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I N T E R A INTRODUCTORY C T PAPER 1 I V RECORDING FINANCIAL E TRANSACTIONS (INTERNATIONAL) T E X BPP is the official provider of training materials for the ACCA's CAT qualification. This Interactive Text forms part of a suite of learning tools, which also includes CD-ROMs T for tuition and computer based assessment, and the innovative, internet-based Learn Online. This text has been specifically written to the current syllabus and Teaching Guide. • Clear language and presentation ••ThiNganHang.comtechniquesPlenty of questions, examples and quizzes to demonstrate and practiseA question and answer bank prepared by BPP Learning Media authors FOR EXAMS IN DECEMBER 2008 AND JUNE 2009 ThiNganHang.com
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First edition 2003 Sixth edition June 2008 ISBN 9780 7517 4830 7 (Previous ISBN 07517 3577 2) British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library All our rights reserved. No part of this publication may be Published by reproduced, stored in a retrieval system or transmitted, in BPP Learning Media Ltd any form or by any means, electronic, mechanical, BPP House, Aldine Place photocopying, recording or otherwise, without the prior London W12 8AA written permission of BPP Learning Media Ltd. www.bpp.com/learningmedia We are grateful to the Association of Chartered Certified Accountants for permission to reproduce past Printed in Great Britain by examination questions. The suggested solutions in the WM Print exam answer bank have been prepared by BPP Learning 45-47 Frederick Street Media Ltd, unless where otherwise stated. Walsall West Midlands WS2 9NEYour learning materials, published by BPPThiNganHang.com Learning Media Ltd, are printed on paper sourced from sustainable, managed forests. © BPP Learning Media Ltd 2008 ii ThiNganHang.com
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Contents Page Introduction How to use this Interactive Text v Approach to examining the syllabus vi The computer based examination vii Tackling multiple choice questions viii Part A Introduction to transaction accounting 1 Business transactions and documentation 3 2 Assets, liabilities and the accounting equation` 31 3 Statement of financial position and income statement 45 4 Recording, summarising and posting transactions 53 5 Completing ledger accounts 87 Part B Recording and accounting for cash transactions 6 Receiving and checking money 117 7 Banking monies received 135 8 Recording monies received 157 9 Authorising and making payments 169 10 Recording payments 197 11 Maintaining petty cash records 211 12 Bank reconciliations 247 Part C Recording and accounting for credit transactions 13 Sales and sales returns day books 263 14 The receivables ledger 285 15 Purchase and purchase returns day books 309 16 The payables ledger 333 17 Control accounts 351 Part D Payroll 18 Recording payroll transactions 363 Exam question bank 401 Exam answer bank 408 List of key terms 413 ThiNganHang.comIndex 415 Review form and free prize draw Contents iii ThiNganHang.com
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How to Use this Interactive Text Aim of this Interactive Text To provide the knowledge and practice to help you succeed in the examination for Paper 1 Recording Financial Transactions (International). To pass the examination you need a thorough understanding in all areas covered by the syllabus and teaching guide. Recommended approach (a) To pass you need to be able to answer questions on everything specified by the syllabus and teaching guide. Read the text very carefully and do not skip any of it. (b) Learning is an active process. Do all the questions as you work through the text so you can be sure you really understand what you have read. (c) After you have covered the material in the Interactive Text, work through the Question Bank, checking your answers carefully against the Answer Bank. (d) Before you take the exam, check that you still remember the material using the following quick revision plan. (i) Read through the chapter topic list at the beginning of each chapter. Are there any gaps in your knowledge? If so, study the section again. (ii) Read and learn the key terms. (iii) Look at the exam alerts. These show the ways in which topics might be examined. (iv) Read the chapter roundups, which are a summary of the fast forwards in each chapter. (v) Do the quick quizzes again. If you know what you're doing, they shouldn't take long. This approach is only a suggestion. You or your college may well adapt it to suit your needs. Remember this is a practical course. (a) Try to relate the material to your experience in the workplace or any other work experience you may have had. (b) Try to make as many links as you can to other papers at the Introductory and Intermediate levels. ThiNganHang.com Introduction v ThiNganHang.com
