FIA Paper FA1: Notes

Notes
FIA Paper FA1

Recording Financial Transactions
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ExPress Notes
FIA FA1 Recording Financial Transactions
Contents
About ExPress Notes

1. 2. 3. 4. 5. 6. 7. 8. Business transactions and documentation Financial statements and their elements Double entry bookkeeping: the debits and credits Cash and bank
3
7 12 18 21 24 29 32 34
Sales and credit transactions

Purchases and credit transactions Payroll Control accounts and initial trial balance
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ExPress Notes
Chapter 1
Business transactions and documentation
START The Big Picture

Bookkeeping means recording appropriately classified monetary transactions in the financial records of an entity. It can be done manually or using an accounting software. It involves maintaining a chronological record of transactions as they occur. Every transaction will be classified according to its type (sales, purchases, etc) and will be recorded in the books of original entry. Periodically a list of the results of all recorded transactions is produced. This is done by extracting each account and its final balance. The list is called a trial balance and is the basis from which financial statements are produced for both internal and external users.
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ExPress Notes
KEY KNOWLEDGE Source documents

Every transaction is evidenced by a document showing all details of that particular transaction. These documents are known as source documents. Some originate outside the organization (invoices received from suppliers), other originate inside the organization (sales invoices sent to customers). Example of source document includes but not limited to:
Document Quotation
Purpose To give a potential customer an indication of what a product or service would be likely to cost. It may be a binding quote or just an indicative quote. To record an order from a customer. Signing a booking form for an ExP classroom course is a sales order that ExP will then process. To record an order placed with a supplier. It may require preauthorisation to be valid. To record that an order for inventory for resale has been received. It will normally only be produced once the goods have been inspected at the point of delivery to ensure that they are correct in description and quality. To record that an order from a customer has been sent out. A request for payment from a supplier. Sent by the supplier to the customer. A summary of transactions recorded by a supplier with a customer, including amounts received from the customer. Sent by the supplier to the customer.
Sales order
Often feeds the accounting information on.... Nowhere. At this stage, there has been no transaction to record; its still at the state of being a prospective transaction. Sales (revenue).
Purchase order Goods received note
Purchases, normally of inventory for resale. Purchases of inventory for resale and payables.
Goods dispatched note Invoice Statement
Sales (revenue) and possibly also inventory management, depending on how the accounting system is set up. Payables. Does not generally instigate any recording of a transaction, since all transactions on the statement will have been recorded when goods were
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ExPress Notes
Credit note
Debit note
Remittance advice
Receipt
Acknowledgement from a supplier that the customer has overpaid and is entitled either to a refund or free goods/ services in the future. To cancel a credit note that previously existed, eg if goods were ordered, paid for and then returned there would initially be a credit note. The refund made would be accompanied with a debit note. Normally included with an invoice. A document that is included with the payment (eg if paid by cheque) with details that will allow the recipient of the funds to match the payment to the customers account. Issued by the supplier for goods, to acknowledge payment of a debt.
ordered. But useful for cross-checking our records with the suppliers records. Payables.
Receivables.
Receivables.
Receivables, payables and purchases.
KEY KNOWLEDGE Data sources / data capture
When a business transaction happens, it is essential that the source data is captured immediately. This does not necessarily mean immediately writing up the books, but it does involve some record being made of the transaction happening.
KEY KNOWLEDGE Books of prime entry
Alternatively called books of prime entry, these will be the bridge between the raw data (eg receipt for cash purchase of some building materials) and the accounting system. They may be written up by the accountant, or by a semi-trained member of staff within the clients business.
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ExPress Notes
The most commonly used books of prime entry are:
Book of prime entry: Cash in book
Used to record data on: Cash received into the business bank account.
Data typically used to feed: All sorts of things! Anything that may generate cash for the business.
Cash payments book Petty cash book
Cash paid from the business bank account. All sorts of things! Anything that results in cash being paid out of the business. Cash in and out of the balance of cash held in notes and coins by the business (normally small). This is often controlled using the imprest system (see later). Sales on credit. Note that sales immediately settled in cash will be recorded in either the cash book (if paid directly into the bank account) or petty cash book (if received in notes and coins). Typically, small expenses (eg Friday cakes for staff!) and sundry income. Sales revenue.
Sales day book
Purchases day book
Purchases of inventory for resale on credit. Purchases of inventory for Note that purchases settled immediately in resale. cash will be recorded immediately in the cash payments book or petty cash book. Anything not covered by any of the other books of original entry. Often, this is the book maintained by the accountant, in which period 13 adjustments like depreciation and bad debts are recorded.
Journal book
Books of prime entry may be recorded in paper form, or using a spreadsheet.
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ExPress Notes
KEY KNOWLEDGE Journal book

