FA1 Notes
FA1 Notes
FA1 Notes
Contents overview
Types of business transaction Documenting business transactions Invoices and credit notes Discounts, rebates and allowances Sales tax Contract law Storage of information Data protection
Business transactions?
Property changes hands Two main types: sales and purchases
By cash or on credit
Sales
By cash: goods or services given in exchange for immediate payment (in notes, coins, cheques) On credit: cash received later
Purchases:
For cash: payment made immediately On credit: cash paid later
Discussion
Documentation to expect
(i) You buy a CD from a shop, paying cash
(1) A receipt
More documents
Inventory lists: check availability of all the parts Supplier lists: where to buy parts Staff schedules: plan for human resource Timesheet: record the actual hours staff spent Goods received notes Expense claims: Employees may incur expenses which need to be reimbursed Accounting system: records, summarizes and presents the information contained in these documents
Credit note
Negative invoice: cancel part or all of previously issued invoice Amount payable: unpaid invoices value minus the credit notes
Debit note
Customer to supplier requesting a credit note Supplier to customer to adjust upwards the amount of issued invoice
Illustration
$1 per unit, but 95p for 100 units or more Given on invoice Permanent
Rebate
Allowance
A reduction in the bills for the following year A cheque for the calculated rebate amount
Sales Tax Many business transactions involve sales tax, and most invoices show sales tax charged separately. Input and Output sales tax Output sales tax is charged on sales Input sales tax is incurred on purchases Usually output sales tax (on sales) exceeds input sales tax (on purchases). The excess is paid over to the government. If Output sales tax is less than input sales tax in a period, the government will refund the difference to the business. In other Words, if a business pays out more in sales tax than it receives from customers it will be paid back the difference.
Retention policy
Sets down how long different kinds of information are retained
Master files and reference files: charter agreement, legal documents Temporary or transitory files Active files: invoices, GRNs files Non-active file: purchase invoices of previous years
Retention Policy Files of data may be permanent, temporary, active and non-active. Permanent Master files and reference files are usually permanent, which means that they are never thrown away or scrapped. They will be updated from time to time, and so the information on the file might change, but the file itself will continue to exist. Temporary A temporary or transitory file is one that is eventually scrapped. Many transaction files are held for a very short time, until the transaction records have been processed, but are then thrown away. Other transaction files are permanent e.g. Cashbook, or are held for a considerable length of time before being scrapped. Active An active file is one that is frequently used, for example, sales invoice files relating to the current FY, or correspondence files relating to current customers and suppliers. Non-Active A non-active file is one that is no longer used on a day-to-day basis. For example, files that contain information relating to customers and suppliers who are no longer current, and purchase invoices relating to previous financial periods. Semi-active files are those that contain information that is still active, but are on their way to becoming inactive, for example, as a contract
nears completion, it will not be used so frequently, but should be kept on hand for reference is so needed.
Data Protection Information stored about Individuals is regulated by DPL Without adequate data protection policies, risks include: Access to personal information by unauthorized parties Using data for other purposes than originally intended.
Automatic data entry such as scanning. Well-designed forms that are easy to read Using tick boxes or drop-down lists Avoid long sequences of numerical character Validation technique Verification by entering the data twice and checking for inconsistencies Well-designed forms that are easy to read Validation Techniques Validation of data ensures that it is reasonable and possible but not that it is necessarily correct. 1. Field presence Essential fields cannot be left blank e.g. the name of a customer 2. Field length Data has the correct number of characters (Min/Max) Data must be a Min of 6 char 3. Range Data value is within a predetermined range eg months of the year must be btwn 1 and 12 4. Format Individual characters are valid eg Acc num must be in a certain for AAA/999 (three letters and three numbers) 5. Batch Header Where batch processing is used, the computer calculates totals that can be matched to the totals of the documents in the batch. 6. Check Digit Code numbers such as bank acc numbers are prone to data entry errors. Check digits are extra digits in a code, calculated by the computer using an algorithm to check that the other digits in the code are correct.
