Tutor
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 2268 1
British Library Cataloguing-in-Publication Data
A catalogue record for this book
is available from the British Library
Published by
BPP Learning Media Ltd
BPP House, Aldine Place
London W12 8AA
www.bpp.com/learningmedia
All our rights reserved. No part of this
publication may be reproduced, stored in a
retrieval system or transmitted, in any form
or by any means, electronic, mechanical,
photocopying, recording or otherwise,
without the prior written permission of BPP
Learning Media Ltd.
©
BPP Learning Media Ltd
2011
ii
So what are the benefits of our FIA Tutor
Notes?
page iv
How do I use the FIA Tutor Notes?
page v
CONTENTS
Teaching session planners
page ix
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
COMPLETING 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
Introduction
iii
INTRODUCING
BPP LEARNING MEDIA’S
TUTOR NOTES
BPP Learning Media’s Tutor Notes for FIA and ACCA qualifications have been developed under the
guidance of experienced tutors from BPP’s classroom courses division and have been written by
tutors and subject experts. Together they bring many years’ experience of producing and delivering
accounting study material to the FIA and ACCA qualifications.
The Notes have been specially configured to add value in all the different teaching environments in
which BPP Learning Media materials are used throughout the world. We pilot tested the concept in
front of BPP students using a variety of technologies reflecting the range available in adopting
colleges and we refined them. Whether you are using a chalkboard or a smartboard, we are
confident these notes will enhance any course, help students pass their FIA exams and that you will
find students recommending your courses to their friends.
So what are the benefits of our Tutor
notes?
Benefit 1: High standard of professional course
presentation
Students remember how their tutors performed in the classroom and they keep the course notes
their college gives them and show them to friends. You only get one chance to make a first
impression. FIA students are just starting out. Our Tutor Notes will enhance the impression you
make on your students and their friends’ impression of your college.

With notes, graphics and carefully written Learning Examples pre-prepared, you can devote
your preparation time to deciding how to enhance your delivery, motivate interest and help
individual learners.

Because our Tutor Notes are produced by the only Platinum ACCA publisher they benefit from
the same unique examiner insights and consistent, professional appearance that is the
hallmark of all our FIA and ACCA materials.
(The Passcards graphics used in the notes are available on request as PowerPoint slides, so you can
incorporate multimedia in your classrooms. This format means they can be enlarged and printed
for attachment to chalkboards, made into acetates, projected from beamers or displayed on
smartboards.)
Benefit 2: Flexibility, so you can add value as you
see fit
Unlike other course notes, our Tutor Notes do not impose someone else’s script on you. Instead
they use Passcards graphics to highlight the essential knowledge elements of each topic and useful
Learning Examples to convey and reinforce the learning. Experienced tutors will add value in their
own ways. And tutors new to the subject have the reassurance of discreet expert guidance on ways
to deliver the topic and the key points to make.
iv
Benefit 3: The right format
The Tutor Notes are designed to be used as part of the tried-and-tested approach of paper media,
text books and good tutors in classrooms. You don’t need to register your students with us and we
don’t expect them to rely on the Internet to read their books. If you adopt our study materials, the
Tutor Notes can be hosted on your network. On request, we can facilitate this and provide
multimedia support right up to helping you support full hosted virtual learning environments. We
know you will choose the formats that are right for you - and we are ready to help.
Benefit 4: Unique integration
Tutor Notes follow the same sequence as our Platinum approved Interactive Text for the subject.
Each topic is covered in the same consistent way and the Notes provide signposts to you and your
students on where to look in the Interactive Text for more information and question practice.
Benefit 5: Continuity
Where courses are team-taught, or where tutors change mid-programme, the Tutor Notes provide
continuity because tutors can see how far their colleagues have progressed through the course.
And for students who miss classes, the notes provide a ready record of what they have missed.
How do I use the Tutor Notes?
Your students must bring their BPP Interactive Texts to each session as we recommend you
incorporate material and features from the Interactive Text into your teaching.
One set of notes for you, one for your students
You will actually be provided with two sets of notes for each subject.

Student Notes are arranged in double-page spreads, with the Passcards diagram for each
topic on the left-hand side (LHS) and some introductory context and Learning Examples
(essentially classroom questions) on the right-hand side (RHS).

