Recording Business transactions

RECORDING BUSINESS TRANSACTIONS

Recording Business Transactions

  • The initial record of business transactions is done using source documents.

  • Source documents: These are the origin of all information recorded by the business. They can be categorized into two major types relating to sales and purchases:

    • Examples Related to Sales and Purchases:

    • Invoice: A document requesting payment for goods or services provided.

    • Credit Note: A document issued to reduce the amount owed by a customer, usually because of a return or discount.

    • Debit Note: A document issued when the seller increases the amount owed by the buyer, often due to additional charges.

    • Purchase Order: A document issued by a buyer to confirm an order for goods or services.

    • Sales Order: A document confirming the sale of goods or services.

    • Statement of Account: A summary of all transactions between a buyer and seller within a specified time.

    • Other Source Documents:

    • Petty Cash Voucher: Initial records of petty cash transactions.

    • Remittance Advice: Document outlining which invoices a payment covers.

    • Payroll Records: Records of wages and salaries.

    • Cheque Stub: Duplicate of a cheque paid out.

    • Cheque Received: A document confirming the receipt of a cheque.

Books of Prime Entry

  • Books of Prime Entry: These form the record of all documented business transactions, whether received or sent. They include:

    • Sales Day Book: Records all sales transactions.

    • Sales Returns Day Book: Records all returned sales transactions.

    • Purchase Day Book: Records all purchases.

    • Purchase Returns Day Book: Records all returned purchases.

    • Cash Book: Records all cash transactions, both inflow and outflow.

    • Petty Cash Book: Records small cash transactions.

    • Journal: Used for purchases or sales of assets, errors, write-offs, opening entries, transfers, and other items.

  • The purpose, content, and format of each book are crucial for proper accounting.

  • Books of Prime Entry and Double Entry: Although essential for recording transactions, they do not form part of the double-entry system. Instead, transactions recorded here are periodically summarized and posted to double-entry ledger accounts.

Summarising Source Documents

  • Summaries are performed in two ways:

    • Summary of Transactions: For individual suppliers or customers recorded in the payables or receivables ledger.

    • Total Summary of Transactions: Related to all suppliers or customers recorded in the general ledger.

General (Nominal) Ledger

  • General Ledger: An accounting record summarizing the financial affairs of the business.

  • Types of accounts contained within the ledger include:

    • Assets

    • Liabilities

    • Capital

    • Income

    • Expenditure

    • Profit and Loss

  • Accounts in the general ledger are posted with totals from the day books.

  • Posting: The process of entering transactions in the ledger accounts derived from the source documents.

Receivables and Payables Ledgers

  • Receivables Ledger: Contains personal receivable accounts with a separate account for each individual customer, tracking the amounts owed by each customer.

  • Payables Ledger: Contains personal payable accounts showing the amounts due to each individual supplier.

    • Both types of accounts do not form part of double-entry accounting.

    • Memorandum Accounts: Contains additional transaction details already recorded in the general ledger.

Control Accounts

  • Control Account: An account in the nominal ledger recording the total value of similar but individual items.

    • Receivables Control Account: Records transactions involving all receivables in total, posted with totals from the sales day book, sales returns day book, and cash book.

    • Payables Control Account: Records transactions involving payables in total, posted with totals from the purchase day book, purchase returns day book, and cash book.

  • Final account balances include control account balances.

  • Other types of control accounts include:

    • Sales Tax Control Account

    • Wages and Salaries Control Account

    • Inventory Control Account

Accounting for Sales Tax

  • Output Sales Tax: Tax charged on sales.

  • Input Sales Tax: Tax charged on purchases.

  • When accounting for output sales tax:

    • Sales record should not include sales tax.

    • Double Entry:

    • DEBIT Cash or Receivables: XX

    • CREDIT Sales: XX

    • CREDIT Sales Tax: XX

  • Input tax accounting varies depending on whether it is recoverable.

    • If recoverable: Purchases figure excludes tax.

    • If not recoverable: Purchases figure includes sales tax.

  • When is tax accounted for? When it first arises in transactions.

Methods of Coding Data

  • Coding: Each account in the accounting system is assigned a unique code used for identification during posting.

  • Advantages of coding data include:

    • Time savings due to shorter descriptions.

    • Reduced storage space.

