Student
Notes
FIA FA1
Recording Financial Transactions
For exams from December 2011 to January 2013
To be used with the 2011 edition of the BPP Interactive Text
i
First edition 2011
ISBN 9781 4453 2275 9
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ii
CONTENTS
chapter 1
BUSINESS TRANSACTIONS AND
DOCUMENTATION
page 1
chapter 2
ASSETS, LIABILITIES AND THE ACCOUNTING
EQUATION
page 13
chapter 3
RECORDING, SUMMARISING AND POSTING
TRANSACTIONS
page 23
chapter 4
COMPLETIING LEDGER ACCOUNTS AND
FINANCIAL STATEMENTS
page 47
chapter 5
RECEIVING AND CHECKING MONEY
page 59
chapter 6
BANKING MONIES RECEIVED
page 65
chapter 7
RECORDING MONIES RECEIVED
page 73
chapter 8
AUTHORISING AND MAKING PAYMENTS
page 79
chapter 9
RECORDING PAYMENTS
page 87
chapter 10
MAINTAINING PETTY CASH RECORDS
page 93
chapter 11
BANK RECONCILIATIONS
page 99
chapters 12 - 13
SALES DAY BOOKS AND THE
RECEIVABLES LEDGER
page 109
chapters 14 - 15
PURCHASE DAY BOOKS AND THE
PAYABLES LEDGER
page 117
chapter 16
CONTROL ACCOUNTS
page 125
chapter 17
RECORDING PAYROLL TRANSACTIONS
page 135
Answer bank
Introduction
iii
iv
chapter 1
WHAT IS A BUSINESS?
X
BUSINESS TRANSACTIONS
X
DISCOUNTS
X
SALES TAX
X
STORAGE OF INFORMATION
X
This chapter defines what a business is and introduces
business transactions and some important terminology.
BUSINESS
TRANSACTIONS
AND
DOCUMENTATION
1
WHAT IS A BUSINESS?
What is a
business?
Business
transactions
Discounts
Sales
tax
Profit
Businesses
make
= income less expenditure
ƒ A business is a separate entity from its owner
ƒ Every financial transaction has a dual effect
ƒ Double entry bookkeeping accounts for the dual aspect of financial transactions
2
Storage of
information
2
Context
Businesses exist to make a profit. If things go wrong, and expenses exceed income, then a loss is
made.
There are also non-profit making organisations (such as charities) but these are outside the scope
of your syllabus.
1: Business transactions and documentation
3
BUSINESS TRANSACTIONS
Wherever property changes hands there has been a business transaction.
A cash transaction is where the buyer pays cash to seller when goods are transferred.
A credit transaction is a sale or purchase which occurs earlier than cash is received or paid.
Business transactions are recorded on documents.
These are the source of information in accounts
and include:
Letter of enquiry
Quotation
Sales/purchase
order
Delivery note
Inventory list
Supplier list
Staff timesheet
Goods received
note
Invoice
Credit note
Till receipt
Cheque
Invoices and credit notes are important documents
which must contain specific information.
An invoice is a demand for payment
A credit note is used by a seller to cancel part
or all of previously issued invoice(s)
If it helps, think of a credit note as a negative
invoice.
The accounting system records, summarises and presents the information contained in the documentation
generated by the transactions.
4
4
Context
Businesses may make sales and purchases, provide services to customers (eg taxi firm, accounting
services), incur other expenses (eg rent of shop premises) and buy items in order to run the
business (eg computers, shelving, delivery van). These are what we mean by business
transactions.
Every business transaction generates some type of paperwork. These documents are very
important as they provide the initial information which will eventually be recorded in the accounting
records.
Learning example 1.1
Which of the following correctly describes the function of a goods received note?
A
It is a record of goods delivered to a customer.
B
It is a note signed by a customer to confirm goods have been received in good condition.
C
It is a record of goods received into the business from a supplier.
D
It is a record of goods returned by a customer.
Solution 1.1
1: Business transactions and documentation
5
DISCOUNTS
A discount is a reduction in the price of goods below the amount at which those goods would normally be sold
to other customers of the supplier.