Chapter 2
Contents
Business definition
Assets
Liabilities
Illustration
Business definition
1
An organization which uses economic resources to create goods or services which customers will buy.
2
A business is an organization providing jobs for people to work in.
3
Invests money in resources (eg it buys buildings, machinery etc; it pays employees) in order to make even more money for its owners.
Legal:
Separate legal entity No distinction with its owners.
Accounting
:
Must always be treated as a separate entity from its owners.
Assets
Noncurrent assets
Assets
Current assets
Text
Text
Assets classification
Classified by period of holding
Non-current assets
Current assets
Held and used in operations for a long time, normally more than 1 years. E.g.: factories, office building, plant and machinery, cars, etc.
Held for only a shorter time. E.g.: Cash and banks, inventories, receivables, etc.
Liabilities
Liabilities
Liabilities classification
Classified by period of liabilities
Non-current liabilities
Current liabilities
Payable in a long time, normally more than one year. E.g.: long term loans or borrowings from banks, etc.
Payable in a shorter time. E.g.: short term borrowings from banks, overdrafts, payables to suppliers, etc.
Assets
Capital
=
(Owners equity Retained earnings)
Liabilit ies
+
(Bank loans, Trade payables Tax payables)
Accounting equation 2
A Business
Assets
Liabiliti es
Accounting equation 3
A Business
Assets
Capital introduced + profit retained in previous periods+ profit earned in current period drawings
Liabiliti es
Accounting equation 4
A Business
Assets
Capital introduced in previous periods + Profit retained in previous periods + Profit earned in current period + Capital introduced in current period Drawings in current period
Liabiliti es
Credit transactions
A sale or a purchase which occurs some time earlier than cash is received or paid.
Credit sales
Creates an account receivable Settled when cash is received from customer
Purchases on credit
Creates an account payable Settled when cash is paid to supplier
Debit:
Increases assets Decreases liabilities Decreases capital Decreases income Increases expenses Means left hand side
Credit:
Decreases assets Increases liabilities Increases capital Increases income Decreases expenses Means right hand side
Chapter 3
Contents
Organisational structure
Users of accounts
CAPITAL ASSETS
EQUAL
LIABILITIE S
Assets
Assets
Non-current assets
Current assets
Acquired for long-term use within the business Strictly, more than one accounting period
Text
Example
Assets
Noncurrent assets Land Office building Factory Machinery Office equipment Etc.
Text
Discussion
Current or non-current?
Current or Business non-current Delivery firm Builder Car trader Audit firm Laptop trader
Non-current
Non-current
Current Non-current Current
42
Liabilities
Liabilities
Noncurrent liabilities
Current liabilities
Debts not payable within the 'short term E.g: longterm bank loans.
Debts payable within one year. E.g.: shortterm loans, bank overdrafts , trade payables, etc.
Text
Text Long-term loan is split to: -Amount due within one year -Amount due beyond one year
Discussion
Classification: (a) PC used in the accounts department of a retail store Non-current asset (b) A PC on sale in an office equipment shop Current asset (c) Wages due to be paid to staff at the end of the week Current liability
Discussion
Classification:
(d) A van for sale in a motor dealer's showroom Current asset (e) A delivery van used in a grocer's business Non-current asset (f) An amount owing to a bank for a loan for the acquisition of a van, to be repaid in 9 months Current liabilities
Capital
Business capital account
Text
BUSINESS NAME INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20X8 $ Sales Cost of sales Gross profit Selling costs Distribution costs Administration expenses Profit for the year $ X X X
X X X X X
Shows in detail how the profit or loss of a period has been made.
Gross profit: Compares revenue with cost of goods sold (direct costs)
Net profit: Different between gross profit and total overheads (indirect costs).
Text
Capital expenditure
Revenue expenditure
Results in: The acquisition of non-current assets; or An improvement in their earning capacity.
Incurred in: For the purpose of the trade of the business. To maintain the existing earning capacity of non-current assets.