The journal book is the book of prime entry that captures transactions not covered by other books of original entry. Often, it includes adjustments and correction of errors and omissions in the other books of original entry. The journal book records double entry records (see later), with an explanation of the reason. Well see an example of it after tackling double entry bookkeeping.
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ExPress Notes
Chapter 2
Financial statements and their elements

Whenever a business transaction takes place (payment of monthly salaries) it will be first recorded into the books of prime entry. On a monthly basis the books are totaled and totals are entered in the ledger accounts. From ledger accounts a trial balance is extracted (see later chapter) and financial statements are produced. A full set of financial statements produced each year comprises: A statement of financial position, showing the assets controlled by the entity and the liabilities owed and how the net assets are financed. A statement of comprehensive income, showing the income earned, the expenses incurred and the profit or loss for the year. A statement of cash flows, which shows the cash receipts and payments for the year. Notes to the financial statements, which give further detail to readers who want to know more than the summary story.
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ExPress Notes
Statement of financial position of Sole Trader X at 30 June 20x1
ASSETS
Non-current assets
Licence to operate Land and buildings Office equipment Motor vehicles Fixtures and fittings 10,000 35,000 20,000 30,000 10,000 105,000 Current assets Inventory Trade receivables Less: allowance for doubtful receivables 13,000 (1,000) 12,000 Prepayments Cash at bank Cash in hand 4,000 3,000 2,000 20,000
Total assets
146,000
EQUITY AND LIABILITIES Capital Initial capital introduced Total cumulative comprehensive income at 1 July 20x0 30,000 85,700
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ExPress Notes
Less: Cumulative withdrawals at 1 July 20x0 Total equity at 1 July 20x0 Total comprehensive income in the current period Withdrawals in the current year Total equity at 30 July 20x1
(24,000) 91,700 16,000 (8,000) 99,700
Non-current liabilities Bank loans 32,000
Current liabilities Bank overdraft Trade payables Accruals Total liabilities 3,300 8,000 3,000 46,300
Total equity and liabilities
146,000
A SOFP may be rearranged into a number of ways. IAS 1 shows a SOFP as given above: Total assets = Equity + total liabilities.
Equally validly therefore:

Total assets total liabilities = Equity Given that equity = capital + cumulative profit cumulative withdrawals, then the equation could be written in any number of ways such as: Total assets total liabilities = Capital + cumulative profit cumulative withdrawals Or Cumulative profit = Total assets total liabilities capital + cumulative withdrawals. This is sometimes called the accounting equation.
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ExPress Notes
Statement of comprehensive income for the year ended 30 June 20x1 $ $
Sales revenue Cost of sales Opening inventory Purchases of inventory Delivery costs inwards Closing inventory 30,000 80,000 10,000 (20,000)
152,000
(100,000) Gross profit 52,000
Sundry income Discounts received
3,000 2,000 57,000
Less: Expenses
Delivery costs outwards Depreciation Discounts allowed to customers Electricity Irrecoverable and doubtful debts Mobile phones Motor expenses Rent Telephone and internet
3,000 6,000 1,000 4,000 2,500 500 2,500 9,000 1,500
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ExPress Notes
Wages and salaries
12,000 (42,000)
Profit for the period before tax
14,000
Other comprehensive income: Revaluation gain on property Total comprehensive income in the period 2,000 16,000
You may be required in the exam to calculate revenue, cost of sales, gross profit and total comprehensive income from given data.
KEY KNOWLEDGE Elements of financial statements

There are five elements of financial statements, from which all financial statements are produced. These definitions are very useful throughout your ACCA studies and could easily be part of a question in paper FA1.
Elements of the statement of financial position: An asset is a resource that is controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Equity is the residual interest in the assets of the entity after deducting all its liabilities.
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ExPress Notes
Elements of the statement of comprehensive income: Income is an increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. An expense is a decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.
Note that income and expenditure are defined effectively as the reason that a change in net assets happened.
KEY KNOWLEDGE Relationship between the statements: the business equation