Trade discount
6
6
Cash discount
A reduction in the amount of money demanded
from a customer
An optional reduction in the amount of money
payable by a customer
Usually results from buying goods in bulk
Given for immediate or very prompt payment
Given on supplier’s invoice
No seperate accounting required
Financing decision
Needs to be recorded separately in the books of
account
Context
Discounts are ways of encouraging customers to buy more goods and to pay for those goods more
quickly.
Learning example 1.2
Vimal purchases goods for $10,000 less 10% trade discount. He also takes advantage of a 2% cash
discount for prompt payment. How much will Vimal pay?
A
$10,000
B
$8,820
C
$8,800
D
$9,000
Solution 1.2
1: Business transactions and documentation
7
SALES TAX
Sales tax
Administered by tax
authorities
Output sales tax
Sales tax charged by the
business on goods/services
8
8
Is an indirect tax levied on the
sale of goods and services
Greater than input?
Pay difference to tax
authorities
Greater than output?
Refund due to business
Can have a number
of rates, eg standard
rate, reduced rate
Input sales tax
Sales tax on purchases made by
the business
Context
A business may be registered with the tax authorities for sales tax (eg VAT in the UK, TVA in
France). If so, it must charge sales tax on its sales but can reclaim any sales tax it pays on its
purchases. Therefore it needs to keep records of input and output tax in order to know what it owes
to (or may recover from) the tax authorities.
Learning example 1.3
Jenny gives a customer a quote for $500 exclusive of sales tax. If sales tax is charged at 10%,
what will the customer pay in total?
A
$500
B
$505
C
$550
D
$450
Solution 1.3
1: Business transactions and documentation
9
STORAGE OF INFORMATION
10
Storage of information
Paperwork must be properly handled to ensure security and availability of information.
A retention policy sets down for how long different kinds of information are retained.
Files of data may be temporary, permanent, active and non-active.
Information no longer needed on a daily basis is electronically scanned for long-term storage, archived or
securely destroyed.
Information stored about individuals is regulated by Data Protection legislation.
10
Context
We have already seen, at the beginning of this chapter, how business transactions generate
documents. These documents must be retained, so that any queries arising can be checked to the
original documents.
Learning example 1.4
Besame Co have sales invoices from three years ago in the current filing system. The department is
running short of storage space. Local law requires sales invoices to be kept for six years. What is
the best solution?
A
Keep the invoices where they are
B
Destroy the invoices as they are no longer needed
C
Put the invoices into storage in a derelict warehouse
D
Archive the invoices securely
Solution 1.4
1: Business transactions and documentation
11
Reinforcement
Interactive Text Chapter 1
12
12

Expand notes on documenting business transactions (section 4) and data
protection legislation (section 9)

Attempt Quick Quiz
chapter 2
THE ACCOUNTING EQUATION
X
ACCOUNTS RECEIVABLE AND PAYABLE
X
DOUBLE ENTRY
X
CAPITAL AND REVENUE EXPENDITURE
X
This chapter introduces the fundamentals of
accounting. It is essential you understand these topics
as they form the basis of your studies of financial
accounting. You will always be asked to demonstrate
your knowledge of double entry bookkeeping. You also
need to distinguish between capital and revenue
expenditure.
ASSETS,
LIABILITIES AND
THE ACCOUNTING
EQUATION
13
14
THE ACCOUNTING EQUATION
Context
The accounting equation states that the assets and liabilities of a business must always be
equal.
Learning example 2.1
Margarita has assets of $50,000 and liabilities of $30,000. What is the capital invested in the
business?
A
$20,000
B
$80,000
C
$50,000
D
$30,000
Solution 2.1
2: Assets, liabilities and the accounting equation
15
ACCOUNTS RECEIVABLE AND PAYABLE
16
Trade accounts receivable and payable
Trade account receivable
A customer who buys goods on credit and pays for
them at a later date.
This is an asset.
Trade account payable
A person to whom a business owes money.
This is a liability.
Context
This section introduces terminology that you will meet in your business life.
2: Assets, liabilities and the accounting equation
17
DOUBLE ENTRY
Basic principles
Double entry bookkeeping is based on the same idea as the accounting equation.