Exam focus
Capital income
Revenue income The sale of trading assets Rent, interest and dividends received from noncurrent assets held by the business
Appears on income statement
Profit/loss apprears on IS
Exam focus
Users of accounts
Managers of the business
Tax authorities
Users of accounts
Trade contacts
Whats what?
(a) Freehold property Non-current asset (b) Payment of wages for a director with a two year service contract Expense (c) Payments into a pension fund Expense
Whats what?
(d) A trade receivable who will pay in 18 months time Non-current asset (e) An irrecoverable debt written off Expense (f) A patent Non-current asset (g) A company car Non-current asset
Whats what?
(h) Interest on a bank overdraft Expense (i) A bank loan repayable in five years Non-current liability (j) Petty cash of $25 Current asset (k) The portion of local taxes paid covering the period after the reporting date Current asset: prepayment
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Chapter 4
Contents
1
Recording business transaction
Recording Sales
Recording purchases
Contents
5
Cash registers and cash received sheets
Sales tax
Posting cash cash receipts receipts to to the the general general ledger ledger Posting
To record
Source documents
Source documents
Invoices Credit notes Petty cash vouchers Cheques received Cheque stubs (for cheques paid out) Wages, salary and employee tax records
Discussion
61
Which of books of prime entry is used if: Your business pays a supplier $5,000? Cash book You send a customer an invoice for $1,320? Sales day book You receive an invoice from J Sunderland for $1,750 Purchase day book
Discussion
You pay Hall & Co $1,000 Cash book Sarti (a customer) returns goods to the value of $100 Sales returns day book You return goods to Elphick & Co to the value of $2,400 Purchase returns day book
Full processes
Recording Sales
Sales invoices Sales credit notes Cheques received
Cash book
Bank account Sales tax control account Receivables ledger Receivables ledger control account
The sale to Jones Co for $105 is also recorded on page 14 of the receivables ledger. Invoice number is unique generated by the business's sales system.
Recording Purchases
Purchase invoices Purchase credit invoices Cheques paid
Cash book
Bank account Sales tax control account Payables ledger Payables ledger control account
The purchase from Cook Co for $315 is also recorded on page 31 of the payable ledger.
C a s h r e c e i p t s d a y b o o k
p a y m e n t b o o k / C h e q u e p a y m e n t d a y b o o k
C a s h
C a s h c o n t r o l a c c o u n t i n G / L
Question
Which of the following will not be entered in the cash book? (a) Cheque received (b) Payment to receivables ledger customers (c) Supplier's invoice (d) Credit note (e) Debit note (f) Bank charges debited to the bank account (g) Overdraft interest debited to the bank account (h) Payment for a non-current asset purchased on credit (i) Refund received from a supplier (j) Depreciation Answer: CDEJ
Text To reconcile
Investigate differences
The T format
The 'T' format accounts: On top of the account is its name Left hand side called debit side Right hand side called credit side
Example
For example: Profit and Loss accounts
Example
For example: Balance sheet accounts
Note: There are always b/f or c/f for profit and losses accounts for balance sheet accounts
The Principles
Every transaction has a two fold effect!!!
83
Dr Cr Cr Cr
87
xxx
Sales day book xxx
(out put sales tax invoiced)
Bank xxx
(input sales tax on cash purchase)
Bank xxx
(out put sales tax on cash sales)
C/f: xxx
Chapter 5
Completing ledger accounts
Contents
The journal The trial balance Methods of coding data Manual and computerized systems Batch processing and control totals Accounting systems Accounting modules
The journal
One of the books of prime entry Record of (not arise from the other books of prime entry) unusual movement between accounts
Date $ $ DEBIT Account name X CREDIT Account name X Narrative to explain the transaction
300
600
80
CREDIT Sales account (or takings account) 80 The provision of a hair-do on credit
Illustration TB
Errors in detail
Errors of transposition Two digits in an amount are accidentally recorded the wrong way round Detect: the difference can be divided exactly by 9 Errors of omission Fail to record a transaction at all Making a debit or credit entry, but not the corresponding double entry
Compensating errors Errors which are, coincidentally, equal and opposite to one another
Errors in detail
Errors of principle Accounting entry breaks the 'rules' of an accounting principle or concept E.g.:
Capital expenditure treated as revenue expenditure Drawings treated as expenses
Correction of errors
Journal entries Requires a debit and an equal credit entry Total debits equal total credits before a journal entry is made They will still be equal after the journal entry is made
Example - JE
Suppose a bookkeeper accidentally posts a bill for $200 to the gas account instead of to the business rates account. A trial balance is drawn up, and total debits are $100,000 and total credits are $100,000. Journal entries DEBIT Business rates account $200 CREDIT Gas account $200 To correct a misposting of $200 from the rates account to electricity account.