An increase in net assets of a business will come from a mixture of these sources: Total comprehensive income made in the period (a profit will increase net assets) New capital introduced by the owner (will always increase net assets) Withdrawals made in the period (will always reduce net assets).
This is sometimes called the accounting equation or the business equation. It is a frequent exam question and can be summarised:
Closing net assets =
Opening net assets + total comprehensive income in the period + new capital introduced in the period withdrawals in the period.
Remember that net assets = equity + liabilities, by definition. So net assets may be given in a question separately as equity and liabilities.
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ExPress Notes
Chapter 3
Double entry bookkeeping: the debits and credits

Bookkeeping is the technique of recording financial transactions as they occur so that summaries can be made and presented as a report to the users of the accounts. There are two main systems for keeping the accounts: Single entry bookkeeping (for small businesses only) Double entry bookkeeping.
Their names really explain the difference between the two. In the double entry bookkeeping for every transaction is in fact recorded twice.
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ExPress Notes
KEY KNOWLEDGE So why debits and credits?
Double entry bookkeeping is the term used to describe how businesses record transactions in their books or accounts. The concept is based upon the fact that every financial transaction involves the simultaneous receiving and giving of value, and is therefore recorded twice. One who receives is a debtor (Dr) and one who gives is a creditor (Cr). Under the double entry accounting system, both the aspects of giving and receiving are recorded in terms of accounts. The account which receives the benefit is debited and the account which gives the benefit is credited. For example if a florist buys flowers, he receives the flowers and gives away the money. When later he makes a sale, he receives money and gives away the flowers. The opposite entries are expressed as debit and credit entries in the records. Money coming in is always a debit. If every debit entry has a credit, the logic dictates that must be a reason for this increase in cash. The reason is that theres been some income from the sale of flowers. This cant be a debit, as what were trying to do is explain where the debit came from. The explanation is arbitrarily called a credit.
KEY KNOWLEDGE Building up the rules

Here are the core concepts that you need to be happy with:
An asset, or an increase in an asset, is a debit. The opposite of an asset is a liability. The opposite of a debit is a credit. So a liability is a credit. If you have more assets (debit assets), the explanation will be to credit income.
Heres a table to summarise the rules. Review this and then try to produce is yourself, using the logic of explaining movements in net assets and things being opposites (eg a liability is a credit because an asset is a debit).
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ExPress Notes
Debits mean
Credits mean
What happens to net assets:

An increase in assets A decrease in liabilities A decrease in assets An increase in liabilities
And the reason for that increase in net assets:

An item of expenditure An item of income
If youre asked to record a transaction, the first step is to identify what assets and/ or liabilities are in question. Decide one of these first (its often easiest at first to start with cash if its a cash transaction) and decide if this is a debit or a credit. Then work out the other side of the transaction. Lets apply these rules to the sale of flowers for cash mentioned above. Cash is coming in (i.e. an asset is increased) therefore debit cash. This means that the other side of the transaction should be a credit, which could be either a decrease in assets, an increase in liabilities or an income. In our case the later applies, therefore credit income (revenue from sale of flowers).
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ExPress Notes
Chapter 4
Cash and bank

According to English common law, a bank has traditionally been characterized as an institution which holds current accounts for depositors, pays cheques which are drawn upon it, and collects cheques on behalf of customers. In addition to chequing accounts, banks offer an increasingly broad range of services, including overdraft and loan facilities, foreign exchange, trade finance (bills of exchange and promissory notes) and investment management. Banks in the UK are licensed by the Financial Services Act, which has over time extended its reach to other types of financial institutions, such as Building Societies, which traditionally specialized in offering mortgage loans.
UK banking clearing system There are different systems designed to clear payments within the UK. These include: London Bankers Clearing House A cheque-clearing system operated by members, designated as clearing banks; the use of cheques remains an important payment method in the UK, particularly for small businesses. The clearing system works on a 3-day cycle:
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ExPress Notes
(1) Sending the item to the clearing center; (2) Sorting of items submitted; (3) Debit to the bank on which the item is drawn. Other systems: Bankers' Automated Clearing Services (BACS) A system for the electronic transfer of payments between banks; 3-day clearing of funds, therefore slow but cheap; Clearing House Automated Payment System (CHAPS) This is for Sterling payments within the UK; beneficiaries receive same day funds; relatively expensive; Responsible for supervising the above payment systems is the Association for Payment Clearing Services (APACS), an industry association of major banks and building societies. Different forms of payment Todays banking system is highly automated with very few transactions processed manually. Common methods of transactions through a bank account are as follows: 1. Cheques the drawer (payer) makes out a cheque to the payee (the person being paid). The cheque is entered into drawers accounts and sent to the payee. The payee, using a paying-in slip, record the details into his books and presents the cheque to its bank. The bank clearing system passes it to the drawers bank for approval and payment. Until the cheque is accepted by the drawers bank, it is considered to be uncleared and the bank has the right to return it as dishonoured if there are insufficient funds in the drawers bank account. 2. BACS (bankers automated clearing system) involves making the payment by a bank transfer. Suitable for immediate transfer of funds both within the country and outside the country. 3. Direct debit agreement with the bank by which the payment beneficiary can collect an amount directly from another bank account. Suitable for recurring payments like credit card or utility bills. 4. Standing order agreement with the bank to pay a set amount at regular intervals. Suitable for fixed regular payments like rent or mortgage. 5. Bank initiated transactions suitable for bank charges, interest received/paid on overdrawn balances, etc.
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ExPress Notes
KEY KNOWLEDGE Documentation