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Approach to examining the syllabus Paper 1 is a two-hour paper. It is taken as a computer based examination. The questions in the computer based examination are multiple choice questions. (See page vii for frequently asked questions about computer based examinations.) Important note Past papers refer to 'doubtful debts' and the 'provision for doubtful debts'. From the December 2005 examination, these have been referred to as 'receivables allowances' or 'allowances for receivables' and this is the terminology we use in this text. The written examination consists of three sections, structured as follows: Number of marks 50 compulsory multiple choice questions of two marks each 100 Analysis of past papers Pilot paper and all past papers Fifty multiple choice questions covering various topics 100 It is important that you practice as many multiple choice questions as possible before your exam. There are questions for you to do at the end of this text and over 200 questions in the Practice and Revision Kit for CAT Paper 1. BPP I-Pass will then give you further practice in a computer environment. See over for important advice on tackling multiple choice questions Student Accountant 2006 has a useful article: Five steps to multiple choice success by Steve Widberg. You can access this article via the ACCA website. ThiNganHang.com vi Introduction ThiNganHang.com
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The Computer Based Examination The ACCA has introduced a computer based examination (CBE) for CAT Papers 1–4 (in addition to the conventional paper based examination for papers 3 and 4). Computer based examinations must be taken at an ACCA CBE Licensed Centre. How does CBE work? • Questions are displayed on a monitor • Candidates enter their answer directly onto the computer • Candidates have two hours to complete the examination • When the candidate has completed their examination, the computer automatically marks the file containing the candidate's answers • Candidates are provided with a certificate showing their results before leaving the examination room • The CBE Licensed Centre uploads the results to the ACCA (as proof of the candidate's performance) within 48 hours Benefits • Flexibility as a CBE can be sat at any time. • Resits can also be taken at any time and there is no restriction on the number of times a candidate can sit a CBE. • Instant feedback as the computer displays the results at the end of the CBE. • Results are notified to ACCA within 48 hours. • Extended closing date periods (see ACCA website for further information) CBE question types • Multiple choice – choose one answer from four options • Multiple response 1 – select more than one response by clicking the appropriate tick boxes • Multiple response 2 – select a response to a number of related part questions by choosing one option from a number of drop down menus • Number entry – key in a numerical response to a question CAT CBE ThiNganHang.comYou will have two hours in which to answer a number of questions, which are worth a total of 100 marks. See the ACCA website for a demonstration and up to date information (www.acca.org.uk/colleges/cbe_demo). Introduction vii ThiNganHang.com
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Tackling Multiple Choice Questions MCQ's are now part of all CAT exams. Papers 1 and 2 are examined by CBE, Papers 3 and 4 can be taken by CBE or by a written paper which is 40% MCQs. Paper 5 is now 50% MCQ's and Papers 6-10 are 20% MCQs. All MCQs carry 2 marks. The MCQs in your exam contain four possible answers. You have to choose the option that best answers the question. The three incorrect options are called distracters. There is a skill in answering MCQs quickly and correctly. By practising MCQs you can develop this skill, giving you a better chance of passing the exam. You may wish to follow the approach outlined below, or you may prefer to adapt it. Step 1 Skim read all the MCQs and identify what appear to be the easier questions. Step 2 Attempt each question – starting with the easier questions identified in Step 1. Read the question thoroughly. You may prefer to work out the answer before looking at the options, or you may prefer to look at the options at the beginning. Adopt the method that works best for you. Step 3 Read the four options and see if one matches your own answer. Be careful with numerical questions as the distracters are designed to match answers that incorporate common errors. Check that your calculation is correct. Have you followed the requirement exactly? Have you included every stage of the calculation? Step 4 You may find that none of the options matches your answer. • Re-read the question to ensure that you understand it and are answering the requirement • Eliminate any obviously wrong answers • Consider which of the remaining answers is the most likely to be correct and select the option Step 5 If you are still unsure make a note and continue to the next question Step 6 Revisit unanswered questions. When you come back to a question after a break you often find you are able to answer it correctly straight away. If you are still unsure have a guess. You are not penalised for incorrect answers, so never leave a question unanswered! After extensive practice and revision of MCQs, you may find that you recognise a question when you sit the exam. Be aware that the detail and/or requirement may be different. If the question seems familiar read the requirement and options carefully – do not assume that it is identical. ThiNganHang.com viii Introduction ThiNganHang.com