Coding Each account in an accounting system has a unique code which is What will be used to identify the correct account for posting. Coding saves time because they are shorter than description. They also save space. In accounting systems, the most obvious examples of codes are as follows: Customer account numbers Supplier account numbers General Ledger account numbers Employee reference numbers Inventory Item Codes External codes include Bank account numbers and bank sort codes. Significant Code The Account code incorporate some digits which describe the item being coded.
Data Entry Errors Source documents can be damaged or destroyed. Poor handwriting can make forms difficult to read Malicious intent Poorly skilled staff Details can be omitted or incorrect in the source doc Transcription error eg enetering 45 istead of 54
Reducing Data Entry Errors Properly trained and experienced staff Automatic data entry such as scanning. Well-designed forms that are easy to read Using tick boxes or drop-down lists Avoid long sequences of numerical character Validation technique Verification by entering the data twice and checking for inconsistencies Well-designed forms that are easy to read
Example
A nominal ledger has the following codes.
Solution
This is a significant digit code. The digits are part of the description of the item being coded. '1' in 100000 clearly represents non-current assets '2' in 100200 represents plant and machinery etc.
Computerized systems
Perform the same tasks as manual systems Differences:
How information is stored How tasks are performed How some package do things 'automatically'
Computerized systems
Input: Entering data from original documents Processing: Entering up books and ledgers and generally sorting the input information Output: Producing any report desired by the managers of the business, including financial statements
Control totals
Used to make sure that there have been no errors when the batch is input Make sure that the total value of transactions input is the same as that previously calculated
E.g.
A batch of 30 sales invoices with total value of $42,378.47. When the batch is input, the computer adds up the total value of the invoices input and produces a total of $42,378.47. The control totals agree No further action is required
Validation Techniques Validation of data ensures that it is reasonable and possible but not that it is necessarily correct. 1. Field presence Essential fields cannot be left blank e.g. the name of a customer 2. Field length Data has the correct number of characters (Min/Max) Data must be a Min of 6 char 3. Range Data value is within a predetermined range eg months of the year must be btwn 1 and 12 4. Format Individual characters are valid eg Acc num must be in a certain for AAA/999 (three letters and three numbers) 5. Batch Header Where batch processing is used, the computer calculates totals that can be matched to the totals of the documents in the batch. 6. Check Digit Code numbers such as bank acc numbers are prone to data entry errors. Check digits are extra digits in a code, calculated by the computer using an algorithm to check that the other digits in the code are correct.
Accounting packages
Advantages
(a) The packages can be used by non-specialists. (b) A large amount of data can be processed very quickly. (c) More accurate than manual (d) Handling and processing large volumes of data.
Disadvantages
(a) Initial time and costs involved (b) Need for security checks (c) The necessity to develop a system of coding (see below) and checking. (d) Lack of 'audit trail'. It is not always easy to see where a mistake has been made. (e) Possible resistance on the part of staff to the introduction of the system.