Tutor Notes are page-for-page the same as the Student Notes. They reproduce the content
of the Student Notes but the tutor version also has annotations to the Passcards diagram
and, on the RHS, additional content such as teaching and topic tips and the solutions to the
Learning Examples.
Here’s what we recommend you do.

Print out and duplicate the Student Notes and provide one copy to each student as part of
their course material along with the BPP Learning Media Interactive Text and other adopted
media. The files are arranged so that they print out double-sided (duplex) to save paper.
However they can be printed single-sided without any changes to the PDFs we provide.

Print out one copy of the Tutor Notes for yourself, for your teaching file.

Decide whether to hand out Student Notes as one complete bank at the beginning of the
course, or session by session. Some colleges prefer to hand out Notes in instalments to
ensure that students attend all sessions.

The final chapter of the Student Notes is a bank of solutions to the Learning Examples used
in the teaching sessions. You may prefer to hold these in reserve so that students attempt
the Learning Examples rather than look for answers in the back of the Notes.
Introduction
v
Session planning
The Notes are arranged as chapters in the same order as the BPP Learning Media Interactive Text
and other resources for the subject. Chapters are topic based, and because topics vary in
complexity the chapters are of varying length. A teaching session may cover several short chapters
or it may not be long enough to cover a long chapter on a complex topic. Recommended session
plans for condensed (three-day) and full-length (six-day) courses, showing how chapters may be
covered, are shown on page ix onwards. These session plans can be adapted to fit the length of
course your college offers.
Teaching the topic
The Notes were designed, and developed further following pilot sessions, to support tutors’
preference for the following approach to teaching.
Step 1
Display the Passcards graphic from the LHS on a screen (more below).
Step 2
Introduce the topic by speaking around the Context note (which is also in the
Student Notes), linking it to the previous topic or explaining why it matters to the
accounting profession, the business environment or particular organisations.
Step 3
Speak about each element of the Passcards using the callouts on the Tutor Notes
version as guidance. (These annotations can be added by hand to the graphic on
screen for the students to copy into their notes (more below).)
Step 4
Return to the RHS of the Tutor Notes and speak around the Key Learning Points to
add emphasis and reassure students on what is important. Students can be
encouraged to take their own notes.
Step 5
Topic Tips can be used in various ways. Stating how and when the topic was
examined focuses the student and provides reassurance that the tutor knows the
exam.
Step 6
The Learning Examples are written especially for the Notes, they do not appear in
any other BPP Learning Media product. They provide illustrations or reinforcement of
the topic. Set them for the class to attempt and then debrief them before moving on
(more below).
Displaying the Passcard graphics
It is not essential that your college has the technology to display the Passcards graphics from the
LHS of the Tutor Notes. The Student Notes do include these and, in pilot testing, tutors were able
to provide perfectly intelligible lectures by referring students to them. The ability to display the
graphics to the class, and - probably more importantly - to annotate them, does improve the quality
of presentation, however.
Tutors in our pilot studies who were not able to display the Passcards graphic used several devices
to help students to understand which part of the graphic was being referred to.

Referring to the Passcards using a clockface metaphor, such as ‘The points about x at 12
o’clock’ to refer to something at top-centre of the graphic

Reading out the wording from the graphic slowly before talking about it

Holding up the LHS of their Tutor Notes (or those of a student in the front row to avoid the
class seeing the tutor’s crib notes on the Tutor Notes version)
Other technologies that can be used to display the Notes include:
Tablet PC connected to a beamer. We have found this to be the best technology. Converting
the Student Notes into Journal documents means that you can annotate the graphics and fill in
Learning Example solutions using the tablet, and students can copy your annotations and solutions
into their Notes. To do this open the PDF, select Print, choose ‘Journal Note Writer’ and then once it
has converted you can save it to the PC. This approach also allows you to save the Journal file from
the lesson with the annotations and solutions. Adobe Acrobat X (10.0.1) also has the functionality
to allow you annotate on the image using a tablet or on a SmartBoard. Students might ask for
these to be emailed to them but this raises two problems:
vi

The files are very large and will crash many email accounts.