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Business transactions and documentation Topic list 1 Types of business transaction 2 Documenting business transactions 3 Invoices and credit notes 4 Discounts, rebates and allowances 5 Sales tax 6 Contract law 7 Storage of information 8 Data protection ThiNganHang.com 3 ThiNganHang.com
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Study guide Syllabus reference 1 (a) Identify the main types of business transactions eg, sales, purchases, 1a payments, receipts, cash and bank and payroll (b) Define a simple contract 1c (c) Identify the main provisions of a sale of goods act or equivalent (fitness for 1c purpose, merchantable quality, description) (e) Distinguish between cash and credit transactions 1a (i) Understand the need to document business transactions 1b (j) Explain the purpose and scope of data protection, storage and archiving 1c policies (k) Distinguish between different types of business documentation 1b (l) Outline the contents and purpose of each piece of documentation 1b (m) Describe the documentation and the flow of documentation for different 1b transactions including Internet transactions 6 (a) Identify and recognise source sales documents 4a (b) Complete sales invoices and process credit notes/debit notes 4a (e) Calculate and record trade and settlement discounts 4a 8 (a) Identify and recognise source purchase and expenditure documents 5a (b) Complete purchase invoices and process credit notes 5a (c) Calculate and record trade and settlement discounts 5a 1 Types of business transaction FAST FORWARD Business transactions are of two main types: cash and credit. 1.1 Businesses In your studies for the ACCA Accounting Technician qualification, and specifically for this paper on transaction accounting, you will be concerned with business transactions. There is no one definition of a business, although we all know more or less what it is. Broadly speaking it is a commercial organisation, large or small, which exists to make money or profits for its owners. It may make this money by manufacturing and/or selling goods or services. ThiNganHang.com1.2 Business transactionsWherever property changes hands there has been a business transaction. The main types of business transactions are sales and purchases. Sales and purchases occur in two different ways, by cash or on credit. (a) A sale takes place at one of two points in time. (i) Cash sales. If the sale is for cash, the sale occurs when goods or services are given in exchange for immediate payment, in notes and coins, or by cheque or plastic card. (ii) Credit sales (goods are ordered and delivered before payment is received). If it is on credit, the sale occurs when the business sends out an invoice for the goods or services supplied; cash is received later. 4 1: Business transactions and documentation ⏐ Part A Introduction to transaction accounting ThiNganHang.com
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(b) A purchase also takes place at one of two points in time. (i) Purchases for cash. If the goods are paid for in cash then the purchase occurs when the goods and cash exchange hands. (ii) Purchases on credit. If the goods are bought on credit, the purchase normally occurs when the business receives the goods, accompanied by an invoice from the supplier. Cash is paid later. Key terms A cash transaction is one where the buyer pays cash to the seller at the time the goods or services are transferred. A credit transaction is a sale or a purchase which occurs some time earlier than cash is received or paid. With credit transactions, the point in time when a sale or purchase is recognised in the accounts of the business is not the same as the point in time when cash is eventually received or paid for the sale or purchase. There is a gap in time between the sale or purchase and the eventual cash settlement. (It is possible that something might happen during that time which results in the amount of cash eventually paid (if any) being different from the original value of the sale or purchase on the invoice.) There are other types of business transaction which need to be recorded. • Payment of wages • Borrowing money • Offering a discount The simplest form of business transaction is a cash transaction. 2 Documenting business transactions FAST FORWARD Business transactions can be evidenced by internal and external documentation. 