M02 Revision Questions

• Business transactions are recorded on source documents like sales and purchase orders, invoices, and credit notes.

Types of Source Documents

• When a business transaction occurs, it is typically recorded in a document.
• These documents serve as the information source for a business's records.
• Source documents record business transactions in the accounts.
• Sales Order: Customer's request for goods/services.
• Purchase Order: A business's order for goods/services.
• Goods Received Note: List of goods a business receives from a supplier, usually from the warehouse.
• Goods Despatched Note: List of goods a business sends to a customer.
• Invoice: Request for payment, details below.
• Statement: Sent by a supplier, listing invoices, credit notes, and payments.
• Credit Note: Issued for goods returned/overpayments, acts as a 'negative' invoice.
• Debit Note: Formal request for a credit note due to returned goods/overpayment.
• Remittance Advice: Sent with payment, detailing invoices/credit notes paid/offset.
• Receipt: Confirmation of payment, common for cash sales.
• Bank Statements: Allows checking of bank balance, used in more detail in Module 6.

Invoices

• An invoice relates to a sales order or a purchase order.
• Businesses send invoices to customers for goods/services sold on credit, matching sales order details.
• Businesses receive invoices from suppliers for goods/services bought on credit, matching purchase order details.
• Invoices are primarily payment demands but also serve other purposes.

Invoice Contents

• Most invoices are numbered.
• Includes seller/purchaser names/addresses, sale date, item description, quantity, price.
• Details trade discounts, total including sales tax/GST/VAT, payment due date, and terms.
• Cash or settlement discounts and discounted amount are included.

Credit Notes

• Sent after an invoice error or returned goods, from China Supplies.
• A credit note is sometimes printed in red to distinguish it from an invoice.
• Details are less than an invoice
• The credit note can be regarded as a negative invoice.

Other Documents

• Debit notes are issued to suppliers to formally request credit notes
• Goods received notes (GRNs) are issued by warehouse department for the receipt of goods, they may supplement supplier advice notes.
• The accounts department may require a GRN before invoice payment to verify receipt of goods.
• Details of supplier consignments arriving without advice notes should be recorded.

Main Types of Business Transactions

• Cash sales leads to the issuance of a receipt
• Credit sales leads to the issuance of an invoice to the customer
• Sales returns lead to the issuance of a credit note to the customer
• Cash purchases leads to the receipt of a receipt
• Credit purchases leads to the receipt of an invoice from the supplier
• Purchase returns leads to the receipt of a credit note from the supplier
• Receipts are issued for cash sales or from credit customers for credit sales
• Payments are issued for cash purchases or to credit suppliers

Ledger Accounts

• Used to record transactions
• Ledger accounts are in the general ledger, also known as the nominal ledger.
• Businesses record transactions and keep track of assets and liabilities.
• The records should be kept chronologically and cummulatively
  • Day by day, week by week, month by month, year by year

The General Ledger

• Summarizes financial affairs

• Contains all ledger accounts

• Known as the nominal ledger in some systems

• Contains details of assets, liabilities, capital, income, expenditure and profit/loss; accounts are named/coded. Examples include:

  • Machinery at cost (non-current asset)
  • Motor vehicles at cost (non-current asset)
  • Machinery, accumulated depreciation (liability)
  • Motor vehicles, accumulated depreciation (liability)
  • Proprietor's capital (a form of liability)
  • Inventories raw materials (current asset)
  • Inventories – finished goods (current asset)
  • Trade receivables control account (current asset)
  • Trade payables control account (current liability)
  • Wages and salaries (expense item)
  • Rent and local taxes (expense item)
  • Advertising expenses (expense item)
  • Bank charges (expense item)
  • Motor vehicle expenses (expense item)
  • Telephone expenses (expense item)
  • Sales (revenue item)
  • Total cash or bank overdraft (current asset or liability).

• Income and expense used to form statement of profit/loss, while assets and liabilities goes into the statement of financial position.

