FIA Recording Financial Transactions FA1 PDF

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ACCA Diploma in Financial and Management Accounting (RQF Level 2)

FA1 Recording Financial Transactions STUDY TEXT

British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. Published by: Kaplan Publishing UK Unit 2 The Business Centre Molly Millars Lane Wokingham RG41 2QZ ISBN: 978-1-78740-381-9

 Kaplan Financial Limited, 2019 Printed and bound in Great Britain. Acknowledgments These materials are reviewed by the ACCA examining team. The objective of the review is to ensure that the material properly covers the syllabus and study guide outcomes, used by the examining team in setting the exams, in the appropriate breadth and depth. The review does not ensure that every eventuality, combination or application of examinable topics is addressed by the ACCA Approved Content. Nor does the review comprise a detailed technical check of a the content as the Approved Content Provider has its own quality assurance processes in place in this respect. We are grateful to the Association of Chartered Certified Accountants for permission to reproduce past examination questions. The answers have been prepared by Kaplan Publishing. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Kaplan Publishing. The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. P .2

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CONTENTS Page Introduction

P.5

Syllabus and study guide

P.7

The examination

P.11

Study skills and revision guidance

P.13

Chapter 1

Business transactions

1

2

Types of business documentation

11

3

Double entry bookkeeping

35

4

Banking: payments and receipts

71

5

Sales and sales records

103

6

Recording sales

133

7

Purchases and purchase records

155

8

Recording purchases

179

9

Recording receipts and payments

189

10

Maintaining petty cash records

211

11

Payroll

231

12

Bank reconciliations

261

13

Control accounts

279

14

The trial balance

305

Answers to activities and exam-style questions

329

Index

383

Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to [email protected] with full details. Our Quality Co-ordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions.

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INTRODUCTION This is the new edition of the Foundations in Accountancy study text for FA1, Recording Financial Transactions, approved by the ACCA and fully updated and revised according to the examiner’s comments. Tailored to fully cover the syllabus, this study text has been written specifically for Foundations level students. A clear and comprehensive style, numerous examples and highlighted key terms help you to acquire the information easily. Plenty of activities and self-test questions enable you to practise what you have learnt. At the end of most of the chapters you will find multiple-choice questions. These are exam-style questions and will give you a very good idea of the way you will be tested.

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THE EXAMINATION Format of the examination 50 multiple-choice questions (2 marks each) Time allowed: 2 hours

Number of marks 100

This is a computer-based examination.

Computer-based examinations •

Be sure you understand how to use the software before you start the exam. If in doubt, ask the assessment centre staff to explain it to you.

•

Questions are displayed on the screen and answers are entered using keyboard and mouse. At the end of the examination, you are given a certificate showing the result you have achieved.

•

Multiple choice questions may ask for numerical answers, but could also involve paragraphs of text which require you to select a narrative, rather than numerical, answer. This could be, for example, requiring you to select the correct definition from several possible answers.

•

Don’t panic if you realise you’ve answered a question incorrectly – you can always go back and change your answer.

Answering the questions Multiple-choice questions – read the questions carefully and work through any calculations required. This examination comprises a mixture of narrative and computational questions. If you don’t know the answer, eliminate those options you know are incorrect and see if the answer becomes more obvious. Remember that only one answer to a multiple-choice question can be right! If you get stuck with a question skip it and return to it later. Answer every question – if you do not know the answer, you do not lose anything by guessing. Towards the end of the examination spend the last five minutes reading through your answers and making any corrections. Equally divide the time you spend on questions. In a two-hour examination that has 50 questions you have about 2.4 minutes per a question. Do not treat multiple-choice questions as an easy option. Do not skip any part of the syllabus and make sure that you have learnt definitions, know key words and their meanings and importance, and understand the names and meanings of rules, concepts and theories.

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Chapter 1

BUSINESS TRANSACTIONS This chapter introduces the common types of business transaction. Later chapters will look at how transactions are recorded, how accounting records are controlled and how the accuracy of these is scrutinised.

