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Notes FIA Paper FA1 Recording Financial Transactions For exams in 2013

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ExPress Notes

FIA FA1 Recording Financial Transactions

Contents

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About ExPress Notes

3

1.

Business transactions and documentation

7

2.

Financial statements and their elements

12

3.

Double entry bookkeeping: the debits and credits

18

4.

Cash and bank

21

5.

Sales and credit transactions

24

6.

Purchases and credit transactions

29

7.

Payroll

32

8.

Control accounts and initial trial balance

34

Š 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes

FIA FA1 Recording Financial Transactions

START About ExPress Notes We are very pleased that you have downloaded a copy of our ExPress notes for this paper. We expect that you are keen to get on with the job in hand, so we will keep the introduction brief. First, we would like to draw your attention to the terms and conditions of usage. It’s a condition of printing these notes that you agree to the terms and conditions of usage. These are available to view at www.theexpgroup.com. Essentially, we want to help people get through their exams. If you are a student for the ACCA exams and you are using these notes for yourself only, you will have no problems complying with our fair use policy. You will however need to get our written permission in advance if you want to use these notes as part of a training programme that you are delivering. WARNING! These notes are not designed to cover everything in the syllabus! They are designed to help you assimilate and understand the most important areas for the exam as quickly as possible. If you study from these notes only, you will not have covered everything that is in the ACCA syllabus and study guide for this paper. Components of an effective study system On ExP classroom courses, we provide people with the following learning materials: • • • •

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ExPress Notes

FIA FA1 Recording Financial Transactions

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FIA FA1 Recording Financial Transactions

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Practice phase

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This is your most important tool at this stage. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. You pass real exams by passing mock exams. Don’t be tempted to fall into “passive” revision at this stage (e.g. reading notes or listening to CDs). Passive revision tends to be a waste of time.

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© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes

FIA FA1 Recording Financial Transactions

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ExPress Notes

FIA FA1 Recording Financial Transactions

Chapter 1

Business transactions and documentation

START The Big Picture Bookkeeping means recording appropriately classified monetary transactions in the financial records of an entity. It can be done manually or using an accounting software. It involves maintaining a chronological record of transactions as they occur. Every transaction will be classified according to its type (sales, purchases, etc) and will be recorded in the books of original entry. Periodically a list of the results of all recorded transactions is produced. This is done by extracting each account and its final balance. The list is called a trial balance and is the basis from which financial statements are produced for both internal and external users.

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ExPress Notes

FIA FA1 Recording Financial Transactions

KEY KNOWLEDGE Source documents Every transaction is evidenced by a document showing all details of that particular transaction. These documents are known as source documents. Some originate outside the organization (invoices received from suppliers), other originate inside the organization (sales invoices sent to customers). Example of source document includes but not limited to:

Document

Purpose

Quotation

To give a potential customer an indication of what a product or service would be likely to cost. It may be a binding quote or just an indicative quote. To record an order from a customer. Signing a booking form for an ExP classroom course is a sales order that ExP will then process. To record an order placed with a supplier. It may require preauthorisation to be valid. To record that an order for inventory for resale has been received. It will normally only be produced once the goods have been inspected at the point of delivery to ensure that they are correct in description and quality. To record that an order from a customer has been sent out.

Sales order

Purchase order Goods received note

Goods dispatched note Invoice Statement

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A request for payment from a supplier. Sent by the supplier to the customer. A summary of transactions recorded by a supplier with a customer, including amounts received from the customer. Sent by the supplier to the customer.

Often feeds the accounting information on.... Nowhere. At this stage, there has been no transaction to record; it’s still at the state of being a prospective transaction. Sales (revenue).

Purchases, normally of inventory for resale. Purchases of inventory for resale and payables.

Sales (revenue) and possibly also inventory management, depending on how the accounting system is set up. Payables. Does not generally instigate any recording of a transaction, since all transactions on the statement will have been recorded when goods were

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ExPress Notes

FIA FA1 Recording Financial Transactions

Credit note

Debit note

Remittance advice

Receipt

Acknowledgement from a supplier that the customer has overpaid and is entitled either to a refund or free goods/ services in the future. To cancel a credit note that previously existed, eg if goods were ordered, paid for and then returned there would initially be a credit note. The refund made would be accompanied with a debit note. Normally included with an invoice. A document that is included with the payment (eg if paid by cheque) with details that will allow the recipient of the funds to match the payment to the customer’s account. Issued by the supplier for goods, to acknowledge payment of a debt.

ordered. But useful for cross-checking our records with the supplier’s records. Payables.