2.1 External documentation It is usual to record a business transaction on a document. The amount of documentation required will vary depending on the type of transaction and the people involved. (a) If you buy a small item from a market stall and pay cash, it is unlikely that any documents would change hands unless you ask for a receipt. (b) By contrast, if you have a central heating system installed, the paperwork involved can include the following. (This is summarised in the diagram on page 6.) (i) First of all you get in touch with the central heating company either by phone, or by letter of enquiry. (ii) The central heating company will probably send round a sales engineer, at an agreed time, to visit you. The sales engineer will take a look at your residence and estimate how much ThiNganHang.comwork needs to be done. You will eventually receive a quotation detailing the price. (iii) Merely asking for a quotation does not commit you to anything. Should you wish to proceed with the quotation, the next thing you might do is send a letter accepting the quotation. You may, on the other hand, be required to sign a more formal sales order document, which you will return to the company. You should receive an acknowledgement. Part A Introduction to transaction accounting ⏐ 1: Business transactions and documentation 5 ThiNganHang.com
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parts tocentralheatingcompany Supplier of £ Purchase orderParts Delivery noteInvoice (2.2(e))Payment (2.2(f)) no tia tn e mu co company l d Central heating(Lots of internaldocumentation)an re Ext £ Enquiry (i)Visit (ii)Quotation (ii)Acceptance (iii)Acknowledgement (iii)Central heatersDelivery note/job sheet (vi)Invoice (vii)Payment (viii) ThiNganHang.comYOU (Customer) The above diagram gives a picture of the external documentation involved. We will not examine what happens inside the central heating company yet, but just look at the system as a whole. 6 1: Business transactions and documentation ⏐ Part A Introduction to transaction accounting ThiNganHang.com
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(iv) The sales order you have signed will be used by the central heating company as evidence of what you require. It gives them the 'go-ahead' to prepare and carry out the work. (v) A great deal of internal documentation will then be prepared. A record must be kept of the process of the installation and its costs. Also, the company might keep other documents. We will look at internal documentation in Paragraph 2.2 below. (vi) Your central heating system has now been installed. The central heating staff will ask you to sign a delivery note. (vii) The delivery note will be evidence to the company that the job has been completed. This is then taken to the accounts department for review. Eventually you will be sent a bill or invoice. If you are charged too much, you will in due course receive a credit note. (viii) At the end of the agreed period of credit that the company has allowed you, you will pay the invoice by cheque. (ix) The company, on receipt of your cheque, will ensure that it is banked, and recorded in the internal books of account. In this one business transaction, then, there has already been a large amount of paperwork. It is quite possible that some of this paperwork will not be paperwork at all. It might be automated, and the majority of the transactions will be carried out by computer. No matter, the principles are the same. Question Cash and credit transactions (a) A friend of yours who has no knowledge of accounting matters has asked you to explain the difference between a cash transaction and a credit transaction. What would you say to him? (b) State what documentation you would expect to change hands in the following circumstances. (i) You buy a CD from a shop, paying cash (ii) You have double glazing installed Answer (a) In a cash transaction you pay cash for the goods at the time they are supplied. In a credit transaction you do not pay until some time after the goods have been supplied. (b) (i) It is usual for shops to provide a till receipt, although the customer does not always take it or retain it. This is the only piece of business documentation that would need to change hands. (ii) This is a much more complicated transaction, and is likely to involve the following documents. (1) A letter of enquiry (2) A quotation (3) An order ThiNganHang.comThe quotation or the order acknowledgement might include details of the supplier's terms and(4)(5)(6) A delivery noteAn invoiceAn order acknowledgement conditions of business. If any part of the work is unsatisfactory, or if the firm overcharges, a credit note may also be issued. Part A Introduction to transaction accounting ⏐ 1: Business transactions and documentation 7 ThiNganHang.com
