Recording Financial Transactions (FA1) Study Notes

Introduction to Business Transactions (Chapter 1)

  • Nature of Transactions: Every business engages in selling goods or services to customers and buying goods, services, and labor from suppliers and employees.
  • Categories of Transactions:
    • Cash Transactions: Payment is made immediately or in advance upon the exchange of goods/services (e.g., retail shop sales).
    • Credit Transactions: The buyer is allowed a 'credit period' to pay after receiving the goods/services. Most business-to-business (B2B) transactions are credit-based.
  • Key Terminology:
    • Sales: Exchange involving money for goods/services.
    • Purchases: Buying goods for resale or consumption.
    • Expenditure: A broad term including purchases, expenses (rent, electricity), and capital equipment.
  • Payroll & Petty Cash:
    • Payroll: Management of employee wages (weekly) and salaries (monthly).
    • Petty Cash: Small amounts of physical cash held for minor office expenses (taxi fares, tea, coffee).
  • Internal Controls: Systems such as reconciliations (till rolls to cash), authorizations for spending, and timely recording are essential to prevent fraud and errors.

Business Documentation (Chapter 2)

  • Documentation Flow:
    • Purchase Side: Purchase Requisition → Purchase Order → Delivery Note/Goods Received Note → Purchase Invoice → Remittance Advice/Payment.
    • Sales Side: Quotation → Sales Order → Dispatch/Delivery Note → Sales Invoice → Credit Note (if returns occur) → Statement of Account.
  • The Invoice: A formal demand for payment. Must include vendor details, customer details, invoice number, date, tax amounts, and settlement terms (e.g., 'net 30 days').
  • Credit/Debit Notes:
    • Credit Note: Issued by the seller to reduce the amount the customer owes (negative invoice).
    • Debit Note: Issued by the buyer to formally request a credit note from the supplier.
  • Data Protection & Retention: Businesses must comply with laws (e.g., GDPR in the UK) regarding personal data. Documents must typically be retained for 3 to 6 years for tax purposes.

Double Entry Bookkeeping (Chapter 3)

  • The Accounting Equation:
    • \text{Capital} = \text{Assets} - \text{Liabilities}
    • \text{Expanded Equation: } \text{Assets} = \text{Capital} + \text{Income} - \text{Expenses} - \text{Drawings} + \text{Liabilities}
  • Dual Aspect Concept: Every transaction affects two accounts.
  • Rules of Debits and Credits (DEAD CLIC):
    • Debit Increases: Debit: Expenses, Assets, Drawings.
    • Credit Increases: Credit: Liabilities, Income, Capital.
  • Ledgers: The Nominal (General) Ledger contains the main double-entry accounts. The Sales and Purchase Ledgers contain memorandum accounts for individual customers/suppliers.
  • Capital vs. Revenue Expenditure:
    • Capital Expenditure: Spending on non-current assets expected to last >1 year (e.g., a delivery van).
    • Revenue Expenditure: Day-to-day running costs (e.g., fuel for the van).

Banking: Payments and Receipts (Chapter 4)

  • Bank/Customer Relationship: The bank is a receivable of the business when in credit; it is a payable (liability) when the business is in overdraft.
  • The Clearing System: Process where banks settle payments between each other via the Central Bank (e.g., Bank of England).
  • Payment Methods:
    • Cheques: Must be signed by 'authorised signatories'. 'A/c Payee' crossing means it must be paid into the named recipient's account.
    • Standing Order: Fixed amount paid at regular intervals (initiated by the payer).
    • Direct Debit: Variable amount and date (initiated by the payee).
    • BACS: Automated electronic transfer for wages and supplier payments.
  • Banking Security: Use of night safes, segregation of duties (two people opening post), and reconciling till rolls to physical cash.

Sales and Purchases Records (Chapters 5 - 8)

  • Books of Prime Entry: Transactions are first listed in day books before being posted to the ledgers to keep the Nominal Ledger uncluttered.
    • Sales Day Book (SDB): Lists credit sales invoices.
    • Sales Returns Day Book (SRDB): Lists credit notes issued to customers.
    • Purchase Day Book (PDB): Lists credit purchase invoices.
    • Purchase Returns Day Book (PRDB): Lists credit notes received from suppliers.
  • Trade vs. Settlement Discounts:
    • Trade Discount: Given for bulk buying; deducted from the list price on the face of the invoice. Not recorded in the ledger accounts.
    • Settlement Discount: Prompt payment discount. Initially recorded based on whether the customer is expected to take notice. If expected, the net amount is recorded. If not expected, the full amount is recorded.
  • Aged Analysis:
    • Aged Receivables Analysis: Lists how long customer debts have been outstanding to aid credit control.
    • Aged Payables Analysis: Monitors amounts owed to suppliers to ensure payment deadlines/discounts are met.

Recording Receipts, Payments, and Petty Cash (Chapters 9 - 10)

  • Cash Book: Usually analyzed into columns (Bank, Receivables, Sales Tax, etc.).
    • Debit Side: Cash Receipts.
    • Credit Side: Cash Payments.
  • Petty Cash Imprest System:
    • The business maintains a fixed 'Float' (e.g., $100).
    • \text{Cash on Hand} + \text{Vouchers} = \text{Imprest Amount}
    • Petty cash is 'topped up' by cashing a cheque for the total amount of the vouchers spent.

Payroll (Chapter 11)

  • Gross Pay vs. Net Pay:
    • \text{Net Pay} = \text{Gross Pay} - \text{Statutory Deductions (Tax, Social Security)} - \text{Voluntary Deductions}
  • Employer Costs: The employer incurs extra costs beyond gross pay, such as employer state benefit contributions and pension contributions.
  • Accounting Entries:
    1. Debit Wages and Salaries Expense (Total Employer Cost).
    2. Credit Wages and Salaries Control Account.
    3. Debit Control Account (Net Pay); Credit Bank.
    4. Debit Control Account (Deductions); Credit Payable to Taxation/Agency.

Reconciliations and Trial Balance (Chapters 12 - 14)

  • Bank Reconciliation: Explains differences between the Cash Book and Bank Statement.
    • Timing Differences: Unpresented cheques (not yet cashed by supplier) and Outstanding lodgements (not yet cleared by the bank).
    • Omissions: Bank charges, interest, or direct debits not yet recorded in the Cash Book.
  • Control Account Reconciliations: The balance on the Receivables Ledger Control Account should match the total of the individual balances in the Sales Ledger.
  • The Trial Balance: A list of all ledger balances. Total Debits must equal Total Credits.
  • Types of Errors:
    • Revealed by Trial Balance: Single-entry errors, casting errors, transposition errors (in one account only).
    • NOT Revealed by Trial Balance: Omission (transaction ignored), Principle (wrong class of account), Commission (wrong specific account), Compensating (two errors cancelling each other out).
  • Suspense Account: A temporary account used to make the Trial Balance agree while errors are investigated. Once all errors are corrected via journal entries, the Suspense Account balance should be zero.