must contain specific information.

There are two kinds of discount.

i) Trade discount: a reduction in the cost of goods
ii) Cash (or settlement) discount: a reduction in the amount payable to the supplier

Sales tax rules can be quite complex but the following are the main points to remember.
i) Output sales tax is charged on sales and input sales tax is incurred on purchases.

A company's retention policy sets down how long different kinds of information are retained.

Information stored about individuals is regulated by Data Protection legislation.

Chapter 2
Assets, liabilities and accounting equation

Assets and Liabilities: Owe from = Asset

A business owns assets and owes liabilities. Owe to = Liability

Assets:
Assets are items belonging to a business and used in the running of the business. They may be
non-current (such as machinery or office premises)or, current (such as inventory, accounts receivable
and cash).

Liabilities:
Liabilties are sums of money by a business to outsiders such as a bank or a trade account
payable.

Accounting equation:
Assets = Capital + Liabilities (the accounting equation).
A business is separate entity from its owners.
i) The business can owe money to, or be owed money by, its owners.
ii) The assets and liabilities of the business are separate from those of the owners.

Accounts payable and accounts receivable:

Account payable are amounts owed by the business to suppliers and account receivable are amount
owed to business from customers.

Double entry bookkeeping:

Double entry bookkeeping requires that every transaction has two accounting entries, a debit and
a credit.

The rule of double entry state that every financial transaction gives rise to two accounting entries,
one debit and other a credit.

A debit is one of the following.

An increase in as asset
An increase in as expense
A decrease in a liability
FA1 study text BPP
A credit is one of the following. TSA Kit
An increase in a liability Kaplan kit
An increase in income BPP Kit
A decrease in an asset

An important distintion is made between capital and revenue items. If these are not identified correctly
then the resulting profit figure will be wrong and misleading
Chapter 3
Recording, summarising and posting transactions

Business transactions are initially recorded on source documents. Records of the details on
these documents are made in books of prime entry.

The main books of prime entry are as follows.

Sales day book
Purchase day book
Journal
Cash book
Petty cash book

Most accounts are contained in the general ledger (sometimes referred to as the nominal ledger).

The accounts in the general ledger are impersonal accounts. There are also personal accounts for
customers and suppliers and these are contained in the receivables ledger and payable ledger.

A control account is an account in the general ledger in which a record is kept of the total value
of a number of similar but individual items.

i) A receivable control account is an account in which records are kept of transactions

involving all receivables in total. It is posted with totals from sales day book and
cash book.
ii) A payable control account is an account in which records are kept of transactions
involving all payable in total, being posted with totals from purchase day book and
cash book.

Each account in an accounting system has a unique code to identify the correct amount for posting.

You should understand the function and importance of the following.

i) Manual and computerised systems.
ii) Batch processing and control totals.

Computer software used in accounting may be divided into two types.

Dedicated accounting packages.
General software, the uses of which include accounting amongst may others.

In principle computerised accounting is the same as manual accouting, but a computerised approach
has certain advantages which you should learn thoroughly.
Chapter 4
Completing Ledger accounts and financial statements:

Once all the transaction for an accounting period have been posted to the ledger accounts, the balance
on each account can be determined.

Balances on the ledger accounts can be collected in a list of account balances. The debit and credit
balances should be equal.

A jornal keeps a record of unusual movement between accounts. The format of a journal is
Date $ $
Debit Account to be debited X
Credit Account to be credited X

Narrative to explain the transaction

Errors can occur for a number of reasons. Accountants need the ability to understand how errors have
been made and how to correct them using the priciples of double entry.

Businesses produce financial statements to demonstrate how well they have performed over the
accounting period and to show their financial position at the end of the period.
ounts, the balance

bit and credit

how errors have

ed over the
Chapter 5
Receiving and checking money

Receipts have to be well controlled to ensure a good cash flow. These are three key features of control.
i) Banking (performed promptly and correctly)
ii) Security (avoiding loss or theft)
iii) Documentation (remittance advice)

Trade customers usually send a remittance advice with their payment.