Good record-keeping and a formalized documentation retention policy are critical to the integrity of an organisations processes and working practices. By providing a well-organised documentary trail, a disciplined approach to documentation retention can protect a company against lawsuits and other challenges, while effectively preserving its ability to enforce claims against others. It can also provide secondary benefits, such as ensuring a smooth service to customers, identify new marketing opportunities, and save storage space. Categories of documents include: (1) Legal documents (contracts and agreements); (2) Transaction documents (invoices and receipts); (3) Other correspondence (with clients, suppliers, etc.)
KEY KNOWLEDGE Cash book and petty cash book

All transactions involving cash at bank are recorded in the cash book. Usually the cash book is divided into: cash receipts book and cash payments book and is kept in columnar form. All transactions involving small amounts of cash are recorded in the petty cash book. It usually operates on an imprest system where an agreed balance of cash is held by the cashier. At regular intervals (usually weekly) the amount paid out of petty cash is reimbursed from the bank to restore the imprest (balance) to its agreed level. Tight control of cash and bank balances is vital and therefore proper procedures regarding payment authorization, signatory rights etc should be instated. Cash itself should be counted on regular basis and compared with the balance in the petty cash book.
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ExPress Notes
Chapter 5
Sales and credit transactions

Sales form the basis of every companys existence and business owners spend time creating products and services customers want and are willing to pay for it. Each time the company makes a sale the following entry is made:
Dr Cash Cr Sales or Dr Receivables Cr Sales
$1,000 $1,000 for cash transactions
$2,000 $2,000 for credit transactions
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ExPress Notes
Credit sales are often made to encourage sales. The problem with extending credit is that not all receivables will pay. This means that some will become irrecoverable. Before being written off as irrecoverable, some will also look like they may not pay (perhaps by being a month overdue for payment). These are doubtful debts. Remember that an asset is a resource that is expected to give an inflow of benefits. Logically therefore if a receivable is not expected to pay, it cannot be shown as an asset.
KEY KNOWLEDGE Irrecoverable debts

If a debt is not going to pay, for example if a person has died bankrupt, then it must be written out of the accounting records as the receivable is no longer an asset. Removing an asset reduces net assets and so generates an expense, which is normally called irrecoverable debts expense, hence:
Dr Irrecoverable debts expense Cr Receivables
$800 $800
KEY KNOWLEDGE Recovery of debts written off

If a debt is unexpectedly paid having previously been written off, it is likely that the cash received will initially be recorded in the cash received book as a receipt from a debtor. This means that the journal to record the cash will be automatically generated thus:
Dr Bank Cr Receivables
$800 $800
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ExPress Notes
However, the balance is no longer in receivables, as it was written off. In order for the journal to work, it is then necessary to reinstate the balance that was previously written off. This is a change in accounting estimates, since the estimate last period was there was no realistic chance of the debt being recovered:
Dr Receivables Cr Irrecoverable debt expense
$800 $800.
There is no attempt to change the previous years figures, which include an expense for the write off of the debt, since this was a fair estimate at the time. There will be an expense recorded for the write off in the year when it was written off and a credit to profit or loss when the cash was received. Depending on how the initial cash receipt has been recorded, it may be possible to simplify the above two journals, because there is a debit and credit of the same amount to receivables, thus:
Dr Bank Cr Irrecoverable debt expense
$800 $800.
KEY KNOWLEDGE Doubtful debts