CONTENTS 1

Types of business transaction

2

Cash and credit transactions

3

Terminology

4

Petty cash

5

Payroll

6

Keeping a record

7

Key personnel

8

Control over transactions

9

Timing of transactions

LEARNING OUTCOMES At the end of this chapter, you should be able to: •

understand the main types of transaction that a business is likely to undertake

•

distinguish between cash and credit transactions

•

distinguish between transactions in goods and in services

•

distinguish between receipts and payments and income and expenditure

•

understand the need to document business transactions

•

identify the key personnel involved in initiating, processing and completing transactions

•

understand the need for effective control over transactions

•

identify the timing of various transactions.

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F A 1 : R E C O R D I N G F I N A N C I A L T R A N SA C T I O N S

1

TYPES OF BUSINESS TRANSACTION Every business sells goods or services to customers and gets paid for what it sells. Every business buys goods and services from suppliers, and pays for what it buys. For example, retail businesses such as department stores and supermarkets have to buy goods for resale to shoppers, and a garage has to buy car parts and components to do repairs on customers' cars. Businesses buy stationery and computers for their office work. Many businesses have employees, and have to pay for their labour. All businesses incur expenses for various services, such as the supply of electricity, telephone services, property rental costs and local taxation (business rates).

2

CASH AND CREDIT TRANSACTIONS Most business transactions for buying and selling goods or services are either cash transactions or credit transactions. •

With a cash transaction, the buyer pays for the item either upon exchange of goods/services or they pay in advance. For example, sales in a shop or supermarket are cash transactions, because the customer pays at the cash desk or check-out point.

•

With a credit transaction, the buyer doesn't have to pay for the item on receipt, but is allowed some time (a 'credit period') before having to make the payment.

Example of a credit transaction Velocity Book Publishers places an order with a printing company, Q Print, to print 5,000 copies of a new book they are publishing. Q Print agree to print the books and Velocity Book Publishers will be given up to 60 days to pay after the books have been printed. Q Print delivers the books into the warehouse of Velocity Book Publishers on 1 March, and submits a demand for payment (known as an invoice) for $15,000, payable on or before 1 May. This is a credit transaction because Velocity Book Publishers does not have to pay for the purchased items when it orders the books, nor even when the books are received. Instead, it has been given time to pay after the goods have been received. Most transactions between two businesses are credit transactions. In other words, businesses usually buy from other businesses and sell to other businesses on credit. The credit terms, such as how long the buyer has to pay, are agreed between the buyer and the supplier in advance. Cash

2

Credit

Sale

Goods or a service are provided and the customer pays immediately.

Goods or a service are provided and the customer pays later.

Purchase

Goods or a service are purchased and paid for immediately.

Goods or a service are purchased and paid for later.

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BU SI N E SS T R A N SA C T I O N S : C HA P T E R 1

ACTIVITY 1 Abdul is given a haircut by Michael, who is a self-employed hairdresser. Abdul pays with a $10 note. 1

2

What kind of transaction is this? A

Sale of goods by Michael

B

Sale of a service by Abdul

C

Purchase of goods by Michael

D

Purchase of a service by Abdul

What kind of transaction is this from Michael’s point of view? A

Cash sale

B

Credit sale

C

Cash purchase

D

Credit purchase For a suggested answer, see the ‘Answers’ section at the end of the book.

Every purchase from one person or firm’s point of view is a sale from the view of the other party to the transaction. The purchaser makes payment and seller receives it in exchange for the goods or services supplied.

3

TERMINOLOGY Precise terminology is important in book-keeping and accounts. Key terms are given at the end of each chapter to highlight appropriate terminology. It is important to be clear on the following: •

Sales – the exchange of goods or services for money. Terms such as commission and fees are also used instead of sales for some services.

•

Purchases – buying goods for resale or consumption.

•

Receipts – money received, often but not exclusively, from cash sales.

•

Payments – money paid out in cash or by cheque or other form of bank payment as described below.

•

Income – a more general term than sales including also interest received, rent received from letting part of the business premises and so on.

•

Expenses – indicates money spent for rent, electricity for lighting, telephone accounts and so on. This does not include purchases of goods for resale.

•

Expenditure – includes purchases, expenses and money spent on buying anything else for the organisation.

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F A 1 : R E C O R D I N G F I N A N C I A L T R A N SA C T I O N S

3.1

METHODS OF PAYMENT You need to know about the different methods of receiving payments from customers, or making payments to a supplier. Four common methods of receiving payments and making payments are used in many businesses: •

payments in 'cash', in other words, in notes and coins

•

payments by debit and credit cards and electronic payment methods

•

payments by cheque

•

automated receipts and payments through the business bank accounts. Examples are standing orders and direct debits.