Till receipts or written receipts should contain certain information.

There are various ways a company can receive money. The main ones are:
Cash
Cheque
Credit or debit card
Electronic payments

Holding cash creates problems and careful security procedures are required.

Strict procedures should also be followed when accepting credit or debit cards as payment.

EFTOPS is a mean of allowing a transaction to be recorded immediately on customer bank

accounts or credit card statements, while at the same time authorising the transaction.
eatures of control.
Chapter 6
Banking monies received

Banking procedures for various kinds of receipts should be fully understood and you should observe real
transaction wherever possible.

You should note the important aspects of banks, bankers and their relationship with their customers.
How the clearing system works
Relationships between bankers and customer
Rights and duties of bankers and customer

When banking cash receipts:

Cash must be properly counted and sorted
Notes and coins must be listed by denomination on the paying-in-slip

The details required on the paying-in-slip when cheques are banked include.
Name of drawer (or endorsed)
Amount of cheque
Total value of cheques banked
Number of cheque banked

Debit and credit transactions which are processed manually must be listed on a summary voucher
for banking purposes. The processing copies are sent to the bank while the retailer retains two
copies of each voucher (including the summary voucher).

Credit, charge or debit card receipts via EFTOPS 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.
should observe real

heir customers.

mary voucher

bank account.
Chapter 7
Recording monies received

Control over the recording of cash receipts include the following:

i) Segregation of duites
ii) Bank reconciliation

Analysed cash books show how much money has been received and paid, and when each amount was
for, by placing it in the correct column. A cash book is a day book or book of prime entry.

Cash register can be vary useful in the control of cash receipts. They are accurate and they can be used
to collect different kinds of sales information.

Cash received sheets, or remittance lists are used to collect receipts ready for recording.

Computerised accounting systems follows the same principles as manual systems.

each amount was

they can be used

Chapter 8
Authorising and making payments

It is very important to apply control over payments.

i) Documentation (invoice, statement, cheque request form, expense claim form)
ii) Authorisation of the expenditure item (passing it for payment)
iii) Authorised signatures for cheques and payment intructions to banks
iv) Secure controls over electronic payments

It is important to establish proper authorisation procedures, with each person in authority having
written limits.

Cheques requisition forms are used when primary documentation such as an invoice has not been
received. Cheque requisition forms help to ensure authorisation and recording of payments.

A business will use a variety of methods to make payments. Ignoring payroll (wages and salaries) and
petty cash, the most common and convenient methods of payments are by cheque and by automated
transfer.

As far as the use of cheques is concerned, you should know how to do the following.
i) Prepare a cheque for payment
ii) Deal with lost cheques
iii) Stop cheques

The timming of payment may depend on credit terms offered by suppliers, including discounts for
promt payment.

Direct debits are not often used for payments by businesses, but might occasionally be used for
convenience.

A busniess should send proper explanatory documentation with all payments to avoid comfusion. Copies
of the relevant documents should be filed in such a way that the documents are easy retrieve .
ority having

has not been

nd salaries) and
nd by automated

discounts for

d comfusion. Copies
Chapter 9
Recording payments

Controls over recording payments are important to avoid fraud and to ensure completeness.

The bank recnciliation is the most important control.

Analysis of payments in the cash book will help to control the expenditure of the business.

Posting the payments side of the cash book to the general follows the same procedures as the
receipts side.
i) Add up the cash columns.
ii) Check that the analysis column add up to the total.
iii) Identify relevant general ledger accounts.
iv) Draw up the posting summary and post to the general ledger.

In a computer system, updating the payables ledger for payments will usually cause the cash book to
be automatically updated.