Format of a General Ledger Account

• T-account structure
  • Top: Name of account
  • Left: Debit side
  • Right: Credit side

Double Entry Bookkeeping

• Based on the idea that each transaction has an equal but opposite effect.
• Accounting event must be entered as a debit and credit. A debit entry will:
  • Increase an asset
  • Decrease a liability
  • Increase an expense

A credit entry will: - Decrease an asset - Increase a liability - Increase income

Dual Effect (Duality Concept)

• Double entry is used to record transactions.
• Every transaction has two effects- dual effect Double entry accounting
• Car bought for cash
  • The owner owns the car
  • The owner now has less cash
• Car bought on finance
  • The owner owns the car
  • The owner owes the bank.

Rules of Double Entry

• Every transaction results in debit and credit entries.
• Total debit value equals total credit value.
• Account of credit/debit depends on transaction nature.
• Increase in expense or assets is a debit entry.
• Increase in revenue or liability is a credit entry.
• Decrease in asset is credit entry
• Decrease in liability is debit entry

Cash transactions

• A cash payment is a credit entry - the asset is decreasing - payments for expenses, buying assets
• A cash receipt is a debit entry - the asset is imcreasing - retailer who makes a cash sale

Credit Transactions

• Most transactions are not settled immediately.
• Trade payables are amounts owed to suppliers.
• Trade receivables are amounts owned by customer.
• Use trade payables and trade receivables accounts.
• Trade payables controls are single accounts in which all trade payables transactions are recorded.

When Cash is Paid to Suppliers or by Customers

• Cash paid is a credit entry to the cash at bank
• The amount owwing is a debit to the trade payables control account

Trade Receivables Control Account

• Credit for cash payments from customer When cash is received from a credit customer
• The amount owed by the customer is reduced (credit entry to trade receivables control)

The General Journal

• Used to record transactions not part of the main business transactions
• Mechanism for recording individual transactions
• Used for corrections
• Used to record unusual or non-routine movement between accounts
• Double entry made which do not arise from the main business transactions. The term 'Journal entry' records all such details as: date, account, debited, credited, amount, narrative

Entering Transactions to the General Ledger Accounts

• Sales on credit are debited to the trade receivables control accounts and credited to the sales accounts
• Purchases on credit are debited to the purchase or expenditure accounts and credited to the trade payables controls account.
• Cash received for credit sales if debited to cash at bank account and credited to the trade receivables control account.
• Cash paid for credit purchase is debited to the trade payables control account and credited to the cash at bank accounts.

The Trade Receivables And Trade Payables Ledgers

• Contain the personal accounts of individual customers and susppliers
• Also known as the memorandums
• Do not normally fork part of double entry ledger.

The Receivables and Payables ledger

• Personal accounts for each customer are stored here that can be used quickly by staff to establish current debt.
• To maintain financial records in case of telephone queries statements are sent to credit customers outlining new invoices and past payments
• Helps keeping a check on credit position of individual customer
• Crucially payments received against debts can easily be tracked.

Electronic Payments

• Pay suppliers by direct transfers of funds from their bank account.
• Batch processing payments, done in a single payment run.
• Payables paid electronically
  1. System generates a list of all the ouitstanding payments.
  2. A file is generated of the bank account number, BSB and amount
  3. The file is transferred to specialised payment software
  4. Bank makes the payments specified

Accounting Software Packages

• Has a coding system that enables the transaction to be processed both efficiently and meaningfully

Coding example

• Assigning numerical codes to group different types of accounts together. For example;
  • account code 100200 may be : plant and machinery (cost) and:
  • account code 100201 : Plant and machinery depreciation.
  • This allows for easy categorization and retrieval of the different types of accounts

Entering Transactions

• Transactions are entered from the suppliers invoice eiter as a batch or creating individual records for the transactions
• The systems are set up to post the credit sides of the transaction to the trade payables control accounts
• Once the details are entered and saved, the system automatically posts the transaction both to the memorandum ledger and the general ledger

Data Import and Bank feeds

• Accounting software enables a large numbers of transactions to be facilitated into the system by importing data
• Files need to be in a tabular format such as csv for files to be imported properly
• some accounting software have the functionality to have Bank feeds for bank transactions directly to the accounting systems