Receiving and making payments by each of these methods will be described in later chapters.

4

PETTY CASH Most businesses prefer to make as few payments in notes and coins ('cash') as possible. It is more secure to pay by cheque or online because there is less risk of loss or theft. However, sometimes it is more convenient, or even necessary, to make payment in cash. Examples of items that might be paid for by a business in cash might include the following: •

payment for small office expenses such as coffee, biscuits, stamps etc

•

payment for taxi fares for business purposes

•

payment for travel costs such as rail and bus for business purposes

•

payment for flowers to send to an employee who is off sick.

A small amount in cash is held on business premises for such purposes. In a business that rarely makes cash transactions, such as a large engineering firm, this is convenient. In the type of business that regularly handles cash such as a restaurant, it is useful to keep a small amount of petty cash separate from income received from sales. This makes it easier to reconcile the cash received with the records of meals served and investigate any discrepancies than it would be if a number of employees were able to take cash from the sales income to spend on various expenses at any time.

5

PAYROLL Many businesses have employees who are paid by the employer for the work they do. Most employers will have a set day on which employees should be paid, and it is the payroll department's responsibility to ensure that wages are paid on the correct due days. Weekly paid employees (wage earners) will be paid at least once a week, normally on the same day each week. Commonly the pay day will be either Thursday or Friday if the working week is from Monday to Friday.

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BU SI N E SS T R A N SA C T I O N S : C HA P T E R 1

Monthly paid employees (salary earners) will be paid once a month, and there will be a formula for determining the pay day. For example, this may be: •

the last day of the calendar month

•

the last Thursday or Friday of the calendar month

•

the same date each month, such as the 26th.

Employees may be paid their wages in several ways: •

in cash

•

by cheque

•

by bank transfer

•

through the Banks Automated Clearing System (BACS).

Making payments by these methods will be described in later chapters. The payroll department also makes payments to outside agencies, such as tax and social services authorities and pension schemes.

ACTIVITY 2 1

2

3

Which of the following terms would be used to classify a payment for electricity to heat the business premises of a firm of plumbers? A

Expense

B

Purchase

C

Receipt

D

Sales

Which of the following would be paid for by petty cash? A

Car repairs on the business owner’s private vehicle

B

Packet of envelopes at local store

C

Paying a supplier for goods bought on credit

D

Wages and salaries

Which of the following transactions are associated with payroll? A

Income from cash sale of computer used to calculate salaries

B

Postage and stationery, office expenses

C

Taxes on employee income, pension scheme payments, wages

D

Credit purchase of safety equipment for delivery staff For a suggested answer, see the ‘Answers’ section at the end of the book.

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F A 1 : R E C O R D I N G F I N A N C I A L T R A N SA C T I O N S

6

KEEPING A RECORD A business keeps detailed records of its sales, purchases, receipts and payments. There are several reasons for keeping records. •

A business needs to keep track of how much it owes to its suppliers and how much it is owed by credit customers.

•

Records of sales and purchases are useful in the event of a query or dispute with a customer or supplier.

•

Keeping records of transactions means that checks can be carried out to make sure that they have been processed honestly, and that there have been no mistakes or fraud.

•

Keeping records of sales, purchases and other expenses allows a business to monitor how well it is performing, and whether it is making a profit or a loss.

Similar reasons apply to keeping petty cash records. Payroll records must also be maintained to ensure that employees are properly rewarded for their work and to ensure that correct deductions are made. Transactions are recorded in accounts. The system of recording transactions is therefore called the accounting system or the bookkeeping system. The system organises transactions into sets of structured ledger accounts. Accounting records will be explained in later chapters. To maintain records, it is important to maintain documents providing evidence of transactions. Chapter 2 looks at these documents in some depth.

7

KEY PERSONNEL In most businesses it is likely that a number of different people will be involved in different types of business transaction. For example, in a department store, the sales will be made by the shop floor assistants. The purchases of goods for resale will be made by the departmental buyers. The general expenses will be paid by the accounts department, the wages by the payroll department and any purchases of equipment will probably be made by the store manager. In a large organisation the number of people involved in business transactions may be in the thousands so it is important to h...