Receivables.

Receivables.

Receivables, payables and purchases.

KEY KNOWLEDGE Data sources / data capture

When a business transaction happens, it is essential that the source data is captured immediately. This does not necessarily mean immediately writing up the books, but it does involve some record being made of the transaction happening.

KEY KNOWLEDGE Books of prime entry

Alternatively called books of prime entry, these will be the bridge between the raw data (eg receipt for cash purchase of some building materials) and the accounting system. They may be written up by the accountant, or by a semi-trained member of staff within the client’s business.

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ExPress Notes

FIA FA1 Recording Financial Transactions

The most commonly used books of prime entry are:

Book of prime entry:

Used to record data on:

Data typically used to feed:

Cash in book

Cash received into the business bank account.

All sorts of things! Anything that may generate cash for the business.

Cash payments book

Cash paid from the business bank account. All sorts of things! Anything that results in cash being paid out of the business.

Petty cash book

Cash in and out of the balance of cash held in notes and coins by the business (normally small). This is often controlled using the imprest system (see later).

Typically, small expenses (eg Friday cakes for staff!) and sundry income.

Sales day book

Sales on credit. Note that sales immediately settled in cash will be recorded in either the cash book (if paid directly into the bank account) or petty cash book (if received in notes and coins).

Sales revenue.

Purchases day book

Purchases of inventory for resale on credit. Purchases of inventory for Note that purchases settled immediately in resale. cash will be recorded immediately in the cash payments book or petty cash book.

Journal book

Anything not covered by any of the other books of original entry.

Often, this is the book maintained by the accountant, in which “period 13” adjustments like depreciation and bad debts are recorded.

Books of prime entry may be recorded in paper form, or using a spreadsheet.

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ExPress Notes

FIA FA1 Recording Financial Transactions

KEY KNOWLEDGE Journal book The journal book is the book of prime entry that captures transactions not covered by other books of original entry. Often, it includes adjustments and correction of errors and omissions in the other books of original entry. The journal book records double entry records (see later), with an explanation of the reason. We’ll see an example of it after tackling double entry bookkeeping.

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ExPress Notes

FIA FA1 Recording Financial Transactions

Chapter 2

Financial statements and their elements

START The Big Picture Whenever a business transaction takes place (payment of monthly salaries) it will be first recorded into the books of prime entry. On a monthly basis the books are totaled and totals are entered in the ledger accounts. From ledger accounts a trial balance is extracted (see later chapter) and financial statements are produced. A full set of financial statements produced each year comprises: • • • •

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A statement of financial position, showing the assets controlled by the entity and the liabilities owed and how the net assets are financed. A statement of comprehensive income, showing the income earned, the expenses incurred and the profit or loss for the year. A statement of cash flows, which shows the cash receipts and payments for the year. Notes to the financial statements, which give further detail to readers who want to know more than the summary story.

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ExPress Notes

FIA FA1 Recording Financial Transactions

Statement of financial position of Sole Trader X at 30 June 20x1

ASSETS

$

$

Non-current assets Licence to operate

10,000

Land and buildings

35,000

Office equipment

20,000

Motor vehicles

30,000

Fixtures and fittings

10,000 105,000

Current assets Inventory

20,000

Trade receivables

13,000

Less: allowance for doubtful receivables

(1,000) 12,000

Prepayments

4,000

Cash at bank

3,000

Cash in hand

2,000

Total assets

146,000

EQUITY AND LIABILITIES Capital Initial capital introduced

30,000

Total cumulative comprehensive income at 1 July 20x0

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85,700

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ExPress Notes

FIA FA1 Recording Financial Transactions

Less: Cumulative withdrawals at 1 July 20x0

(24,000)

Total equity at 1 July 20x0

91,700

Total comprehensive income in the current period

16,000

Withdrawals in the current year

(8,000)

Total equity at 30 July 20x1

99,700

Non-current liabilities Bank loans

32,000

Current liabilities Bank overdraft

3,300

Trade payables

8,000

Accruals

3,000

Total liabilities

Total equity and liabilities

46,300

146,000

A SOFP may be rearranged into a number of ways. IAS 1 shows a SOFP as given above: Total assets = Equity + total liabilities.