Automated credit systems are useful methods of making and recording payments. They can save a
business time.
he cash book to

ey can save a
Chapter 10
Maintaining Petty Cash records:

Petty cash is used to make small payments with notes and coins. The cash must be kept safe, in a
locked box or tin, and its security is the responsibility of a petty cashier. Payments must be properly
authorised, and all transaction should be supported by receipts and vouchers.

All payments out of petty cash must be properly authorised and evidenced by a voucher, signed by both
the person receiving the payment and the person authorised it. Claims for payment must be supported
by a receipt whenever possible.

If there is no receipt to support a claim for payment, the petty cashier should refer the claims to his or
her supervisor.

There is no receipt to support a claim for payment, the petty cashier should refer the claim to his or
her supervisor.

There is usually an imprest system for petty cash, whereby a certain amount of cash is held in the box,
say $200. At regular intervals or when cash runs low, vouchers are added up and recorded and the
total of the vouchers is used as the amount by which to top up the imprest to $200 again.

$
Cash in box X
Total of vouchers = top-up X
Imprest amount X

Whenever a payment is made out of the petty cashier will produce a petty cash voucher. The
receipt for the expense incurred will be attached to this voucher as part of the petty cash records.

At regular intervals, details of payment out of the petty cash are recorded from the vouchers into the petty
cash book. Vouchers should be in the date order and numbered sequentially and they should be entered
into the petty cash book in this order.

Businesses will normally maintain a petty cash book to record petty cash transactions. Similar in format
to a cash book, the petty cash book will have sections for receipts and payments and analysis columns
for the detail of each transaction.

When the sales tax element in petty cash expenditure is recorded, there must be a sales tax receipt
as evidence of the payment, and an analysis column for sales tax in the petty Cash book.

A new page in the petty cash book is started whenever the imprest float is topped up.

When the imprest float is topped up, a sequence of procedures must be followed.
 pt safe, in a
st be properly

her, signed by both

must be supported

e claims to his or

claim to his or

s held in the box,

rded and the

ash records.

ouchers into the petty

y should be entered

. Similar in format
analysis columns

les tax receipt

Chapter 11
Bank Reconciliations:

A bank reconciliation is a comparison between the bank balance recorded in the books
of a business and the balance appearing on the bank statement.

The cash book of a business is the record of how much cash the business believes that
it has in the bank.

The Bank statement:

It is common practice for a business to issue a monthly statement to each credit customer.
i) The balance the customer owed on his account at the beginning of the month
ii) New debts incurred by the customer during the month
iii) Payments made by the customer during the month
iv) The balance the customer owes on his account at the end of the month

Procedures for performing a bank reconciliation:

The comparison may reveal errors or ommission in the records of the business, which
should be corrected by appropriate adjustment in the cash book.

Once the cash book has been corrected it should be possible to reconcile its balance with the bank
statement balance by taking account of timming differences: payment made and cheques received which
are corrected in the cash book but have not yet cleared through the bank account and have not,
therefore, appeared on the bank statement.

The cash book and bank statement will rarely agree at a given date. Several procedure should be
followed to ensure that the reconciliation between them is performed correctly.

Step 1: Identify the cash book balance and the bank balance (from the bank statement) on the
date to which you wish to reconcile.
Step 2: Add up the cash book for the period since the last reconciliation and identify and note
any errors found.
Step 3: Examine the bank statement for the same period and identify those items which
appear on the bank statement but which have not been entered in the cash book.
Step 4: Identify all reconiling items due to timming difference.
 Chapter 12
Sales and Sales return day book:

i) The sales day book lists the invoice raised by a business when it supplies goods or service on credit

ii) The sales returns day book lists the credit notes raised when goods are returned. The sales day book
and the sales return day book are 'books of prime entry': transaction are recorded in them before being
recorded elsewhere.

iii) How transaction are entered in the books of prime entry depends upon the accounting
system which is used by the business. Details will be entered from invoices in some systems. In other,
information about which orders have been despatched will be entered and the invoices and primary records
of sales will be generated by computer from this information.