The student will need to have Journal reader or Adobe Acrobat X on their PC to read them.
Journal reader is available as a free download from the Microsoft site, and Acrobat from the
Adobe site, but obtaining it can present difficulties, particularly on work machines if the
employers’ IT security policy forbids downloads.
Hosting the Journal files or annotate Acrobat files on a college’s virtual learning environment may
overcome the problem of download size. For convenience the Student Notes are provided as a
single PDF. This means that you cannot post individual chapters but will have to re-use the same
Journal file at each meeting of the class and re-post to the VLE.
Conventional PC connected to a beamer. Displaying the PDF of the Student Notes helps
students navigate through their own notes and enables you, the tutor, to point at the Passcards
with a light-pointer or your hands. Without additional software and a tablet to write on it is not
possible to annotate the notes, however.
Using the associated PowerPoint presentations
We have produced two sets of PowerPoint presentations to support your use of the Tutor Notes.
They are tailored to suit different learning styles. One set is simply the Passcard images embedded
in slides. You can direct student attention to key points on the image and, if you have a tablet
connected to your PC, you can write on the image (Ctrl P). The second set of slides are conventional
bullet points which pick out the key points from the Passcard and explain them in succinct detail.
Printed on to acetate and used on an OHP. This is more effective than using a PC if you are
unable to annotate the projected image from the PC. Putting the acetate under a screen roll or
clean acetate on the OHP means that you can annotate without having to clean or reprint the
acetate with the Passcards graphic on it. You can use colour to emphasise points and you could
well find that your handwriting is better compared to when using PC tablets.
Printed out as an enlarged diagram and attached to chalkboard. The Notes are A4 format.
These can be enlarged to A3 on most photocopiers but even at double-size these are not legible
from a distance. So why not trim round the Passcards graphic, fix it to the middle of the
chalkboard and then write the call-outs at a legible size on the chalkboard outside the paper
graphic. Students can look at their notes, see where you are indicating and add in the call-out.
Using the Learning Examples in the Student Notes
The Learning Examples have been specially written to reinforce the Key Learning Points for each
Passcards graphic. Whilst not necessarily reflecting the types of question that your students could
face in the exam, they are an excellent means within a classroom environment of testing key points
that are likely to appear in exam papers. They also provide you with an opportunity to encourage
discussion and explore issues, and enable you to circulate amongst the students to check their
understanding of topics - for example by looking over their shoulder at what they are writing or by
listening to conversations about discussion Learning Examples.
The icons beside the Learning Examples denote our recommendations on how each may be used.
Pen icon
This denotes a Learning Example where students should produce a written response. This will
probably involve calculations, the completion of pro-formas or the evaluation or discussion of a
problem.
Some Learning Examples require brief written answers that can be fitted into the space provided on
the RHS of the Student Notes. Others will have longer solutions and so you should advise students
to write solutions on file paper and to insert this behind the relevant page of their Notes.
A successful strategy is to set the Learning Example and to provide the students with time to
complete it. Circulate amongst the students and you’ll be able to determine how the class is coping
with it.

It might be generally understood and you won’t need to intervene.

It may be causing general problems for the class. In this case you may decide to call a halt
and to give guidance on how to interpret the question and/or how to develop the solution.
Introduction
vii

Difficulties might be experienced by a few students. In this case you can help each
individually or, if it is the same difficulty, gather together the students and provide help to
them as a group.
Debriefing written Learning Examples can be done by open discussion, working through on the
board/screen, or by directing students to turn to the solution at the back of the Student Notes. In
each case a vital part of the learning process will be to encourage students to ask questions about
things they are unsure of. In some subjects there will be no single correct solution and so
discussion of alternative answers should be encouraged (providing their interpretation of the
question is right and the points being made are valid).
Discussion icon
Discussion Learning Examples are principally for reinforcing knowledge and will be more valuable in
some subjects than others. There is a lot of benefit to be gained from students internalising the
information by discussion. If students query the value of these Examples, you can emphasise that:

Discussion helps them through the process of analysing the problem and formulating a
solution, which is what they will need to do in the exam, but they should remember that
discussing it is much quicker than writing it down.