Equally validly therefore: Total assets – total liabilities = Equity Given that equity = capital + cumulative profit – cumulative withdrawals, then the equation could be written in any number of ways such as: Total assets – total liabilities = Capital + cumulative profit – cumulative withdrawals Or Cumulative profit = Total assets – total liabilities – capital + cumulative withdrawals. This is sometimes called the “accounting equation”.

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ExPress Notes

FIA FA1 Recording Financial Transactions

Statement of comprehensive income for the year ended 30 June 20x1 $

Sales revenue

$

152,000

Cost of sales Opening inventory

30,000

Purchases of inventory

80,000

Delivery costs inwards

10,000

Closing inventory

(20,000) (100,000)

Gross profit

52,000

Sundry income

3,000

Discounts received

2,000 57,000

Less: Expenses

Delivery costs outwards

3,000

Depreciation

6,000

Discounts allowed to customers

1,000

Electricity

4,000

Irrecoverable and doubtful debts

2,500

Mobile phones

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500

Motor expenses

2,500

Rent

9,000

Telephone and internet

1,500

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ExPress Notes

FIA FA1 Recording Financial Transactions

Wages and salaries

12,000 (42,000)

Profit for the period before tax

14,000

Other comprehensive income: Revaluation gain on property Total comprehensive income in the period

2,000 16,000

You may be required in the exam to calculate revenue, cost of sales, gross profit and total comprehensive income from given data.

KEY KNOWLEDGE Elements of financial statements There are five elements of financial statements, from which all financial statements are produced. These definitions are very useful throughout your ACCA studies and could easily be part of a question in paper FA1.

Elements of the statement of financial position:

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An asset is a resource that is controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity.

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Equity is the residual interest in the assets of the entity after deducting all its liabilities.

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ExPress Notes

FIA FA1 Recording Financial Transactions

Elements of the statement of comprehensive income: •

Income is an increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

An expense is a decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Note that income and expenditure are defined effectively as the reason that a change in net assets happened.

KEY KNOWLEDGE Relationship between the statements: the business equation An increase in net assets of a business will come from a mixture of these sources: • • •

Total comprehensive income made in the period (a profit will increase net assets) New capital introduced by the owner (will always increase net assets) Withdrawals made in the period (will always reduce net assets).

This is sometimes called the accounting equation or the business equation. It is a frequent exam question and can be summarised:

Closing net assets =

Opening net assets + total comprehensive income in the period + new capital introduced in the period – withdrawals in the period.

Remember that net assets = equity + liabilities, by definition. So net assets may be given in a question separately as equity and liabilities.

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ExPress Notes

FIA FA1 Recording Financial Transactions

Chapter 3

Double entry bookkeeping: the debits and credits

START The Big Picture Bookkeeping is the technique of recording financial transactions as they occur so that summaries can be made and presented as a report to the users of the accounts. There are two main systems for keeping the accounts: • •

Single entry bookkeeping (for small businesses only) Double entry bookkeeping.

Their names really explain the difference between the two. In the double entry bookkeeping for every transaction is in fact recorded twice.

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ExPress Notes

FIA FA1 Recording Financial Transactions

KEY KNOWLEDGE So why debits and credits?

Double entry bookkeeping is the term used to describe how businesses record transactions in their books or accounts. The concept is based upon the fact that every financial transaction involves the simultaneous receiving and giving of value, and is therefore recorded twice. One who receives is a debtor (Dr) and one who gives is a creditor (Cr). Under the double entry accounting system, both the aspects of giving and receiving are recorded in terms of accounts. The account which receives the benefit is debited and the account which gives the benefit is credited. For example if a florist buys flowers, he receives the flowers and gives away the money. When later he makes a sale, he receives money and gives away the flowers. The opposite entries are expressed as “debit” and “credit” entries in the records. Money coming in is always a debit. If every debit entry has a credit, the logic dictates that must be a reason for this increase in cash. The reason is that there’s been some income from the sale of flowers. This can’t be a debit, as what we’re trying to do is explain where the debit came from. The explanation is arbitrarily called a credit.