Modules
Invoicing Inventory Receivables ledger Payables ledger Nominal ledger Payroll Cash book Job costing Non-current asset register Report generator
Program which deals with one particular part of a business accounting system Modules may be integrated with the others
QB 9
A credit balance of $917 brought down on Y Co's account in the books of X Co means that A X owes Y $917 B Y owes X $917 C X has paid Y $917 D X is owed $917 by Y Answer: A
Chapter 6
Receiving and checking money
Contents
Control over receipts Remittance advices Receipts given to customers Ways in which customers pay Cash: physical security considerations Cheques Receipt of cheque payments Receipt of card payments EFTPOS Other receipts
Remittance advices
Trade customers usually send a remittance advice with their payment A remittance advice shows which invoices a payment covers
Till receipts
Issued by a cash registers or 'tills
Written receipts
Or typed may be used if no cash register is used
Main types
Cash Cheque Credit or debit card
Other types
Standing order Direct debit Mail transfer and telegraphi c transfer Automate d credit services
How to deal
Careful examination Cash register security, Safes Protective glass ('bandit screen') Frequent banking Never be sent by post
Cheques
Definition
A cheque is 'an unconditional order in writing addressed by a person to a bank, signed by the person giving it, requiring the bank to pay on demand a sum certain in money to or to the order of a specified person or bearer
Cheque: procedures
1. Ensure details are correct (date, payee, amount) 2. Signature: on the cheque vs. guarantee card 3. Check the details on the cheque guarantee card.
'Expires end' date Amount of the guarantee Name agrees with that on the cheque Other details
Plastic card
Most retail outlets which accept PLASTIC cards now use an electronic system known in the UK as EFTPOS (Electronic Funds Transfer at Point of Sale). CREDIT vs. DEBIT cards
Mustafa Khuwaja - CAT Finalist 125
Credit cards
Credit card payment involves 3 transactions
EFTPOS
Electronic Funds Transfer at Point of Sale: makes possible the automatic transfer of funds from a customer's bank account to a retail organization at the point in time when the customer purchases goods (or services) from it. The EFTPOS terminal
Other receipts
Bankers draft Standing orders and direct debits
Method of payment available from banks for a fee When a customer needs a guarantee that the payment cannot be dishonoured
Regular payments
Standing order can only be changed by the payer Direct debit can be changed by the receiver at will
Discussion
Business: electricity company 'I am a domestic customer, and receive a bill from you each quarter. I want to continue to pay quarterly, but I don't want to go the trouble of writing out a cheque or making a special trip (for example to a bank or your office) to pay the bill. However, I do need to know how much the bill is going to be before I am due to pay it. What method of payment would you suggest? 'You can pay by quarterly direct debit. You need to complete a direct debit mandate form which authorises us to debit amounts from your bank account. We will send you a bill in the usual way each quarter, and the amount due will be debited from your account 14 days after the date of the bill, so you'll know how much is to be debited well in advance. If an error is made, either the bank or ourselves must put it right.'
Business: mail order company 'I want to place an order with you. I don't have a bank account, building society account or a credit card, so I suppose that I'll need to send you the amount due by cash through the post. Is that OK? 'We do not advise you to send cash through the post, as we cannot accept responsibility if it is lost. We suggest that you pay by postal order, obtained from your post office. The post office will charge a fee for this service.'
Business: DIY retailer 'I want to call in to your store to buy something costing $34 for a friend. I understand that you accept cheques supported by a cheque guarantee card. My friend has made out and signed the cheque and given me her cheque guarantee card. I'd like to bring the cheque and card in when I collect the goods. 'In order to pay by a cheque supported by a banker's card, it is necessary for the person whose signature appears on the card to sign and date the cheque in the presence of the payee in other words, in our store. This rule is a standard rule of all of the banks. Please therefore ask your friend to call in to make the payment herself, unless you wish to pay by some other means, such as cash.
Chapter 7
Banking monies received
Contents
The banking system The banker/customer relationship Procedures for banking cash Procedures for banking cheques Procedures for banking plastic card transactions Banking other receipts
Clearing is the mechanism for obtaining payment for cheques E.g. of the cheque clearing system
Contractual relationship
Returned/dishonoured cheques
Insufficient funds: not be enough money in the customer's account to cover the cheque. Banks will honour a cheque in the following circumstances
Cheque amount lower than the cheque guarantee card limit There is evidence that a check was made between the cheque and the guarantee card
Cheque returned to you marked 'refer to drawer and You will return the cheque to the drawer and request a replacement
Banking and EFTPOS Credit, charge or debit card receipts via EFTPOS are credited directly to the retailer's bank account. He can agree the amounts received to the 'End of day' reconciliation produced by the terminal
Chapter 8
Recording monies received
Contents
Controls over recording receipts Cash registers Cash received sheets (remittance lists) Posting cash receipts to the general ledger
Exam focus ?