    • Examples of coding systems include:

    • Customer account number

    • General ledger account number

    • Employee reference number

    • Inventory item code

Examples of Coding Systems

  • Businesses can develop their coding systems to suit individual needs. Examples include:

    • Alphabetical Codes: Only letters.

    • Sequential/Numerical Codes: Only numbers.

    • Alphanumeric Codes: Letters followed by numbers.

    • Faceted Codes: Group codes identifying units of information.

  • Features of a Good Coding System:

    • Each item has a unique code.

    • Uniform length across codes.

    • Codes reflect significant information about the accounts.

    • An indexing system exists to account for codes.

    • Scope for additional codes is available.

    • Characters like commas and colons are not used.

    • New codes must be authorized.

Benefits of Coding

  • Time Efficiency: Saving time on processing transactions.

  • Transaction Classification: Classification based on transaction types.

  • Reduction in Errors: Codes minimize risks of mistakes.

  • Easy Information Location: Improved filing accuracy and faster searches for transactions/documents.

Manual and Computerised Systems

  • Manual Accounting Systems: Involves recording transactions in physical books.

  • Computerised Accounting Systems: Store information in digital format.

    • Three Processes of Computer Activity:

    • Input: Entering data from original documents.

    • Processing: Posting to books, ledgers, and sorting information.

    • Output: Producing reports, including financial statements.

  • Advantages of Computerised Systems:

    • Speed

    • Accuracy and reliability

    • Enhanced storage and processing capabilities

Differences Between Manual and Computerised Accounting Systems

  • Manual System:

    • Information stored in physical books.

    • Journal entries done by hand.

  • Computerised System:

    • Information stored in computer files.

    • Journal entries accessed through menu options.

Batch Processing and Control Totals

  • Batch Processing: Similar transactions collected and processed together for efficiency.

  • Control Totals: Ensure no errors occurred during batch input.

Accounting Systems and Software

  • Types of Computer Software:

    • System Software: Operating system managing hardware and applications.

    • Application Software: Programs used for specific tasks, such as accounting.

    • Dedicated Accounting Packages: Software specifically designed for accounting tasks.

    • General Software: Software used for multiple business tasks, including accounting (e.g., spreadsheets).

  • Modules: Specific programs handling particular parts of the accounting system (e.g., invoicing).

    • Standalone Module: An accounting package with only one module.

    • Suite: A collection of several modules that work together.

    • Integrated Software: Modules linked to ensure data entered in one module automatically updates others.

Accounting System Reports and Linkages

  • Linkages to Other Systems: Information from the accounting system can also inform other business functions such as:

    • Sales System: Provides sales reports identifying major customers and performance comparisons.

    • Human Resource Management System: Supplies payroll information to HR.

    • Procurement System: Evaluates procurement operations using financial information.

    • Production and Service Provision: Integrates financial information for effective monitoring and control.

Computerised Accounting Systems

  • Technological advancements have shifted the recording of transactions to computerized systems, categorizing activities into three processes:

    • Inputs: Data entered from source documents.

    • Processing: Data posted to relevant ledger accounts.

    • Output: Financial statements and reports for management purpose.

  • Features of Computerised Systems:

    • Multiple modules handle various business functions.

    • Integration capability with other management modules.

    • Backups are available to recover lost files.

    • Ability to amend transaction details with a log of changes.

    • Reduced likelihood of errors, ensuring accurate data processing.

    • Generation of real-time, comprehensive management reports cost-effectively.

Desktop vs Cloud Accounting Systems

  • Desktop Accounting Software:

    • Hosted on the computer’s hard drive and requires installation.

  • Cloud Accounting Software:

    • Hosted and maintained online, accessible only with an internet connection.

Comparison: Desktop Software vs Cloud Software

  • Accessibility:

    • Desktop: Accessible on machines with software installed.

    • Cloud: Accessible from any device with internet.

  • Users:

    • Desktop: Typically single-user at a time.

    • Cloud: Multiple users, including remote access.

  • Updates and Backup:

    • Desktop: Manual updates and backups required.

    • Cloud: Automatic updates and backups.

  • Pricing:

    • Desktop: One-time fee until renewal.

    • Cloud: Monthly subscription fee.

  • Installation:

    • Desktop: Must be installed.

    • Cloud: No installation required.

  • Security:

    • Desktop: Security tied to the machine.