KEY KNOWLEDGE Building up the rules Here are the core concepts that you need to be happy with:

• • •

An asset, or an increase in an asset, is a debit. The opposite of an asset is a liability. The opposite of a debit is a credit. So a liability is a credit. If you have more assets (debit assets), the explanation will be to credit income.

Here’s a table to summarise the rules. Review this and then try to produce is yourself, using the logic of explaining movements in net assets and things being opposites (eg a liability is a credit because an asset is a debit).

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ExPress Notes

FIA FA1 Recording Financial Transactions

Debits mean

Credits mean

What happens to net assets: An increase in assets

A decrease in assets

A decrease in liabilities

An increase in liabilities

And the reason for that increase in net assets: An item of expenditure

An item of income

If you’re asked to record a transaction, the first step is to identify what assets and/ or liabilities are in question. Decide one of these first (it’s often easiest at first to start with cash if it’s a cash transaction) and decide if this is a debit or a credit. Then work out the other side of the transaction. Let’s apply these rules to the sale of flowers for cash mentioned above. Cash is coming in (i.e. an asset is increased) therefore debit cash. This means that the other side of the transaction should be a credit, which could be either a decrease in assets, an increase in liabilities or an income. In our case the later applies, therefore credit income (revenue from sale of flowers).

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ExPress Notes

FIA FA1 Recording Financial Transactions

Chapter 4

Cash and bank

START The Big Picture According to English common law, a bank has traditionally been characterized as an institution which holds current accounts for depositors, pays cheques which are drawn upon it, and collects cheques on behalf of customers. In addition to chequing accounts, banks offer an increasingly broad range of services, including overdraft and loan facilities, foreign exchange, trade finance (bills of exchange and promissory notes) and investment management. Banks in the UK are licensed by the Financial Services Act, which has over time extended its reach to other types of financial institutions, such as Building Societies, which traditionally specialized in offering mortgage loans.

UK banking clearing system There are different systems designed to clear payments within the UK. These include: London Bankers Clearing House – A cheque-clearing system operated by members, designated as “clearing banks”; the use of cheques remains an important payment method in the UK, particularly for small businesses. The clearing system works on a 3-day cycle:

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ExPress Notes

FIA FA1 Recording Financial Transactions

(1) Sending the item to the clearing center; (2) Sorting of items submitted; (3) Debit to the bank on which the item is drawn. Other systems: Bankers' Automated Clearing Services (BACS) – A system for the electronic transfer of payments between banks; 3-day clearing of funds, therefore slow but cheap; Clearing House Automated Payment System (CHAPS) – This is for Sterling payments within the UK; beneficiaries receive “same day” funds; relatively expensive; Responsible for supervising the above payment systems is the Association for Payment Clearing Services (APACS), an industry association of major banks and building societies. Different forms of payment Today’s banking system is highly automated with very few transactions processed manually. Common methods of transactions through a bank account are as follows: 1. Cheques – the drawer (payer) makes out a cheque to the payee (the person being paid). The cheque is entered into drawer’s accounts and sent to the payee. The payee, using a paying-in slip, record the details into his books and presents the cheque to its bank. The bank clearing system passes it to the drawer’s bank for approval and payment. Until the cheque is accepted by the drawer’s bank, it is considered to be uncleared and the bank has the right to return it as dishonoured if there are insufficient funds in the drawer’s bank account. 2. BACS (bankers automated clearing system) –involves making the payment by a bank transfer. Suitable for immediate transfer of funds both within the country and outside the country. 3. Direct debit – agreement with the bank by which the payment beneficiary can collect an amount directly from another bank account. Suitable for recurring payments like credit card or utility bills. 4. Standing order – agreement with the bank to pay a set amount at regular intervals. Suitable for fixed regular payments like rent or mortgage. 5. Bank initiated transactions –suitable for bank charges, interest received/paid on overdrawn balances, etc.