Every accounting transaction has two equal but opposite effects
Equality of assets and liabilities is preserved
Therefore, in a system of double entry bookkeeping, every accounting event must be entered in ledger accounts
both as a debit and as an equal but opposite credit.
18
Debit
Credit
An increase in an expense
An increase in an asset
A decrease in a liability (or capital)
An increase in income
An increase in a liability (or capital)
A decrease in an asset
Context
Double entry is the most important topic that you will meet on this course. It forms the basis of
double entry bookkeeping.
Learning example 2.2
Jasmine receives a bill from a supplier for $4,500. Which of the following correctly records this
transaction assuming that the bill is unpaid?
A
Debit assets, credit liabilities
B
Debit liabilities, credit expenses
C
Debit liabilities, credit assets
D
Debit expenses, credit liabilities
Solution 2.2
2: Assets, liabilities and the accounting equation
19
CAPITAL AND REVENUE EXPENDITURE
20
Revenue expenditure
Capital expenditure
To improve or acquire non-current assets
Creates or increases non-current assets
VERSUS
For maintenance or trade of the business
Charged against profit
Context
It is very important to understand the differences between capital and revenue expenditure.
If revenue expenditure is wrongly recorded as capital expenditure, it will reduce expenses and so
show a profit that is too high. In reality the business could even have made a loss.
Learning example 2.3
Which of the following is an example of capital expenditure?
A
Insurance of goods in transit
B
Wages of sales staff
C
Purchases of goods for sale
D
A new desk
Solution 2.3
2: Assets, liabilities and the accounting equation
21
Reinforcement
Interactive Text Chapter 2
22

Expand notes on assets and liabilities (section 2) and the accounting equation
(section 3).

Work through the extended example on the accounting equation throughout
section 3.

Attempt Quick Quiz
chapter 3
OVERVIEW
X
SALES AND PURCHASE DAY BOOKS
X
CASH BOOK
X
GENERAL LEDGER AND DOUBLE ENTRY
X
POSTING FROM THE DAY BOOKS
X
ACCOUNTING PROCESSES
X
In this chapter you get to grips with the nuts and bolts
of double entry. Once you understand this you will be
able to deal with transactions posting in your
assessment.
RECORDING,
SUMMARISING
AND POSTING
TRANSACTIONS
23
OVERVIEW
Overview
24
Sales and
purchase day books
Cash
book
General ledger
and double entry
Posting from the
day books
Accounting
processes
Book of prime entry
Documents recorded
Summarised and posted to
Sales day book
Sales invoices, credit notes sent
Receivables ledger/control account
Purchase day book
Purchase invoices, credit notes
received
Payables ledger/control account
Cash book
Cash paid and received
General ledger
Petty cash book
Notes and coins paid and
received
General ledger
Journal
Adjustments
General ledger
Context
The previous chapters have been essential background information. You are now going to see how
the business documents (from chapter 1) are recorded in the financial records using double entry
bookkeeping (from chapter 2). In deciding to which accounts a transaction should be posted, you
will also be using your knowledge about capital and revenue expenditure (from chapter 2).
Learning example 3.1
Which of the following statements is correct?
A
Adjustments are recorded in the journal and posted to the general ledger.
B
Cash paid is recorded in the cash book and posted to the journal.
C
Sales credit notes are recorded in the sales returns day book and are summarised and posted
to the receivables ledger.
D
Purchase invoices are recorded in the purchases day book and are summarised and posted to
the receivables ledger.
Solution 3.1
3: Recording, summarising and posting transactions
25
SALES AND PURCHASE DAY BOOKS
26
Overview
Sales and
purchase day books
Cash
book
General ledger
and double entry
Sales day book
The sales day book is used to keep a list of all
invoices sent out to customers each day. Here is an
example.
Date
3.3.X9
Invoice
number
207
208
Rec’bles ledger Total
ref
invoiced
$
ABC & Co
SL12
4,000
XYZ Co
SL59
1,200
5,200
Customer
Posting from the
day books
Accounting
processes
Purchases day book
This is used to keep a record of invoices which
a business receives. Here is an example.