Explaining their thinking to other students helps them to develop effective communication
for work and for later in their studies
Facilitating discussion Learning Examples can be done in several ways and changing the approach
provides variety for students.
Open class discussion. Set the Learning Example and then throw it open to the class for
discussion. It helps if you note down salient contributions on the board/screen. A key tutor skill
here is the ability to listen to what the student says and to develop, articulate or clarify what they
mean without appearing to suggest their contribution is inadequate. Praising them and saying ‘so
to capture that in a quick note…’ and writing it down in a clearer way is effective. The problem with
this approach is that some students won’t contribute because you, the tutor, already know the
answer or because they are too shy to do so. Generally speaking, open class discussions are most
effective with small class sizes.
Small group discussion. Break the class into groups of four or five and set the Learning Example
to each to discuss. Discussion will be better if a time limit is set for the exercise and they are told
that they have to appoint someone to read out what they decide - the person appointed to speak
will ensure the discussion progresses. You should circulate around the groups after a few minutes
and discreetly listen to what is being said. Stir the pot with comments to a group, or to the room at
large, such as ‘one group had an interesting idea…’ or ‘some of you are taking a very interesting
approach to this...’ before contributing something to help them (whether or not any group had
actually come up with it themselves). Asking students to prepare and give elaborate presentations
on their findings tends to alienate students; they see it as a waste of time because the ACCA does
not assess students using presentations.
Web icon
These denote Learning Examples that require students to research from the Internet. They are
used very sparingly because it may be difficult for colleges to assure Internet access for classes of
students, but they can sometimes be set for homework.
viii
Teaching session planners
Our planners are based on 90-minute sessions – this really is as long as you can expect your
students to concentrate without a break – over two types of course.

A condensed three day course (so 12 sessions)