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© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes

FIA FA1 Recording Financial Transactions

KEY KNOWLEDGE Documentation Good record-keeping and a formalized documentation retention policy are critical to the integrity of an organisation’s processes and working practices. By providing a well-organised documentary trail, a disciplined approach to documentation retention can protect a company against lawsuits and other challenges, while effectively preserving its ability to enforce claims against others. It can also provide secondary benefits, such as ensuring a smooth service to customers, identify new marketing opportunities, and save storage space. Categories of documents include: (1) Legal documents (contracts and agreements); (2) Transaction documents (invoices and receipts); (3) Other correspondence (with clients, suppliers, etc.)

KEY KNOWLEDGE Cash book and petty cash book All transactions involving cash at bank are recorded in the cash book. Usually the cash book is divided into: cash receipts book and cash payments book and is kept in columnar form. All transactions involving small amounts of cash are recorded in the petty cash book. It usually operates on an imprest system where an agreed balance of cash is held by the cashier. At regular intervals (usually weekly) the amount paid out of petty cash is reimbursed from the bank to restore the imprest (balance) to its agreed level. Tight control of cash and bank balances is vital and therefore proper procedures regarding payment authorization, signatory rights etc should be instated. Cash itself should be counted on regular basis and compared with the balance in the petty cash book.

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Š 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes

FIA FA1 Recording Financial Transactions

Chapter 5

Sales and credit transactions

START The Big Picture Sales form the basis of every company’s existence and business owners spend time creating products and services customers want and are willing to pay for it. Each time the company makes a sale the following entry is made:

Dr Cash

$1,000

Cr Sales

$1,000 for cash transactions

or

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Dr Receivables

$2,000

Cr Sales

$2,000 for credit transactions

Š 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes

FIA FA1 Recording Financial Transactions

Credit sales are often made to encourage sales. The problem with extending credit is that not all receivables will pay. This means that some will become irrecoverable. Before being written off as irrecoverable, some will also look like they may not pay (perhaps by being a month overdue for payment). These are doubtful debts. Remember that an asset is a resource that is expected to give an inflow of benefits. Logically therefore if a receivable is not expected to pay, it cannot be shown as an asset.

KEY KNOWLEDGE Irrecoverable debts If a debt is not going to pay, for example if a person has died bankrupt, then it must be written out of the accounting records as the receivable is no longer an asset. Removing an asset reduces net assets and so generates an expense, which is normally called irrecoverable debts expense, hence:

Dr Irrecoverable debts expense

$800

Cr Receivables

$800

KEY KNOWLEDGE Recovery of debts written off If a debt is unexpectedly paid having previously been written off, it is likely that the cash received will initially be recorded in the cash received book as a receipt from a debtor. This means that the journal to record the cash will be automatically generated thus:

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Dr Bank

$800

Cr Receivables

$800

Š 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes

FIA FA1 Recording Financial Transactions

However, the balance is no longer in receivables, as it was written off. In order for the journal to work, it is then necessary to reinstate the balance that was previously written off. This is a change in accounting estimates, since the estimate last period was there was no realistic chance of the debt being recovered:

Dr Receivables

$800

Cr Irrecoverable debt expense

$800.

There is no attempt to change the previous year’s figures, which include an expense for the write off of the debt, since this was a fair estimate at the time. There will be an expense recorded for the write off in the year when it was written off and a credit to profit or loss when the cash was received. Depending on how the initial cash receipt has been recorded, it may be possible to simplify the above two journals, because there is a debit and credit of the same amount to receivables, thus:

Dr Bank

$800

Cr Irrecoverable debt expense

$800.

KEY KNOWLEDGE Doubtful debts It is likely that some receivables will not pay, even if they have not yet been written off. The business will continue to chase the receivables for full payment and may eventually even sue for the full balance. The amount cannot be written out of debtors, as credit control will need the records of the debt in full to know how much to chase for payment. However, if it’s estimated that there is a 20% chance that a debt will not pay, an allowance will be made, which reduces the value of net receivables, without corrupting the records of the actual debtor balance that will be needed to try to obtain payment. Creating, or increasing, an allowance will reduce net assets. This therefore creates an expense.

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© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes

FIA FA1 Recording Financial Transactions

Dr Bad debt expense

$500

Cr Allowance for receivables

$500.