PURCHASES DAY BOOK
Date
Supplier
3.4.X9
10.4.X9
15.4.X9
RST Co
JMU Inc
DDT & Co
Payables
ledger ref
PL31
PL19
PL24
Total
invoiced
$
215
1,804
758
2,777
SALES DAY BOOK
Most businesses analyse their sales and purchases using additional columns for different product lines, for
example
Sales and purchase returns day books summarise goods returned to/by the business
Context
The sales day book records all credit invoices sent out by the business and the purchase day book
records all credit invoices received by the business.
Learning example 3.2
Invoices sent out are recorded in which prime entry record?
A
Purchases day book
B
Sales day book
C
Purchases returns day book
D
Sales returns day book
Solution 3.2
3: Recording, summarising and posting transactions
27
CASH BOOK
Overview
Sales and
purchase day books
Cash
book
General ledger
and double entry
Posting from the
day books
Cash book
Money received and paid out is recorded in the cash book, a book of prime entry.
Cash receipts are recorded as follows, with the total column analysed into its
component parts.
CASH RECEIPTS
Date
Narrative
3.3.X9
Cash sale
Receivable:
ABC & Co
(discount taken)
Discounts
allowed
$
50
__
50
__
__
Total
$
150
1,000
____
1,150
____
____
Discounts allowed are shown in a memorandum column
Cash payments are recorded in a similar way
28
Rec’bles
ledger
$
1,000
____
1,000
____
____
Cash
sales
$
150
Sundry
$
___
150
___
___
___
___
___–
Accounting
processes
Context
All monies paid into or out of the business bank account are recorded in the cash book. Therefore
the cash book will record cheque and debit/credit card transactions, as well as cash.
However small amounts of cash held on the premises to pay small bills (eg the window cleaner,
stamps) is called petty cash and this is dealt with separately in chapter 10.
Learning example 3.3
A customer receives an invoice for a total of $5,000. He takes advantage of a cash discount and
pays $4,900. How will the discount be recorded in the seller’s books?
A
$100 in the discounts received column in the cash book
B
$100 in the discounts allowed column in the cash book
C
$100 in the sales day book
D
$100 in the purchases day book
Solution 3.3
3: Recording, summarising and posting transactions
29
GENERAL LEDGER AND DOUBLE ENTRY
30
Overview
Sales and
purchase day books
Cash
book
General ledger
and double entry
Accounting
processes
Posting from the
day books
General ledger
Ledger accounting is the process by which a business keeps a record of its transactions:
In chronological order
Built up in cumulative totals
The general ledger (or nominal ledger) is an accounting record which summarises the financial affairs of a
business. Accounts within the general ledger include the following.
Plant and machinery (non-current asset)
Rent (expense)
Inventories (current asset)
Total payables (current liability)
Sales revenue (income)
A ledger account or 'T' account looks like this.
NAME OF ACCOUNT
$
DEBIT SIDE
$
CREDIT SIDE
Context
The general ledger (or nominal ledger) contains all the accounts which will eventually be used to
prepare the financial statements.
Learning example 3.4
Which of the following statements is correct?
A
Profit is a liability and so is a credit entry
B
Profit is an asset and so is a debit entry
C
Profit reduces capital and so is a credit entry
D
Profit increases capital and so is a credit entry
Solution 3.4
3: Recording, summarising and posting transactions
31
GENERAL LEDGER AND DOUBLE ENTRY
32
Overview
Sales and
purchase day books
Cash
book
General ledger
and double entry
Posting from the
day books
Double entry
Remember from Chapter 2:
Every accounting transaction has two equal but opposite effects
Equality of assets and liabilities is preserved
Debit
Credit
Increase in expense
Increase in income
Increase in asset
Increase in liability/capital
Decrease in liability/capital
Decrease in asset
The cash book is a good starting point for understanding double entry.
Accounting
processes
Context
Double entry bookkeeping ensures that for every debit made, there is an equal credit entry (a
practical example of the accounting equation).
When dealing with cash transactions, it is always useful to start with the cash entry first in order to
decide whether a debit or credit is needed. This will be dealt with in detail over the next pages.
Learning example 3.5
The cash book contains the transactions on the business bank account. Which of the following
statements is true?