A full-length six-day course (so 24 sessions)
Obviously your course might be structured differently but you should be able to adapt the planners
we have provided as necessary.
Condensed course
Session
Chapters
Learning examples
1
1
1.1-1.4
2
2
2.1-2.3
3
3
3.1-3.8
4
4
4.1-4.4
5
5, 6 and 7
5.1-7.1
6
8 and 9
8.1-9.2
7
10
10.1-10.2
8
11
11.1-11.3
9
12 and 13
12.1-12.2
10
14 and 15
14.1-14.2
11
16
16.1-16.3
12
17
17.1-17.2
Introduction
ix
Standard course
x
Session
Chapters
Learning examples
1
1
1.1-1.4
2
2
2.1
3
2
4
2
2.2
5
2
2.3
6
3
3.1-3.4
7
3
3.5-3.8
8
4
4.1-4.4
9
4
10
5
5.1
11
5
5.2
12
6
6.1-6.2
13
7
7.1
14
8
8.1
15
8
8.2-8.3
16
9
9.1-9.2
17
10
10.1
18
10
10.2
19
11
11.1
20
11
11.2-11.3
21
12 and 13
12.1-12.2
22
14 and 15
14.1-14.2
23
16
16.1-16.3
24
17
17.1-17.2
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?
Regardless of the legal
position.
What is a
business?
If expenditure exceeds
income, then the business
has made a loss.
Business
transactions
Discounts
Sales
tax
Storage of
information
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
An understanding of
double entry is of prime
importance in the study
of financial accounting.
2
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.
Key learning points
The accounting position is the same as the legal position in the case of limited liability companies,
which are treated as separate legal entities from their owners. However, for sole traders and
partnerships, the legal position is that the owners are personally liable for business debts.
1: Business transactions and documentation
3
BUSINESS TRANSACTIONS
A cash transaction means
payment is made
immediately. Payment
may be by cash, cheque,
credit card, debit card,
etc.
Property here means an
object hold by a business for
sale ie inventory (or stock).
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.
A credit transaction
means payment is
delayed for a period
of credit.
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.
Key learning point
The most important documents for accounting purposes are the invoice and the credit note. We
shall be returning to these documents later in the course.
Topic tips
Students should be advised to bring their Interactive Texts to college in order to access quick
quizzes and questions for use in class.
Emphasise to students that exam questions cover every topic and even this early background
information will be examined.
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
The correct answer is C. A goods received note is a record of goods received from a supplier.
A is a delivery note.
B is an advice note.
D is a goods returned note.
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
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
Trade discount is
given to a customer
as an incentive to
buy more goods.
6
6
Cash discount
Cash discount is an
incentive for a customer
to pay early or promptly.
Context
Discounts are ways of encouraging customers to buy more goods and to pay for those goods more
quickly.
Key learning points
Giving a trade discount may help to increase sales. Trade discounts may also be given to ensure
customer loyalty. Either way, this is effectively a reduction in the price of the goods sold and so the
accounting treatment reflects this by recording sales net of trade discount.
The whole point of a cash discount is to get money into the business as soon as possible. As it is
the customer’s decision whether to take advantage of the cash discount, the discount is recorded
separately as a business expense if and when taken.
Topic tip
Students should be aware that they may be asked to calculate both trade and cash discounts in the
exam.
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
The correct answer is B.
$
Cost of goods
10,000
Trade discount
(1,000)
Net cost
9,000
Cash discount
(180)
Amount paid
8,820
(10% x 10,000)
(2% x 9,000)
1: Business transactions and documentation
7
SALES TAX
A sales tax account must be
set up to record the amount
owing to or from the tax
authority.
Sales tax
Administered by tax
authorities
Output sales tax
Sales tax charged by the
business on goods/services
Output because it is
charged on items going
out of the business.
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
Input because it is paid
on items coming into 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.
Key learning point
Sales tax does not belong to the business! The business acts as a collecting agent on behalf of the
tax authorities.
Topic tip
Although the UK rate of VAT is normally 17.5%, any rate could be used in the exam.
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
The correct answer is C.
$
Net price (excluding sales tax)
Sales tax (10% x 500)
Gross price (including sales tax)
500
50
550
1: Business transactions and documentation
9
STORAGE OF INFORMATION
10
This may be covered by
local legislation. For
example, in the UK, tax
records must be kept for
at least three years.
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.
Key learning point
Documents must be retained not only in order to help resolve queries but to provide evidence that
the accounting records are correct.
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
The best solution is D.
A does not solve the storage problem and, as the invoices are unlikely to be regularly needed, they
do not need to be kept in the current system.
B breaks the local law as the invoices must be kept for six years.
C answers the current storage problem, but a derelict warehouse does not sound secure and it is
likely that the documents could be damaged by, for example, rats and water leakage.
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
THE ACCOUNTING EQUATION
Students must learn
this equation.
14
Context
The accounting equation states that the assets and liabilities of a business must always be
equal.
Key learning points
The accounting equation is the basis of the fundamental rules of accounting.
Topic tip
The accounting equation is very important in the exams and students need to be reminded to learn
the equation.
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
The correct answer is A.
Assets = capital + liabilities
50,000 = capital + 30,000
capital = 20,000
2: Assets, liabilities and the accounting equation
15
ACCOUNTS RECEIVABLE AND PAYABLE
16
Also known as accounts
receivable, receivable or
debtor.
Also known as account
payable, payable or creditor.
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.
Key learning points
We will be using these terms throughout the rest of this course, so make sure that students
understand the difference between receivables (amounts due to the business) and payables