iv) Sales may be analysed into different categories, according to the information needs of the business and
its system of accounting. A spreadsheet could be used as model to produce an analysed sales day book.

v) Acconting systems rely on coding system to classify, sort and analyse financial transactions. Such
coding systems may manual or computerised.

vi) The day book totals for sales and returns are posted to the general ledger receivables control account,
the sales tax control account and sales account. The amount owed by individual customers are
entered in the sales ledger personal account (when these are maintained as memorandum accounts
separate from the general ledger).
Chapter 13
The receivable ledger

Personal accounts for credit customers:

The receivables ledger contains the personal accounts of credit customers of the business. An account
must be kept for each customer so that the business always has a full record of how much each
customer owes and what items the debt is made up of.

The receivables ledger:

A customer account in the sales ledger will normally show a debit balance: the customer owes money
to the business and is therefore a receivable of the business.

Personal accounts as memorandum accounts:

The personal accounts of customers do not form part of the double entry system of bookkeeping. This is
because the personal accounts include details of transactions which have already been summarised in
day books and posted to ledger accounts.

Recording transaction in the receivable ledger:

It is common for customers' personal account to be maintanied separately from the general (or
impersonal') ledger, as memorandum accounts. Receivables ledger postings then do not form of
the double entry in the system of bookkeeping being used. Intead, a total receivables' or receivables
ledger control account is maintained in the general ledger to keep track of the total of the amounts
which make up the entries in the individual personal accounts.

The age analysis of receivables and other reports:

The age analysis of debts is useful to a credit controller wisihing to decide on which debts to chase up. It
also provides a general guide as to whether the debts of a business are being collected quickly enough.

Irrecoverable debts:
Some debts may need to be written off as 'irrecoverable debts' because there is no real prospect of them
being paid.

Allownces for irrecoverable debts:

Allownces for irrecoverable debts may be specific (an allownce against a particular receivable ) or
simply a percentage allownce based on past experience of irrecoverable debts. An increase in the
allownce for irrecoverable debts is treated as an expense.
 Chapter 14
Purchase and Purchase return day book:
Study text BPP
BPP kit
i) The purchase day book lists the invoice received by a business from its credit supplier. Kaplan Kit
TSA kit
ii) The purchase returns day book lists the credit notes received when goods are returned to
suppliers. The purchase day book and the purchase returns day book are 'book of prime entry': 3 Hub mocks > 70%
transactions are recorded in them before being recorded elsewhere.

iii) An expenses day book may be kept to record expense purchases, as distinct from purchases for
inventory. Alternatively, all purchases of goods and services may be recorded in the same place.

iv) Purchases and expenses may be analysed into different categories in the day books. As with the
sales day books, a computer spreadsheet might be used to produce an analysed purchase day book.

v) Invoices received from suppliers will have their own unique reference number based on the
supplier's accounting system. These invoices will need to be codified by the receiving business so
that they can be posted to their accounting system.

vi) The day book totals for purchases and purchase returns are posted to the general ledger total
payable account, the sales tax control account and the relevant purchase and expense accounts.

vii) Expenses accounts will include capial expenditure (non-current assets) accounts as well as
accounts for recording business expenses such as administrative expenses. The amount owed to
individual suppliers are entered in the payable ledger personal accounts (where these are
maintained as memorandum accounts separate from the general ledger).
Chapter 15
The payable ledger

Personal accounts for suppliers:

The payable ledger contains the personal accounts of suppliers (trade payables) of the business. The
suppliers' personal accounts provide the business with a full record of how much it owes to each
supplier and of what items the debt consists.

Recording transaction in the payable ledger:

A supplier's account in the payable ledger will normally show a credit balance: the supplier is owed
money by the business and is therefore a payable of the business. Other payables which a business may
have include the tax authorities, bank and employees (for any wages and salaries due).

