FA1 Recording Financial Transactions

Welcome to Section 1
Lesson 1: Introduction to business and recording transactions
Lesson 2: Introduction to sales on credit
Lesson 3: Books of prime entry – sales day book and sales returns day book

By the end of this lesson, you will be able to:

Give an overview of bookkeeping and accounting
Describe different types of transactions
Give an overview of business documents
Describe the accounting equation

Lesson 1: Introduction to business and recording transactions

Unit 1: The bigger picture
Unit 2: Introduction to sales and purchases
Unit 3: Introduction to financial documents
Unit 4: Assets
Unit 5: Liabilities and capital
Unit 6: Income and expenditure
Unit 7: Document retention, computerised systems and risks to data
Summary
Apply your learning

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Unit 1: The bigger picture

What is bookkeeping?

Bookkeeping is the act of recording financial transactions.

Important things to remember when bookkeeping are the need to keep accurate and
complete records, and understanding that your work is confidential.

The business keeps track of what transactions have happened

through bookkeeping.

It is important that the business only records transactions that specifically relate to
the business. This means the business accounts must not include transactions for
the personal expenses of the owner.

When a company is set up, then it is easy to keep the items separate because the
company is a legal person, so there is a clear separation in all the paperwork.

In the FA1 course we will assume that the business is owned and controlled by one
person, known as a sole trader.

A business can be owned by one person or by many. You will learn about businesses
that are owned by many people, such as companies, later in your accounting studies.

In a sole trader business, the owner is personally responsible for the finances of
the business. This can make it harder to maintain separate records, but you must be
very careful to do this. When the tax returns for the business are sent to the tax
authorities, they will not allow personal expenses to be paid for by the business. There
can be large fines for doing this.

Business transactions
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In your role as a bookkeeper, you need to know about different types of business
transactions because you will be responsible for recording them in the accounts. You
will learn how to record the transactions in subsequent lessons in this section.

Types of financial transactions include:

Sales – exchanging a good or service for money
Purchase – buying a good or service
Payments – transfer of money to someone else (for example, for purchases or for
wages to employees)
Receipts – getting money from someone else (for example, from customers)
Petty cash – paying for low value items with a small fund of cash
Payroll – wages and salaries paid to employees, and any payroll taxes.
These transactions are entered in the accounting records of the business, which are
also known as the 'books'.

Let us look at some common business transactions.

Sales

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Sales of the goods or services that the business produces.

Purchases
Goods and services that are bought by the business.

Receipts
Cash that the business receives. Receipts can come from cash sales, a loan from the
bank, amounts received from owners (capital), or amounts from customers who have
been allowed to delay payment (called sales on credit).

Payments
Cash paid to purchase goods or services. For example, cash purchases and payments
to suppliers who have allowed the business to have goods before paying for them
(called purchases on credit).

Petty cash
Cash paid, or possibly received, for low-value business transactions (we will discuss
this in more detail in Section 4).

Payroll
Wages or salaries paid to employees that work for the business (we will discuss this in
more detail in Section 4).

Accounting for business transactions

An important part of the role of a bookkeeper is to process these common business
transactions.

Useful information
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All transactions that are recorded must have a valid document associated with them.
For example, an invoice or a receipt.

The records are used to prepare a set of accounts (also known as financial
statements or financial accounts).

The importance of accounting in business

An accountant starts their career by learning the principles of bookkeeping to record
financial transactions.

Then through further study and practical experience they learn how to use financial
information to benefit the business. The accountant understands how the records are
maintained and what the financial statements reveal about the state of the business.

A bookkeeper records the past activities of the business; an accountant uses this
information to prepare financial statements and other reports, including reports
that influence the future activities of a business.

When you work as an accountant you will usually work for an organisation. This
could be a commercial business, a partnership, a charity or a government organisation.
In this course we will concentrate on a business, but the principles of bookkeeping and
accounting are the same in all organisations.

Quiz
What is the difference between bookkeeping and accounting?
Bookkeeping is recording transactions and accounting is using the bookkeeping
information to prepare financial statements.

What is a business?

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A business is an organisation that aims to make a profit for its owner. It can do this
through buying or making and selling goods or services.

Profit is the difference between a business's income and expenses.

Income comes mainly from the sales of goods or services by a business.

Expenses are the amounts that a business pays in order to run the business (including
buying the items that it will sell, as well as the other costs of running the business, like
electricity for the lights).

A business can be small, medium or large.

A business is separate from its owner(s)

It is important to understand that there is a difference between the business and its
owner. The owner of a business usually gives money to the business to start it.
The business then tries to make more money for the owner.

Financial statements
Eventually you will need to prepare financial statements. We keep track of the
financial transactions for many reasons, one of which is so that we can monitor how
the business is performing.

Financial statements (also known as a set of accounts or financial accounts) are

documents containing formal statements which describe the current financial state of
the business, as well as how it has performed during a period of time (usually a year).

Accounting is the process of using the bookkeeping information (the record of

transactions) to prepare financial statements.

Quiz

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What is profit?
Profit is the difference between income and expenses.
Can business accounts include the owner's personal expenses?
Business accounts must not include transactions for the personal expenses of the
owner.