(amounts the business owes to others).
2: Assets, liabilities and the accounting equation
17
DOUBLE ENTRY
Also known as the
DUALITY concept.
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
Debits increase
Credits increase
Expenses
Liabilities
Assets
Income
Drawings
Capital
Context
Double entry is the most important topic that you will meet on this course. It forms the basis of
double entry bookkeeping.
Key learning points
Debits represent assets, while credits represent capital and liabilities. The accounting equation says
that:
Assets = capital + liabilities
So every transaction must be represented by an equal debit and credit entry.
Topic tip
This topic is the foundation of the whole course and will definitely be examined in depth.
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
The correct answer is D. A bill from a supplier is for purchases, which is an expense. It has not yet
been paid, so we debit expenses and credit liabilities (payables).
A is not correct as it debits assets instead of expenses
B reverses the correct entries reducing both expenses and liabilities
C is the reverse of A
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
This does not affect
the profit
VERSUS
For maintenance or trade of the business
Charged against profit
This does affect the
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.
Key learning points
Capital expenditure does not affect profit.
Revenue expenditure is charged against profit.
Topic tip
The exam usually includes questions requiring a knowledge of which expenses are capital and which
are revenue.
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
The correct answer is D.
The others are all examples of revenue expenditure.
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
Sometimes there are
sales returns and
purchase returns day
books which are used to
record credit notes.
Overview
Sales and
purchase day books
Individual invoices are posted
to the receivables/payables
ledger but the day book
totals are posted to the
control accounts.
Cash
book
General ledger
and double entry
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
Also known as the
nominal ledger.
24
Posting from the
day books
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).
Key learning points
The source documents are recorded in the books of prime entry. These books of prime entry are
then summarised and the totals are posted to the general ledger by the process of double entry
bookkeeping.
As the general ledger accounts show the total amounts owed to/by the business, it is very difficult
to see what is owed by a single customer or is payable to a single supplier. Therefore separate
receivables and payables ledgers are kept which show this detail. These ledgers are outside the
double entry system and are called memorandum accounts.
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
The correct answer is A.
B is incorrect because the posting is to the general ledger.
C is incorrect because the summary and posting is to the general ledger, individual credit notes are
posted to the customer accounts in the receivables ledger.
D is incorrect because the summary and posting is to the general ledger, individual invoices are
posted to the supplier accounts in the payables ledger.
3: Recording, summarising and posting transactions
25
SALES AND PURCHASE DAY BOOKS
Only credit sales and
purchases are recorded in
the sales and purchases
day books.
Overview
Sales and
purchase day books
The purchase day book
usually includes all expenses
paid on credit, not just goods
for resale.
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
For example, sales of a
footwear business could
be analysed into boots,
shoes and sundry items.
26
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.
Key learning points
Note that only credit sales and purchases are recorded in the day books, not cash transactions.
Cash transactions are dealt with in the cash book (see the next page).
The purchases day book usually includes all the expenses of a business (eg rent, light and heat,
insurance, stationery) not just purchases of goods for resale.
Topic tip
Exam questions often include cash and credit transactions in the same question. Students must be
able to distinguish between the two and remember that only credit transactions go through the
sales and purchase day books.
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
The correct answer is B. Invoices sent out by a business are sales invoices and these are recorded
in the sales day book.
3: Recording, summarising and posting transactions
27
CASH BOOK
Discounts allowed is a
memorandum column and
is not part of the analysis.
Overview
Sales and
purchase day books
ABC & Co paid $1,000 but
this clears a sales invoice of
$1,050, so we record the
discount taken of $50 in a
separate memorandum
column. This is a cash
discount.
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
Rec’bles
ledger
$
1,000
1,000
____
1,150
____
____
____
1,000
____
____
Cash
sales
$
150
Sundry
$
___
150
___
___
___
___
___–
Discounts allowed are shown in a memorandum column
Cash payments are recorded in a similar way
The total column equals
the analysis columns ie
1,000 + 150 = 1,150
28
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.
Key learning points
The key thing to remember is that the cash book records cash transactions as opposed to credit
transactions. Therefore all cash sales and purchases will be recorded in the cash book.
Payments received from credit customers will just be recorded in a receivables ledger column. No
further analysis is needed as this will have been recorded in the sales day book.
Similarly payments made to credit suppliers will just be recorded in a payables ledger column. No
further analysis is needed as this will have been recorded in the purchases day book.
Discounts allowed must be recorded, otherwise the individual account in the receivables ledger will
still show an amount outstanding ($50 in the case of ABC & Co). This is achieved by recording the
discount allowed in a memorandum column in the cash receipts book. The same thing applies to
discounts received in the cash payments book. This ensures that the discount is not forgotten and
can be recorded in the ledger accounts.
Topic tip
It is worth repeating that the exam will include questions that mix cash and credit transactions. This
is to test whether students can sift through material to see which information is relevant to the
question asked.
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
The correct answer is B. The discount has been allowed to a customer (hence discount allowed) and