A
If there are funds at the bank, then it is a debit balance
B
If the bank balance is overdrawn, then it is a debit balance
C
If there are funds at the bank, then it is a credit balance
D
A bank loan is a debit balance
Solution 3.5
3: Recording, summarising and posting transactions
33
GENERAL LEDGER AND DOUBLE ENTRY
34
Overview
Sales and
purchase day books
Cash
book
General ledger
and double entry
Posting from the
day books
Accounting
processes
Here are the main cash transactions.
Cash transactions
Sell goods for cash
Buy goods for cash
Pay an expense
DR
Cash
Purchases
Expense account
CR
Revenue
Cash
Cash
Cash sale:
CASH ACCOUNT
$
1.1.X1 Revenue a/c
$
100
REVENUE ACCOUNT
$
$
1.1.X1 Cash a/c
Cash purchase:
100
Credit sale:
CASH ACCOUNT
$
A credit sale just adds an extra stage.
$
1.1.X1
Purchases a/c
(i) Sale made on credit
RECEIVABLES ACCOUNT
200
$
$
1.1.X1 Revenue 300
PURCHASES ACCOUNT
$
$
1.1.X1 Cash a/c 200
REVENUE ACCOUNT
$
$
1.1.X1 Receivables
300
Context
As previously mentioned, the bank account is a good starting point for cash transactions. It is
usually quite straightforward to decide the entry in the cash book. Then if the entry in the cash
book is a debit, the other side must be a credit and vice versa.
Learning example 3.6
Appledore buys a computer for use in his business for $450. He also buys a maintenance contract
for $50. Which of the following shows the correct double entry for these transactions?
A
Debit cash $500, credit computer $500
B
Debit computer $500, credit cash $500
C
Debit computer $450, debit maintenance $50, credit cash $500
D
Debit cash $500, credit computer $450, credit maintenance $50
Solution 3.6
3: Recording, summarising and posting transactions
35
GENERAL LEDGER AND DOUBLE ENTRY
36
Overview
Sales and
purchase day books
Cash
book
General ledger
and double entry
Posting from the
day books
(ii) Customer pays amount due
RECEIVABLES ACCOUNT
$
1.1.X1 Revenue
300
$
31.1.X1 Cash
300
CASH ACCOUNT
$
31.1.X1 Receivables 300
The receivables account now has a zero balance.
$
Accounting
processes
Context
Once you are used to cash transactions, credit transactions merely add an extra step with an entry
to receivables or payables account.
3: Recording, summarising and posting transactions
37
POSTING FROM THE DAY BOOKS
38
Overview
Sales and
purchase day books
General ledger
and double entry
Cash
book
Posting from the
day books
Accounting
processes
Posting from the day books
Note that day books are often analysed as in the following extract (date, customer name and reference not shown).
Total invoiced
$
340
120
600
_____
1,060
_____
_____
CD revenue
$
160
70
350
___
580
___
___
DVD revenue
$
180
50
250
___
480
___
___
To identify revenue by product, total revenue would be entered (‘posted’) as follows.
DEBIT
CREDIT
Receivables a/c
Revenue: CDs
Revenue: DVDs
$
1,060
$
580
480
Other books of prime entry are analysed and posted in a similar way.
Context
The totals from the day books need to be posted to the ledger accounts. This is achieved by using
double entry.
Learning example 3.7
A business has let customers take discounts of $320. Which of the following entries correctly
accounts for this?
A
Debit discounts allowed $320, credit receivables $320
B
Debit discounts received $320, credit receivables $320
C
Debit receivables $320, credit discounts allowed $320
D
Debit receivables $320, credit discounts received $320
Solution 3.7
3: Recording, summarising and posting transactions
39
POSTING FROM THE DAY BOOKS
Overview
Sales and
purchase day books
Cash
book
General ledger
and double entry
Receivables and payables ledgers
To keep track of individual customer and
supplier balances it is common to maintain
subsidiary ledgers called the receivables
ledger and the payables ledger.
Each account in these ledgers represents the
balance owed by or to an individual customer
or supplier.
Accounting
processes
Important
Remember that these receivables and payables
ledgers are kept purely for reference and are
therefore known as memorandum records. They do
not normally form part of the double entry
system.