What for?
Avoiding theft Collusion
Cash registers
What is it?
To check the amount of money in the cash register at the end of the day against the summary To record receipts in the cash book
148
150
Posting results
Chapter 9
Authorizing and making payments
Contents
Controls over payments Cheque requisition forms Expenses claim forms The timing and methods of payments Payments by cash Payments by cheque Bank Giro credits (credit transfers) Payments by banker's draft (payable order) Payments by standing order and direct debit Documentation to go out with payments
Authorization - Illustration
newspaper wants payment of $470 ($400 + sales tax at 17%) in advance, and has sent a fax letter requesting this amount. A receipt will be sent later with confirmation that the advertisement has been inserted and paid for.
The advertising manager will fill in a cheque requisition form.
Methods of payment
Commonly used
Cheques Automated transfers (especially for salaries and wages) Internet payments
Other
Cash Banker's draft Standing order Direct debit Company credit card or charge card Mail transfer and telegraphic transfer Internet payments
Payments by cash
For small payments out of petty cash Sometimes for wages Pay large amounts? Not recommended
Rare Secure Dishonest dealers in backstreet or underworld businesses
Payments by cheque
Signatures on business cheques:
Only certain specified individuals With names and signatures supplied to the bank on a bank mandate form Cheques above a certain value must contain two authorized signatures Might consist of the chairman, all the directors and the chief accountant or financial controller
Payments by cheque
164
Lost cheques
165
Step 1 Telephone your bank saying that you want the cheque to be stopped. Step 2 Confirm this instruction in writing.
Standing orders
To make regular payments of a fixed amount Arranged by a Standing Order Mandates
Direct debits
Similar
Like standing orders, are used for regular payments
Difference
the person who receives the payments who initiates each payment Payments can be for a variable amount each time, and at irregular intervals
A copy of a pro-forma invoice where this has been provided by the supplier for payments with an order A bank giro credit form for telephone, electricity and other similar bills A covering letter explaining what the payment is for, when other forms of documentation do not exist
Chapter 10
Recording payments
Contents
Controls over recording payments The cash book: recording payments Posting cash payments to the general ledger Returned cheques Automated credit systems
Fraud
All payments are authorised correctly Proper checks against supporting docs Segregation of duties At day end, a list of the payments for that day is submitted to a senior member of staff to check for unusual payments A minimum number of cheque books is in use at any time
Completeness
Regular bank reconciliations Sequential numbering A sequence check carried out on the cheques in cash book Regular examinations of bank statements to ensure that all payments by direct debit and standing order have been recorded in the cash book (along with bank interest and charges)
4. Related data and info a recorded and saved 5. The business's records will be updated with the same information
Chapter 11
Maintaining petty cash records
Contents
1 The purpose of petty cash 2 Security and control of petty cash 3 The imprest system 4 Petty cash vouchers 5 The petty cash book 6 Recording and analysing petty cash transactions 7 Recording petty cash transactions: sales tax 8 Topping up the float, balancing off and posting petty cash
Chapter scenario
Exam focus point: A possible MCQ might be 'Which one of the following items would/would not be paid out of petty cash?'
What might be the reason? (a) A mistake in the amount of cash paid out, eg the petty cashier might have paid out $10.00 for a voucher of only $9.80, leaving a 20c shortage of cash (b) Theft from the petty cash box
When staff borrows cash, he or she must put an IOU into the petty cash box
An employee of the organisation might use some of the office's postage stamps, to put on personal letters. He or she will pay for the stamps by giving the cash to the petty cashier Similarly, employees might be expected to pay for any private telephone calls that they make from an office telephone Very occasionally, perhaps when the petty cash float is running low, the money received from a cash sale might be used to boost petty cash.