is recorded in the cash book.
A is incorrect because discounts received refer to purchases (the discount is received from the
supplier).
C and D are incorrect because discounts are never recorded in the sales and purchase day books.
3: Recording, summarising and posting transactions
29
GENERAL LEDGER AND DOUBLE ENTRY
30
Revenue expenditure
Capital expenditure
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
Assets
Capital
Expenses
Liabilities
Drawings
Income
Context
The general ledger (or nominal ledger) contains all the accounts which will eventually be used to
prepare the financial statements.
Key learning points
The debit and credit sides of the account relate to the accounting equation. Debits represent
assets, while credits represent capital and liabilities. Income increases capital and so is a credit.
Therefore expenses and drawings, which decrease capital, are debits.
Remember that to keep the accounting equation in balance: for every debit, there must be an equal
credit.
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
The correct answer is D.
Profit is defined as income less expenses. Income is a credit entry and so profit (net income) is also
a credit entry. Expenses are debits and so any loss (net expenses) would be a debit.
In addition, profit is added to capital and so this confirms that the entry is a credit.
3: Recording, summarising and posting transactions
31
GENERAL LEDGER AND DOUBLE ENTRY
32
Including capital
Overview
Sales and
purchase day books
Cash
book
General ledger
and double entry
Posting from the
day books
Accounting
processes
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.
Decide the effect on the
bank account. If it is
debit bank, then the
other entry must be a
credit, and vice-versa.
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.
Key learning points
It is worth reiterating the DEAD CLIC mnemonic to help students remember their debits and credits.
D Debits increase
E Expenses
A Assets
D Drawings
C Credits increase
L Liabilities
I Income
C Capital
Make sure that students understand the point about bank statements raised in the following
example.
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
The correct answer is A. If there are funds at the bank, this is an asset and so it is a debit balance
(the bank owes us this money).
Remember that a bank statement shows the balance from the bank’s point of view. This is the
opposite of the business viewpoint. The bank owes this money to its customer and so a balance in
hand is a liability and so a credit.
3: Recording, summarising and posting transactions
33
GENERAL LEDGER AND DOUBLE ENTRY
34
Receipts increase the
bank account asset and
so are debits.
Overview
Sales and
purchase day books
Payments decrease the bank
account asset and so are
credits.
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.
Key learning points
Bank receipts are debits because they increase the asset. Therefore the other side of a bank
receipt will be a credit (eg some form of revenue or decreasing an asset like receivables due from
customers).
Meanwhile bank payments are credits because they are reducing the asset. Therefore the other
side of a bank payment will be a debit (eg paying an expense, buying an asset or reducing a liability
like payables due to suppliers).
Topic tip
Double entry bookkeeping is the foundation of everything in the exam. Students must practice their
double entry bookkeeping until they are confident in this skill.
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
The correct answer is C.
The computer and maintenance contract have been bought and so a payment has been made out of
the bank account – ie credit cash. This rules out options A and D.
The debit needs to be split between capital expenditure (the computer) $450 and revenue
expenditure (the maintenance contract) $50. Therefore C is the correct solution.
3: Recording, summarising and posting transactions
35
GENERAL LEDGER AND DOUBLE ENTRY
36
Once the cash is received,
the receivables account is
clear and the remaining
entries are the same as
that for a cash
transaction.
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.
Key learning points
Students should be aware that, in the case of credit sales, once cash has been received the
receivables account balance reduces to nil and the remaining entries are the same as for a cash
sale.
Debit receivables, credit sales
Debit cash, credit receivables
So the net result is: Debit cash, credit sales
Similarly, with credit purchases, the payables account balance is nil and the remaining entries are
the same as for a cash purchase.
Debit purchases, credit payables
Debit payables, credit cash
So the net result is: Debit purchases, credit cash
3: Recording, summarising and posting transactions
37
POSTING FROM THE DAY BOOKS
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.
Note that total debits
(1,060) equal total
credits (580 + 480 =
1,060).
38
Context
The totals from the day books need to be posted to the ledger accounts. This is achieved by using
double entry.
Key learning points
The posting from the purchase day book would be: debit purchases/expense accounts, credit
payables account.
The posting from the cash receipts book would be: debit cash, credit cash sales/ receivables/other
income.
Cash payments would be posted: debit cash purchases/other expenses, credit cash.
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
The correct answer is A.
Discounts given (allowed) to customers are called discounts allowed. Discounts received are
received from suppliers and so options B and D are incorrect.
The discounts allowed reduce the amount due from customers and so we are reducing the asset –
credit receivables. The other side of the double entry is debit discounts allowed (an expense
incurred by allowing the discount in order to receive cash quicker). Therefore A is the correct
option.
3: Recording, summarising and posting transactions
39
POSTING FROM THE DAY BOOKS
The receivables ledger may
also be called the sales
ledger and the payables
ledger may be called the
purchases ledger.
Individual invoices are
posted to the
memorandum ledgers.
Totals are posted to the
control account.
Overview
Sales and
purchase day books
Cash
book
General ledger
and double entry
Posting from the
day books
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.
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
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
The total of the individual balances in
the receivables ledger should be the
same as the balance on the
receivables control account.
40
Accounting
processes