KEY KNOWLEDGE Discounts There are two types of discount that you may encounter: trade discounts and settlement discounts. Trade discounts are those given to customers at the point of sale, perhaps because the customer buys in large volumes or is a member of staff. These discounts are not subject to any uncertainty at the time of sale – it is known for sure that the customer will never pay the list price of the goods or services. The accounting is therefore very simple: they are simply ignored. The sale is recorded at the amount net of the trade discount. A settlement discount is an incentive for customers to pay you earlier than they otherwise naturally would. For example, a discount of 5% may be offered on the invoice sent to customers if payment is received within seven days of the invoice being sent. If payment is not received within that period, the offer of the discount lapses. Settlement discounts are uncertain at the point of sale. The actual amount of the debt is gross of the settlement discount, ie before its deduction, since this is the amount that the customer will eventually be chased for if they don’t pay early. If the settlement discount is allowed to the customer, this is similar to the treatment of irrecoverable debts. It is simply a debt that we are voluntarily choosing to write off as partially irrecoverable because of the cash flow advantage of receiving the cash quickly. Settlement discounts are sometimes also called cash discounts for this reason and are recorded as follows: Dr: Discounts allowed (expense)

$200

Cr: Receivables

$200

Discounts allowed are settlement discounts that we allow to customers. They are therefore partial write off of debts receivable by us. They are therefore an expense in our books.

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© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes

FIA FA1 Recording Financial Transactions

KEY KNOWLEDGE Sales tax In many countries certain organisations are required to charge a sales tax or Value Added Tax (VAT). The sales tax rate varies between countries and also varies between the nature of goods and services supplied. The sales tax collected does not belong to the organisation that collects it and therefore must be remitted to the tax authorities on a regular basis. Sales tax received can be referred to as “output” sales tax. The double entry bookkeeping records need to show the goods sold and the sales tax value separately. If the above cash transaction is subject to 20% sales tax the following entries will be made: Dr: Cash Cr: Sales Cr: Sales tax

$1,200 $1,000 $ 200

If the above credit transaction is subject to 10% trade discount, sales tax should be charged on the reduced amount as follows: Trade discount: 10%*2,000 =200 Dr: Receivables Cr: Sales Cr: Sales tax

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$2,160 $1,800 $ 360

© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes

FIA FA1 Recording Financial Transactions

Chapter 6

Purchases and credit transactions

START The Big Picture For most businesses, inventory will be a very short lived asset, which is expected to be sold (or possibly thrown away or stolen!) by the end of the accounting period. When inventory is received, purchases account is used to record this transaction. Based on whether the transaction is settled immediately or not the following journal entries are made:

Dr Purchases

$1,000

Cr Cash

$1,000 for cash transactions

or

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Dr Purchases

$2,000

Cr Payables

$2,000 for credit transactions

Š 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes

FIA FA1 Recording Financial Transactions

It is normal for businesses to return unwanted goods to suppliers. The double entry arising will depend on whether or not the goods or acquired for cash: Dr Cash

$200

Cr Purchases returns

$200, for cash transactions

or Dr Payables

$300

Cr Purchases returns

$300, for credit transactions

KEY KNOWLEDGE Discounts As explained in the previous chapter, there are two types of discounts: trade and settlement discounts. Trade discounts are deducted at the point of sale and therefore purchases are recorded net. Settlement discounts received from suppliers is recorded as follows: Dr: Payables

$100

Cr: Discount received (income)

$100.

Discounts received are settlement discounts that our suppliers allow to us. They are therefore partial forgiveness of debts that we owe to other people. They are therefore a source of income in our books.

KEY KNOWLEDGE Sales tax The organisation may also have to pay sales tax itself on goods and services bought. This sales tax paid can normally be reclaimed. Even though the organisation has to pay the supplier the full amount, if the sales tax is reclaimable then it does not affect the value of the item purchased.

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Š 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes

FIA FA1 Recording Financial Transactions

The sales tax paid is referred to as “input” sales tax. The double entry bookkeeping records need to show the goods sold and the sales tax value separately. Assuming a tax rate of 20% the above cash transaction will be recorded as follows: Dr: Purchases Dr: Sales tax Cr: Payables

$1,000 $ 200 $1,200.