Payments to suppliers:
Payment to suppliers should be organised according to the periodic procedure of the business. Checks
and authorisation are necessary in order to ensure that only valid payments are made. Payment
methods vary, and the checks necessary will differ according to the payment methods used.

The age analysis of payable and other reports:

The age analysis of payable shows the age 'profile of suppliers' balances on the payable ledger. It
indicates how quickly the business is paying off its debts. A computerised payables ledger will also allow
a number of other reports to be printed out as necessary.
 Chapter 16
Control Accounts:

Internal Check:
Internal Check is concerned with the maintenance of accounting records. Internal checks, sometimes
known as internal controls, ensure that transactions to be recorded and processed have been
authorised, that they are all included and that they correctly recorded and accuratley processed.

Types of internal check:

a) A trial balance is a type of internal check. If a trial balance does not balance, you know that an
error has been made. As you may remember, a trial balance will not pick up every error.
b) Bank reconciliation are a check on the accuracy of the cash book.
c) Control account reconciliations: The balance on the control account should ideally be the
same as the total of the sales or purchase ledger balances.
d) Segregation of duties is another form of internal check. For example, the person preparing a
cheque should not be the person who sign it.
e) Authorisation: All transactions should require authorisation or approval by an appropriate
responsibe person. The limits for these authorisation should be specified.

Control Accounts:
A control account is an account in the general ledger in which a record is kept of the total value of a
number of similar but individual items.

Reasons for having control accounts:

Control accounts have various uses.
i) Check accuracy of entries made in the personal accounts
ii) Assist in the location of errors.
iii) Internal check where there is separation of bookkeeping duties
iv) A balance can be extracted quickly for producing a trial balance or statement of financial position.

Control account reconciliation:

For various reasons, the balance on the control account may not agree with sum of the individual
receivables or payable balances extracted from the receivables or payables ledger.

Period end routines:

At the end of an accounting period accountants will perform certain routines in preparation for
putting together the financial statements of the entity. For internal purposes the accounts may be
produced on a monthly basis whereas full accounts will typically be produced at the end of the
financial year.
Chapter 17
Recoding Payroll transactions
The payroll function in an organisation is important.
i) The employer's obligations to pay wages are carried out.
ii) The employer's obligations as a tax collector are undertaken efficiently.

A person's wage packet or pay cheque is that person's net pay for a period.
i) Gross pay
ii) Less tax, benefit contributions and other deductions.

Gross pay is the pay for the employee's work done in a period.
i) Basic pay
ii) Overtime
iii) Commission, bonuses, profit related pay and so forth.
iv) Back pay.

Overtime comprises hours worked over a standard working week. The overtime rate can be
based on the hourly rate, or can be fixed by mutual agreement with hourly paid or salaried
staff.

Commission is often paid to employees who have succeeded in making a sale. It is normally
a percentage of the value of the sale.

Bonuses may be paid to employees if an agreed target is reached, or for any reason determined
by management. Bonuses can take many forms.

There are a number of documents associated with payroll preparation.

i) Timesheets record the hours spent by each employee can job, or doing the work of
each client.
ii) Attendance records are used by the personnel department to determine the reasons for
absence from work, and to administer the granting of annual leave.
iii) Other personnel record documantation includes cards to record a person's career progress.

Income tax and benefit contributions are normally deducted from an employee's gross pay before
the net pay is handed over.

Payments into a pension scheme are another important payroll deduction.

For the employee the payslip is second in importance only to the actual money received. Certain
things must be on a payslip.

Payments are usually made either by cheque or increasingly by credit transfer.

Payments should be secure and authorised.

Cash payment have reduced due to the following reasons.
i) Security problems.
ii) Extra time and effort compared to other payment methods.

It is vitally important that businesses keep accurate and up to date records on employees and the
financial transaction relating to them.
he reasons for

career progress.

ss pay before

ed. Certain
yees and the