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2.2 Internal documentation Internal documents needed would include purchase orders, if some parts had to be purchased from other suppliers. A similar set of documents to the ones described above, but this time between the central heating company and its suppliers, would then be necessary. In addition there will be several other internal documents. (a) Inventory lists, to check that all the parts for the central heating system are available. Each part will be identified by its own specific code number. (b) Supplier lists, to trace from the code numbers of the parts which supplier manufactures which item of stock. (c) Staff schedules. The central heating company's engineers will travel from job to job, and it is thus probable that the right mix of qualified staff must be booked. They will record the actual hours they spend on a timesheet. (d) Goods received notes. When the parts ordered have been received, a goods received note might be raised by the goods inwards section to notify other sections that the parts have been received. (e) Invoices. The company will receive an invoice from its supplier which will be used to update the company's accounting records. A credit note may be required. (f) Cheques. The company will eventually pay the supplier by cheque. (g) Expense claims. Employees may incur expenses which need to be reimbursed. Are more documents involved? Plenty! This is for several reasons. (a) Yours will not have been the only central heating system installed. The organisation will have hundreds of transactions to schedule, to keep track of, to account for and to keep on a list of who owes it money. (b) The central heating company might also need a list of people to whom it owes money (the suppliers of parts for example). (c) The central heating company needs to ensure that it has enough cash at the right times to pay its bills, and to pay its employees. (d) Comparing what it earns with what it costs is important, as the company hopes to make a profit. ThiNganHang.com 8 1: Business transactions and documentation ⏐ Part A Introduction to transaction accounting ThiNganHang.com
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ThiNganHang.com Part A Introduction to transaction accounting ⏐ 1: Business transactions and documentation 9 ThiNganHang.com
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The diagram on the previous page summarises the internal documentation required by the central heating company. What does the accounting system actually do? Key term The purpose of the accounting system is to record, summarise and present the information contained in the documentation generated by transactions. In the case of the central heating company, this would entail the following. (a) The workers who installed the central heating system will expect to be paid. If they are paid an hourly rate, then the total number of hours they work in a period must be aggregated. This is the job of the payroll system, and is covered in Part D of this Interactive Text. (b) At defined periods the accounting system produces the following lists. • Those who owe the firm money (accounts receivable) • Those to whom the company owes money (accounts payable) This is the job of the receivables ledger and payables ledger systems, and is covered in Part C of this Interactive Text. (c) The accounting system will keep track of the business's resources of cash, and the funds in the bank account (covered in Part B of this Interactive Text). This is covered in Part B of this Interactive Text. (d) Finally, the accounting system will be used to provide periodic information to management (covered in the later stages of your studies). In this chapter we will concentrate on two very important types of document, invoices and credit notes, as examples of the sort of accounting information contained in business documentation. 3 Invoices and credit notes FAST FORWARD Invoices and credit notes are important documents which must contain specific information . As an example of the importance of documents in organisations, let us examine the use of the invoice. Documents, as we have seen, are created when contact is made between customer and supplier. (a) Sales order: a customer writes out an order or signs an order for goods or services he wishes to buy. (b) Purchase order: a business places an order with another business for the purchase of goods or services, such as material supplies. 3.1 The invoice Invoices are created when there is a sale or a purchase. Remember that what is a sale to one business is a purchase to the individual or business in receipt of the goods. The details on the invoice should agree ThiNganHang.comwith what was on the purchase/sales order. Key term An invoice is a demand for payment Three different uses of the invoice can be described. Transaction Example Document best described as A transaction is settled Manager paying cash for Receipt: invoice marked by immediately in cash, with the a business meal in a restaurant as 'paid with thanks' invoice created as evidence of restaurant expense/receipt of payment 10 1: Business transactions and documentation ⏐ Part A Introduction to transaction accounting ThiNganHang.com
