ACC100 - Recording Financial Transactions: Business Transactions and Documentation

Business Transactions and Documentation

Terminology

  • Business: A commercial organization, large or small, that exists to trade and make a profit for its owner(s) by manufacturing and/or selling goods and services.
  • Bookkeeping: The daily process of recording a business's financial transactions into organized accounts.
  • Accounting: A system for recording and summarizing business and financial transactions, then analyzing, verifying, and reporting the results.
  • Sales: The exchange of goods or services for money.
  • Purchases: Buying goods for the main purpose of resale or use in a business.
  • Payments: Money paid out in cash/cheque or another form of payment.
  • Revenue: The total amount of income generated by the sale of goods or services.
  • Expenses: Costs associated with operating a business to earn revenue, recorded in the same period they are used.
  • Income: A broader term than sales, including other means of collecting money.
  • Expenditure: A payment or the incurrence of a liability in exchange for goods or services.
  • Profit: The excess of income over expenditure. Profits may be reinvested to generate additional income.
  • Loss: The excess of expenditure over income.

Transactions

  • Every business either:
    • Sells goods/services to customers and gets paid.
    • Buys goods/services from suppliers and pays.
  • Most business transactions are either:
    • Cash transactions
    • Credit transactions
Cash Transaction
  • Payment is made/received in advance or immediately upon the exchange of goods or services.
Credit Transaction
  • Goods and services are exchanged, but payment is not received immediately.
  • Payment occurs later, as agreed upon by the buyer and seller.
  • The timing of recognizing a sale or purchase differs from when cash is received or paid.
  • A gap exists between the sale/purchase and the actual cash payment.
  • Possible events during this gap can alter the final cash payment amount.
Business Documentation
  • Transactions are documented at each stage when a business sells or buys goods.
  • Documentation can be electronic or in paper form.
  • Documents are used by both the seller and the buyer.
Examples of Business Documentation:
  1. Cheque
  2. Credit Memo or Note
  3. Debit Memo or Note
  4. Delivery Note (Dispatch Note/Goods Received Note)
  5. Paying-In Slip
  6. Journal Voucher
  7. Petty Cash Voucher
  8. Purchase Requisition
  9. Purchase Invoice
  10. Purchase Order
  11. Cash Receipt
  12. Remittance Advice
  13. Sales Invoice
  14. Sales Order
  15. Statement of Account
Other Source Documents
  1. Time Sheet
  2. Bank Statement
Flow of Business Documentation
  • Purchaser:
    • Wants to buy - places order.
    • Receives goods and checks them.
    • Receives Invoice
    • If faulty, goods returned to the supplier, Debit Note prepared by Purchaser.
    • Receives Statement of Account.
    • Sends Remittance Advice with Payment.
  • Seller:
    • Receives Order.
    • Goods Dispatched, Delivery/Dispatch Note.
    • Sends invoice request for payment.
    • Receives faulty goods and Debit Note, Credit Note (prepared by Seller).
    • Sends credit note showing refund/allowance.
    • Send Statement of Account requesting payment.
    • Receives remittance advice with payment.
Internal Documentation
  • Generated inside the business.
  • Examples:
    • Inventory Lists
    • Purchase Orders
    • Supplier’s List
    • Staff Schedules and Time Sheets
    • Goods Received Notes
    • Sales Invoices
    • Payments Received
    • Expense Claims
    • Debit Note
External Documentation
  • Generated outside the business.
  • Examples:
    • Purchase Invoices
    • Quotations
    • Banking Documents (cancelled cheques, deposit slips, bank statements)
    • Letter of Acknowledgement
    • Delivery Note
    • Payments Made
    • Credit Note

Documentation in Detail

Sales Order
  • Order is received from customer.
  • A credit check is done before order processing.
Delivery Note
  • Goods are delivered to the customer.
  • Customer signs the delivery note.
Sales Invoice
  • Invoice is created from the delivery note and sales order.
  • Invoice is sent to the customer.
Recording of Sales Invoice
  • This is the first accounting entry made for the credit sales transaction.
Recording Payment Received
  • Customer pays, and the account is updated.
Purchase Requisition
  • A properly authorized request is sent to the Purchasing Department to purchase item(s).
Purchase Order
  • The buyer places an order with a supplier after checking prices and delivery periods.
Purchase Invoice
  • An invoice is received from the supplier.
Recording of Purchase Invoice
  • This is the first accounting entry made for the credit purchase transaction.
Recording Payment
  • The invoice is paid, and the payment is recorded.

Invoices

  • Created for sales or purchases.
  • It is a request for payment from seller to buyer.
Main parts of an Invoice:
  • Seller’s name, address, and telephone number
  • Purchaser’s name, address, and telephone number
  • Invoice number
  • Date of the Transaction
  • Description of what is being sold
  • Quantity and unit price of what is being sold
  • Total amount of the invoice including any details of sales tax and discounts
  • Date payment is due
Additional Information on Invoice:
  • FOB: Freight on Board
  • Ex Works: The buyer of a shipped product pays for the goods when they are delivered to a specified location
  • E & OE: Errors and Omissions Excepted
Invoice Copies
  1. Sent to purchaser (Request to pay for the goods)
  2. Kept as a file copy (So that the business can prove sale)
  3. Delivery Note (Sent to customer for signature and then retained by seller)
  4. Advice Note (Signed and kept by purchaser)
Sale Order Sets
  1. Sent to customer (Confirming order)
  2. Sent to warehouse (Arranging delivery to customer)
  3. Kept in Sales Department (Dealing with customer queries about orders)
  4. Passed to ‘accounts’ (Used to process an invoice)
  5. Sent with goods (Acting as advice note for the order - customer keeps)
  6. Sent with goods (Acting as delivery note for the order – seller keeps)
  7. Kept in warehouse (Used for dealing with customer queries)
Purchase Order Sets
  1. Sent to supplier (Used to place or confirm order)
  2. Kept in purchasing department or warehouse (Used for reference for supplier’s order and delivery note)
  3. Accounts department (Used to verify order)