Chapter 12
Bank reconciliation
Contents
Bank reconciliations The bank statement Procedures for performing a bank reconciliation Reconciliations on a computerised system
Bank reconciliations
A bank reconciliation compares the balance of cash in the business's records to the balance held by the bank. Differences will be errors or timing differences, and they must be identified and satisfactorily explained.
Contents
Personal accounts for credit customers Recording transactions in the receivables ledger The age analysis of receivables and other reports Irrecoverable debts
Authorisation
Ensure it will receive payment for those goods. Authorisation procedures
Require references from suppliers with whom he already has a credit account, and maybe also a reference from his bank. The customer's credit limit must be authorised Before goods are despatched to a customer, the order may need to be authorised by the credit control department.
If the customer has invoices overdue for payment, it may be decided that no further orders can be accepted until payment is received.
Benefits
Very few businesses expect to be paid immediately in cash What benefits?
Accounts receivable
Sales returns (credit notes) inc sales tax X Discounts allowed Payments received X
202
Balancing
Summary
206
Discounts allowed
Pet supplies makes a sale for $1,000 worth of goods to Janice. A 10% discount will be allowed if Janice settles within 10 days. Assuming that Janice settles within 10 days record the journal entries in the suppliers' books.
207
What for?
Other reports
Statements of account Sales tax analysis Sales analysis List of customer accounts Customer mailing lists
Irrecoverable debts
Some debts may need to be written off as 'irrecoverable debts' because there is no real prospect of them being paid. Reasons? What should be done?
A write off of any irrecoverable debt will need the authorisation of a senior official in the organisation.
Example
If both the debts written off in previous example were inclusive of sales tax, the accounts would look as follows.
Chapter 15
Purchase and purchase returns day books
Contents
What is the purchase day book? What is the purchase returns day book? Entering purchase transactions in the day books Coding data Posting the day book totals
Discussion
Which of the following cases would you classify as a purchase return by your business (a) Goods purchased from you by a customer and returned. (b) You have been billed twice, by accident, for a single amount of goods, and you return the superfluous purchase invoice. (c) You have been delivered some goods which are faulty and you send them back. You have posted the invoice received in respect of the goods. (d) A customer sends back some sub-standard goods to you. (e) A supplier sends back some goods to you which you have delivered there by mistake, thinking the supplier was in fact a customer. (f) An item of inventory is damaged in a fire at your warehouse and, because you cannot use it any more, you have to go back to the original supplier and order a replacement. (g) You question an invoice because you have been billed for items which you have not ordered, and which you have not received. (h) You have been delivered a quantity of goods in excess of your requirements. The supplier agrees that you can return them.
Analysis of purchases
219
Chapter 16
The payables ledger
Contents
Personal accounts for suppliers Recording transactions in the payables ledger Payments to suppliers The age analysis of payables and other reports Contra entries with the receivables ledger
Discussion
(a) What is the status of a trade account payable in the accounts of a business?
(i) An asset (ii) A liability (iii) An expense (iv) An item of revenue
Discussion
(b) Which are not normally found in a payables ledger of trade accounts payable?
(i) Depreciation provision (ii) Personal accounts for suppliers of subcomponents (iii) Taxation authorities (iv) Sales tax authorities (v) Suppliers of raw materials (vi) Bank overdraft (vii) Long-term bank loan (viii) Share premium (ix) Telephone expenses (x) Drawings (xi) Proprietor's capital
Answer: 2 5 9 only
Recording transactions
Discounts received
Remember: Memorandum' discounts received column in the cash book Recording?
Contents
Internal check Control accounts Control account reconciliations
Internal check
What is it?
Types of internal check
Also known as internal controls, ensure that transactions to be recorded and processed have been authorised, that they are all included and that they are correctly recorded and accurately processed.
