• Document: FIA FA1. Recording Financial Transactions
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FIA FA1 Recording Financial Transactions Chapter 1 Business transactions and documentation What is a business? Business transactions Discounts Sales tax Storage of information What is a business? Business • The purpose of a business is to make a profit for its owner(s) • Profit = income less expenditure • A business is a separate entity from its owner • Every financial transaction has a dual effect • Double entry bookkeeping accounts for the dual aspect of financial transactions Slide 3 Business transactions • 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. Slide 4 Business transactions Business transactions are recorded on documents. These are the source of information in accounts and include: • Letter of enquiry • Goods received note • Quotation • Invoice • Sales/purchase order • Credit note • Delivery note • Till receipt • Inventory list • Cheque • Supplier list • Staff timesheet Slide 5 Business transactions • 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. Slide 6 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. There are two types of discount: • Trade discount • Cash discount Slide 7 Discounts Trade discount • A reduction in the amount of money demanded from a customer • Usually results from buying goods in bulk • Given on supplier’s invoice • No separate accounting required Slide 8 Discounts Cash discount • An optional reduction in the amount of money payable by a customer • Given for immediate or very prompt payment financing decision • Needs to be recorded separately in the books of account Slide 9 Sales tax Sales tax • Is an indirect tax levied on the sale of goods and services • Administered by tax authorities • Can have a number of rates, eg standard rate, reduced rate Slide 10 Sales tax Output sales tax • Sales tax charged by the business on goods/services Input sales tax • Sales tax on purchases made by the business Slide 11 Sales tax Output tax is greater than input tax? • Pay difference to tax authorities Input tax is greater than output tax? • Refund due to business Slide 12 Storage of information 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. Slide 13 Storage of information Storage of information • Information stored about individuals is regulated by Data Protection legislation. Slide 14 Chapter 2 Assets, liabilities and the accounting equation The accounting equation Accounts receivable and payable Double entry Capital and revenue expenditure The accounting equation • The accounting equation says: Assets = Capital + Liabilities Slide 16 The accounting equation • Asset – something which a business owns or has the use of • Liability – something which the business owes to someone else • Capital – investment of funds to earn a return. Capital is owed to the owner • Drawings – are amounts of money taken out of a business by its owner Slide 17 Accounts receivable and payable Trade account receivable • An account receivable is a person to whom the business has sold items and by whom the business is owed money. • A receivable is an asset of a business (the right to receive payment is owned by the business). Slide 18 Accounts receivable and payable Trade account payable • An account payable is a person from whom a business has purchased items and to whom a business owes money. • An account payable is a liability of the business. Slide 19 Double entry 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 liabi

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