    • Cloud: Usually involves multiple layers of encryption for data protection.

How Accounting Data is Used

Locating Accounting Data

  • Efficient data retrieval relies on correct categorization, coding, and up-to-date databases:

    • Standardised Reports: Most systems offer pre-built reports for easy access.

    • Direct Search: Users can search for a transaction by code or keyword.

    • Custom Queries: Users can build personalized queries to extract specific data.

    • Dashboard: Some systems use dashboards for presenting essential information.

Displaying Accounting Data

  • Accounting data is often displayed as:

    • Tables: Present data points with meaningful headers.

    • Reports: Formatted information assisting management in decision-making.

    • Dashboards: Visual representation of key data for quick understanding.

    • Graphs: Visuals for identifying trends and making comparisons.

Checking Accounting Data

  • Accuracy is essential, involving:

    • Comparing source financial documents.

    • Querying personnel responsible for initiation and approval.

    • Verifying transaction trails and categorizations.

    • Analyzing trends, patterns, and ratios.

    • Trends: Changes over time.

    • Patterns: Repeated data movements.

    • Ratios: Relative comparisons between two data points.

Data Entry Errors

  • Human errors can introduce inaccuracies, such as:

    • Transposition errors (e.g., entering 560 as 650).

    • Lack of proper training for clerks.

    • Poor handwriting leading to incorrect entries.

    • Omission of documents from recording.

Preventing Data Entry Errors

  • Strategies for reducing errors:

    • Training employees on procedures such as double-checking work.

    • Supervisor oversight for verification.

    • Testing samples of entries for accuracy.

    • Validating data against source documents.

    • Automating data entry processes (e.g., scanning).

Data Validation Techniques

  • Different validation checks include:

    • Format Check: Ensuring data follows a defined format.

    • Field Length Check: Verifying data does not exceed specified length.

    • Field Presence Check: Confirming that required fields are filled.

    • Range Check: Ensuring data falls within a specified range.

    • Lookup Table: Cross-referencing against a predefined list.

    • Check Digit: Validating numbers with an additional check digit.

Tools and Techniques for Accounting Data Processing

Data Input Methods:

  • Typed Entries: Manual data entry by bookkeeping staff.

  • Barcode Readers: Scanning barcodes for efficiency.

  • Online Banking Integration: Automated updates of payments and receipts into the accounting system.

  • Smart Cards: Using payment and transport cards for transactions.

  • Mobile Devices: Utilizing mobile technology for data collection.

Data Storage and Processing

  • Servers: Central storage for data accessible by multiple devices.

  • Portable Storage Devices: External devices for saving data extracts.

  • Spreadsheets and Databases: Common tools for managing financial information.

  • Digitalization and Robotic Process Automation (RPA): Enhancing data processes and integrity.

Period-End Routines

  • Processes that clarify the financial status and ensure data integrity include:

    • Reconciliations: Identifying discrepancies between data sources.

    • Periodic Management Reporting: Providing financial insights for decision-making.

    • Account Closing: Finalizing accounts and correcting any anomalies.

Data Risks and Security

  • Data Security: Protecting data from unauthorized access is critical. Risks include:

    • Accidental destruction (e.g., fires).

    • Viruses corrupting stored data.

    • Security breaches leading to data theft.

    • Internal leaks of confidential information.

Data Protection Measures

  • Safeguards to ensure data integrity and security:

    • Employee Training: Instilling good security practices.

    • Physical Security: Controlling access to hardware systems.

    • Management Controls: Limiting access to sensitive data for privileged personnel.

    • Software Security: Keeping all applications updated for robust protection.

    • Good Disposal Practices: Securely disposing of unneeded documents and data.

Data Storage Management

  • Proper methods for storing data include:

    • Securing paper documents in locked cabinets.

    • Digital data protected with passwords and permissions.

    • Limiting access to confidential information.

Document Retention

  • Document retention refers to keeping business documents for a specified duration to:

    • Comply with Legislation: Meeting legal requirements for document storage.

    • Retrieve Historical Documents: Allowing reference to past information for resolving disputes.

Master Files

  • Master Files: Permanent files updated periodically containing critical business information:

    • Customer details (name, address, contact).

    • Supplier information.

    • Employee records.

    • Bank account details and business terms with banks.