If the above credit transaction is subject to 10% trade discount, sales tax should be charged on the reduced amount as follows: Trade discount: 10%*2,000 =200 Dr: Purchases Dr: Sales tax Cr: Payables

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$1,800 $ 360 $2,160

© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes

FIA FA1 Recording Financial Transactions

Chapter 7

Payroll

START The Big Picture It’s a fact of business, if a company has employees it has to account for payroll and benefits. Payroll and benefits include: • • • • • •

Wages; Salaries; Bonuses and commissions; Overtime; Payroll taxes Employer paid benefits such as holiday pay.

A clear distinction should be made between gross and net pay. From gross pay of an employee statutory deductions are made by the employer for items like personal income tax and employee social security contributions. However, the employee may authorise his employer to make other deduction from their salaries –called voluntary deductions- for items like sports club membership fee, pension contribution, trade union subscription, etc.

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© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes

FIA FA1 Recording Financial Transactions

Ledger entries for below pay details are as follows: Payroll details: Gross pay

$1500

Social security tax –employee

6% of gross pay

Pension

5% of gross pay

Income tax

$200

Social security tax –employer

10% of gross pay

Trade union subscription

$25

Dr: Wages expense account

$1500 (gross pay)

Dr: wages expense account

$150 (employer’s social security)

Cr: Tax payable account

$ 150 (employer’s social contribution) $ 200 (income tax) $ 90 (employee’s social contribution)

Cr: Pension payable account

$ 75

Cr: Trade union payable account

$ 25

Cr: Wages payable account

$1,110

KEY KNOWLEDGE Payroll processing There are three common methods of payroll processing: 1. 2. 3.

Cash –usually suitable for temporary employees; Cheque Automated payments -suitable for companies with large number of employees.

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© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes

FIA FA1 Recording Financial Transactions

Page | 34

Š 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes

FIA FA1 Recording Financial Transactions

Chapter 8

Control accounts and initial trial balance

START The Big Picture A control account contains exactly the same information as in individual account in the ledger that it controls, using totals rather than individual transactions. They are sometimes referred to as total accounts. Common control accounts include the sales/receivable ledger control account and purchase/payables ledger control account. Receivables and payables accounts are always kept up to date, with transactions entered immediately as they arise. The daybooks are totaled periodically and can be used as a control mechanism.

KEY KNOWLEDGE Reconciling control accounts

Page | 35

Š 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes

FIA FA1 Recording Financial Transactions

The control account must be checked on a regular basis against the total of balances in the relevant ledger and any arising difference between the two must be investigated. Any discrepancies found may be due to: • • •

errors in the individual ledger accounts; errors in the control account; errors in both the control account and ledger account.

KEY KNOWLEDGE Reconciling the cash book The business records all transactions with the bank in the cash book. The bank records all transactions with the business in the bank statement. Therefore the content of the cash book should be exactly the same as the bank statement. Bank reconciliation should be performed at least monthly as part of control procedures over cash. When performing the reconciliation there are three main differences: • • •

unrecorded items like bank charges; timing differences like outstanding cheques; errors either in the cash book or in the bank statement.

KEY KNOWLEDGE Initial trial balance After all transactions are recorded in the ledger accounts an initial trial balance is extracted. Since the balances in the ledger accounts are results of double entries the total of debit balances should equal the total credit balances. If this is not the case a suspense account is opened to make the debits and credits equal. The balance on this account is cleared after all errors are identified and corrected. Typical errors where the trial balance does not balance are: • • • • • •

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single sided entry: a credit has been entered without a corresponding debit; debit and credit entry have been made for different amounts; two entries have been entered on the same side; miscasting; opening balances ignored; extracting errors.

© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes

FIA FA1 Recording Financial Transactions

Deliberate creation of suspense accounts A suspense account may be used deliberately where a transaction has happened but the bookkeeper is uncertain what it relates to. By recording the transaction in suspense, it can ensure that the records are at least partially correct, but can then be corrected fully when the information necessary is known.

(end of ExPress notes)

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Š 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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FIA FA1 2013 notes  

FIA FA1 2013 notes

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