Scenario
We are going to follow the progress of a fairly new business set up by Rajiv. Rajiv
loves fashion and clothing, so he set up a business selling clothing through a shop.
The shop is called RFashion.

He had lots of good ideas, but knew he needed help from a specialist. His friend Tisha
is a qualified accountant and she gave him some good advice. She helped him make
sure that he set up the accounting systems he needed to record all his transactions. She
also explained how he could invest his own money in the business, and set up a bank
account for the business.

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Now that Rajiv has been in business for a short time, we will be able to look at how
his bookkeeper (an accounts trainee who worked with Tisha) has been recording his
business activities. Rajiv's customers mostly buy clothing for cash. However, he has a
number of local businesses and regular customers that he allows to buy goods from
him and pay for them later.

Throughout this course we will be following the progress of Rajiv's business and
looking at the documents involved in recording its transactions.

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Financial documents

The starting point of the bookkeeping process. These provide evidence that a
transaction took place. For each of the transactions in the previous activity, a
document will exist. For example, an invoice is evidence of a sale; a cheque that has
been received is evidence of payment.

Books of prime entry

Where the details from the financial documents are entered and totalled. There are
several different books and you will learn about them in this course. Common
examples are the sales day book, the cash book and the purchase day book.

Ledger accounts

Summarised information from the books of prime entry is transferred into the ledger
accounts, which are used to total the values of transactions of similar types. 'Ledger'
is an old word for a book – before computers, these records were written in large
books. In computerised systems, ledger accounts are used in the same way, but they
are in the form of files within the computer program.

Trial balance

The total balances from each ledger account are listed out in a trial balance, which is
used to try to ensure that there are no mistakes made in recording the transactions.

Financial statements

Information is taken from the trial balance and used to prepare financial statements,
which are a high-level summary of the activities and current position of the business.

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Who is interested in your financial information?
The tax authorities may decide to check your tax records and they may want to
look through all your records.

A future investor may want to look at how well your business is doing to decide
whether or not to invest their money into your business.

The bank manager will ask to see your financial statements if you ask for a bank
loan.

Suppliers will ask to see your financial statements before they decide to give you
credit (we will look at credit transactions in the next unit).

Well done for completing Unit 1 of the FA1 course. You will now be familiar with
some of the key words, business transactions and documentation used in bookkeeping
and accounting. In the next unit we will look in more detail at two of the transactions
we discussed in this unit – sales and purchases.

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Unit 2: Introduction to sales and purchases

Cash and credit transactions

Wherever property changes hands there has been a business transaction. The main
types of business transactions are sales and purchases.
Sales and purchases occur in two different ways, by cash or on credit.

Cash transaction
A cash transaction is one where the buyer pays cash to the seller at the time the
goods or services are transferred.

 Cash sales. If the sale is for cash, the sale occurs when goods or services are
given in exchange for immediate payment, in notes and coins, or by cheque or
plastic card.

 Purchases for cash. If the goods are paid for in cash then the purchase occurs
when the goods and cash exchange hands.

Credit transaction
A credit transaction is a sale or a purchase which occurs some time earlier than
cash is received or paid.

 Credit sales occur when goods are ordered and delivered before payment is
received

 Credit purchases are transactions where the supplier provides goods to the
business before they are paid for.

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Look at the flowchart to help you understand more about sales and purchases.

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Unit 3: Introduction to financial documents

Scenario – examples of financial documents

Today you are working in the receivables ledger department with Tisha. The
receivables ledger department deals with customers placing orders on credit. A
customer, the owner of Ocean View Restaurant, wants to order five suits as
uniforms for their waiting staff, and you need to respond to their query.

Let us look at the financial documents you will need. These documents are an
important part of bookkeeping and accounting because they must be correct in order
for your customer to pay you.

In the following activity, use the 'Next' button to navigate through the images and
learn about the documents that are needed at each stage of the bookkeeping and
accounting processes.

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Quotation: A document that shows how much an item or items will cost.

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 Purchase order:
The document that
is completed by
the customer and
sent to the
supplier showing
what they would
like to order.

Delivery note

This document accompanies the goods that are delivered and is signed by the
customer when delivered. It can also be used by the supplier to check that the correct

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goods are being sent.

Goods received note

(GRN)

This is an internal
document that the
customer would complete
as an extra check that
everything has been
received that was ordered.

Invoice
Shows the customer how
they much they owe the
supplier for goods
purchased on credit.

An invoice is a demand
for payment.

Three types of invoice:

1) Receipt: invoice
marked by
business as 'paid
with thanks'
2) Cash on delivery
(COD) invoice
3) Credit invoice
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 Debit note

A debit note is issued

by a customer to a
supplier as a means of
formally requesting a
credit note.
A supplier might also
issue a debit note
instead of an invoice in
order to adjust upwards
the amount of an
invoice already issued.

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 Credit note
A document to show a
reduction in the amount
owing to a supplier due to
faulty or damaged goods
being supplied.

A credit note is used by a

seller to cancel part or all of
previously issued invoice(s).

Credit notes can be treated

like negative invoices.

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 Statement
Sent to a customer to
remind them how much
they owe the supplier,
usually at the end of the
month.

Remittance advice
 Sent by the customer to the supplier to show that payment of their account has
been made.
 It provides details of amount being paid.

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