Entries to the receivables ledger are made as follows.
1
On sending out an invoice, when making an entry in the sales day book, an entry is then made on the debit
side of the customer's account in the receivables ledger.
2
When cash is received and an entry made in the cash book, an entry is also made on the credit side of the
customer's account in the receivables ledger.
The payables ledger operates in much the same way.
Control accounts
Control acccounts are part of the double entry system
A receivables control account is posted with totals from
the sales day book and the cash book
A payables control account is posted with totals from the
purchases day book and the cash book
The control accounts should agree with the total of the
individual balances and act as a check on the recording
of transactions
The control account balances appear in the final accounts
40
Posting from the
day books
Accounting for sales tax
Records of sales and purchases
should not include sales tax
It is recorded separately in the
analysis columns of the day books or
cash book and posted to the sales
tax account
The tax paid to or recovered from
the authorities each quarter is the
balance on the sales tax account
Context
We looked at the receivables and payables ledgers in Chapter 2. Now we are seeing how the
memorandum ledgers are posted.
Keeping a memorandum ledger is also an important check on the accuracy of the double entry
bookkeeping. The balances on the individual ledger accounts should add up to the total on the
control account. We will look at this in detail in chapter 16.
Learning example 3.8
Virden is registered for sales tax. During a quarter, his sales are $4,000 plus sales tax of $400.
During the same period, he has cash purchases of $400, plus sales tax of $40 and credit purchases
of $1,500, plus sales tax of $150. Assuming all transactions are fully chargeable and recoverable,
what is the balance due to or from the tax authorities?
A
$400 payable
B
$190 receivable
C
$250 payable
D
$210 payable
Solution 3.8
3: Recording, summarising and posting transactions
41
ACCOUNTING PROCESSES
Overview
Sales and
purchase day books
Cash
book
General ledger
and double entry
Posting from the
day books
Accounting
processes
Accounting process overview
The diagram below summarises the topics you have revised so far. Look at it just before your assessment –
everything should fall into place.
Computerised accounting
ƒ The principles of a computerised system are exactly the same as for manual accounting but the records
or files are held in electronic formats
ƒ Computer activity is divided into input, processing and output
ƒ Batch processing is where similar transactions are gathered into batches, then each batch is sorted and
processed by computer
ƒ Control totals are used to make sure there have been no errors when the batch is input
ƒ Computer programs are the instructions that tell the electronics how to process data. The general term for
these is software
ƒ Each account has a unique code for identification and posting
ƒ An accounting package consists of a number of modules which perform all the tasks needed and are
usually integrated with each other
42
Context
This diagram acts as a summary of all you have learned to date.
So far, we have assumed that the bookkeeping is being done by hand. Most businesses use
computers for at least some of their accounting processes. The computer works on exactly the
same principles as for manual accounting.
3: Recording, summarising and posting transactions
43
ACCOUNTING PROCESSES
Overview
Sales and
purchase day books
General ledger
and double entry
Cash
book
Accounting
processes
Data input into one module is automatically transmitted to another relevant module.
Receivables
ledger module
General
ledger
Invoicing
Module
Inventories
module
Report
generator
Invoice
Invoice
You should learn the advantages and disadvantages of a computerised accounting system thoroughly.
Advantages
Disadvantages
5 Ability to deal with a large volume of transactions
and process them quickly
4 Danger of unauthorised access to files,
security checks need to be set up
5 Rapid analysis of data to provide useful output
which may take a variety of forms, eg invoices,
trial balance, aged receivables reports
4 Danger of data/program corruption
4 Chance of incorrect/omitted input –
system of checks required
5 Integration of systems, or modules, prevents
wasteful repetition as one entry may update
several records
4 'Invisibility' of data
4 Time and cost of installation, training
and developing a coding system
5 Improved accuracy
5 Operators can be non-specialists, as use of codes
for input means correct accounts will be updated
44
Posting from the
day books
Context
Remember that computers have disadvantages as well as advantages.
3: Recording, summarising and posting transactions
45
Reinforcement
Interactive Text Chapter 3
46

Expand notes on posting from the day books (section 4) and accounting for
sales tax (section 7)

Attempt Quick Quiz