A trial balance Bank reconciliations Control account reconciliations Segregation of duties Authorisation
Control accounts
A control account is an account in the nominal ledger in which a record is kept of the total value of a number of similar but individual items. Control accounts are used chiefly for receivables and payables
Solution
Chapter 18
Recording payroll transactions
Contents
The nature of payroll Gross pay and basic pay Overtime, bonus payments and commissions Payroll administration and documentation Payroll deductions Payment methods Updating records
Payroll
A payroll is a list of employees and what they are to be paid. Being on the payroll of an organisation means that you are selling your labour to it for an agreed price.
Question
All an employee's income is assessed to tax through the system operated by employers? False. The employer only deals with income arising from the employment. If the employee, say, received interest on a deposit account, this would not be taxed directly, through his or her employer's payroll system, although it might be reflected in the tax code. However, lower rate tax on such income may be deducted at source.
Question
It is the employee's duty to ensure that the correct deductions are made from his or her income and that the correct records are kept?
False. Although the employee owes the tax, it is the employer's legal duty to ensure the correct working of the tax deduction system. Any underpaid tax under a payroll scheme is collected from the employer, who may then try to recover it from the employee
Timeliness
The employees do not being short of cash Employee morale does not suffer The government's requirements
Security
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Piecework
Wages = Units produced Ra It is common for pieceworkers to be offered a guaranteed minimum wage, so that they do not suffer loss of earnings when production is low through no fault of their ownte of pay per unit
Differential piecework
Offer an incentive to employees to increase their output by paying higher rates for increased levels of production.
Up to 80 units per week, rate of pay per unit = $1.00 80 to 90 units per week, rate of pay per unit = $1.20 Above 90 units per week, rate of pay per unit = $1.30
Overtime
Overtime comprises hours worked over a standard working week If an hour at basic rate is $4, how much is an hour of overtime at time and a half?
$6 per hour.
Bonuses
An extra payment made to an employee as a reward for results achieved. To motivate employees to work harder and to reach or exceed some target
Commission
Payment made to an employee (or agent) based on the value of something (usually sales) the employee (or agent) has generated Straight percentage of all sales
10%: $1,000 of sales get $100, for $100,000 get $10,000
Personnel department
Responsible for recruiting, engaging and holding certain basic data of employees
Record of attendance card
Payroll function
Calculation of gross pay Calculation of tax, national insurance and other deductions Preparing payslips Making appropriate returns to external agencies Making up wages, or preparing tapes for bank transfer Distributing payslips Preparing payroll statistics.
Documentation
Hourly paid Salaried employees employees
Personnel records held in the personnel department document how much each salaried employee is to be paid, and for what periods Payroll department will receive instructions from the personnel department relating to salary increases, or other alterations to an employee's pay.
Attendance cards are the basis for payroll preparation Time recording clock
Job cards
Cards are prepared for each job
Weekly time sheets Similar to daily time sheets but are passed to the cost office at the end of the week Entries should be made daily to avoid error.
Route cards
Similar to job cards, except that they follow the product through the works and carry details of all operations to be carried out.
Payroll deductions
Benefit contributions
Compulsory contributions Remittances to authorities
The total cost of wages and salaries in the income statement is: Gross wages + employer's benefit contribution
Payroll giving
Payroll giving is entirely voluntary In a payroll giving scheme, an employee is allowed to set aside a portion of his or her gross salary for charitable donations.
This portion of gross salary is not taxed Both employer's and employees contributions are still payable on this amount.
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Other deductions
Sharesave payments
Deductions from net pay linked to share options. They do not affect payroll calculations. Run by employer cooperates with building society or bank. The employer deducts an agreed sum from net pay of the employee and deposits it in a building society or bank.
Pension scheme
Payroll department deducts from employees' pay, maintain records and report them to the pension fund administrators. The employer only (a so-called noncontributory pension scheme) The employer and the employee (called a contributory pension scheme)
267
Payment methods
Cash payment Automated payment system The payroll department prepares the payroll on magnetic disk or tape, then sends it to the automated service run by the clearing banks. The system then automatically transfer the funds from the employers banks accounts to the employees'
268