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Transaction Example Document best described as An invoice is sent from seller to Delivery of new car to Cash on delivery (COD) invoice buyer, and is paid on receipt of the company goods using cheque or cash An invoice is sent after goods have Delivery of raw materials Credit invoice been delivered, with request to pay from long-standing within a certain time supplier on usual credit terms Although you may find it helpful to think of the receipt, the COD invoice and the credit invoice, you will find that usually people refer only to receipts (for cash transactions, such as buying a newspaper) and invoices (for credit transactions). Remember, however, that not all documents described as invoices are invoices on credit terms – they may need to be settled immediately. 3.2 What does an invoice show? The invoice below is a fairly typical example of a demand for payment from a seller (Chippies) to a purchaser (Table Tops). ThiNganHang.com (a) Name and address of the seller (b) Name and address of the purchaser (c) Invoice number (so that the business can keep track of all the invoices it sends out) (d) Date of the transaction (e) Description of what is being sold (f) Quantity and unit price of what has been sold (30 tables at $250 a table) Part A Introduction to transaction accounting ⏐ 1: Business transactions and documentation 11 ThiNganHang.com
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(g) Total amount of the invoice including any details of sales tax Points to note about the invoice shown above include the following. (a) Delivery address. Businesses sometimes want goods delivered to somewhere other than their own premises. (b) Referencing. A business usually keeps a record of its orders, just as it does of its sales. In this case, Table Tops order number was 2490. Chippies puts the order number on the invoice so that Table Tops can quickly see which order the invoice relates to. (c) Unit price. In our example, tables were $250.00 each, but sometimes goods are sold in batches of, say, 20. If that is the case, then something like '$6 for 20' will be put in the unit price column. The amount of the invoice is calculated in the usual way. 3.3 Other information often found on invoices Sometimes, the date by which payment is due, and other terms of sale, are shown on the invoice. 'Net 30 days' means that payment is due 30 days after the date of delivery. 'FOB' stands for 'free on board', and may be found on import or export invoices. 'FOB shipping point' means that the supplier pays all costs of carriage (shipping, insurance and freight for example) up to the point of shipping but the customer will have to pay any subsequent carriage costs. The tax point for sales tax will be found on invoices for goods or services subject to sales tax. Two other phrases you may find on an invoice are as follows. (a) Ex works. This means that the price excludes the cost of delivery. (b) E & O E. This stands for 'errors and omissions excepted', meaning that the supplier reserves the right to make alterations to the details as shown on the invoice should any prove at a later date to be incorrect. 3.4 Invoice copies Invoice forms for different businesses will be designed in different ways, although they all show the same sort of information. Another thing they have in common is that there are usually several copies of the invoice. Businesses may use as many as four copies of an invoice, often as follows. Copy Location Purpose of invoice copy 1 Sent to the purchaser Request to pay for the goods, as we have seen. 2 Kept as a file copy Partly to keep records straight, and partly so that the business can prove it made out the invoice in the first place. (In a large business, both the sales and accounts departments may keep copy sales invoices.) ThiNganHang.com3 Delivery note sent to Whoever delivers the goods to the purchaser asks the customer for signature, and purchaser to sign the note as proof that the goods have actually then retained by seller been delivered. The delivery note is then brought back to the supplier's business and matched with the file copy as proof of the validity of the sale. 4 Advice note signed and kept Rather like the delivery note, this goes with the goods but by purchaser instead of being brought back to the supplier, it is left with the purchaser. (The purchaser's storekeeper uses it as a checklist to make sure that the goods being delivered are the same as those on the invoice.) Note that either copy 3 or copy 4 may be used by the selling business as a 'picking list' for an order, so it can be sure it packs up the required quantities. 12 1: Business transactions and documentation ⏐ Part A Introduction to transaction accounting ThiNganHang.com
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