It is likely that some receivables will not pay, even if they have not yet been written off. The business will continue to chase the receivables for full payment and may eventually even sue for the full balance. The amount cannot be written out of debtors, as credit control will need the records of the debt in full to know how much to chase for payment. However, if its estimated that there is a 20% chance that a debt will not pay, an allowance will be made, which reduces the value of net receivables, without corrupting the records of the actual debtor balance that will be needed to try to obtain payment. Creating, or increasing, an allowance will reduce net assets. This therefore creates an expense.
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ExPress Notes
Dr Bad debt expense Cr Allowance for receivables
$500 $500.
KEY KNOWLEDGE Discounts

There are two types of discount that you may encounter: trade discounts and settlement discounts. Trade discounts are those given to customers at the point of sale, perhaps because the customer buys in large volumes or is a member of staff. These discounts are not subject to any uncertainty at the time of sale it is known for sure that the customer will never pay the list price of the goods or services. The accounting is therefore very simple: they are simply ignored. The sale is recorded at the amount net of the trade discount. A settlement discount is an incentive for customers to pay you earlier than they otherwise naturally would. For example, a discount of 5% may be offered on the invoice sent to customers if payment is received within seven days of the invoice being sent. If payment is not received within that period, the offer of the discount lapses. Settlement discounts are uncertain at the point of sale. The actual amount of the debt is gross of the settlement discount, ie before its deduction, since this is the amount that the customer will eventually be chased for if they dont pay early. If the settlement discount is allowed to the customer, this is similar to the treatment of irrecoverable debts. It is simply a debt that we are voluntarily choosing to write off as partially irrecoverable because of the cash flow advantage of receiving the cash quickly. Settlement discounts are sometimes also called cash discounts for this reason and are recorded as follows: Dr: Discounts allowed (expense) Cr: Receivables $200 $200
Discounts allowed are settlement discounts that we allow to customers. They are therefore partial write off of debts receivable by us. They are therefore an expense in our books.
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ExPress Notes
KEY KNOWLEDGE Sales tax

In many countries certain organisations are required to charge a sales tax or Value Added Tax (VAT). The sales tax rate varies between countries and also varies between the nature of goods and services supplied. The sales tax collected does not belong to the organisation that collects it and therefore must be remitted to the tax authorities on a regular basis. Sales tax received can be referred to as output sales tax. The double entry bookkeeping records need to show the goods sold and the sales tax value separately. If the above cash transaction is subject to 20% sales tax the following entries will be made: Dr: Cash Cr: Sales Cr: Sales tax $1,200 $1,000 $ 200
If the above credit transaction is subject to 10% trade discount, sales tax should be charged on the reduced amount as follows: Trade discount: 10%*2,000 =200 Dr: Receivables Cr: Sales Cr: Sales tax $2,160 $1,800 $ 360
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ExPress Notes
Chapter 6
Purchases and credit transactions

For most businesses, inventory will be a very short lived asset, which is expected to be sold (or possibly thrown away or stolen!) by the end of the accounting period. When inventory is received, purchases account is used to record this transaction. Based on whether the transaction is settled immediately or not the following journal entries are made:
Dr Purchases Cr Cash or Dr Purchases Cr Payables
$1,000 $1,000 for cash transactions
$2,000 $2,000 for credit transactions
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ExPress Notes
It is normal for businesses to return unwanted goods to suppliers. The double entry arising will depend on whether or not the goods or acquired for cash: Dr Cash Cr Purchases returns or Dr Payables Cr Purchases returns $300 $300, for credit transactions $200 $200, for cash transactions
KEY KNOWLEDGE Discounts

As explained in the previous chapter, there are two types of discounts: trade and settlement discounts. Trade discounts are deducted at the point of sale and therefore purchases are recorded net. Settlement discounts received from suppliers is recorded as follows: Dr: Payables Cr: Discount received (income) $100 $100.
Discounts received are settlement discounts that our suppliers allow to us. They are therefore partial forgiveness of debts that we owe to other people. They are therefore a source of income in our books.
KEY KNOWLEDGE Sales tax

The organisation may also have to pay sales tax itself on goods and services bought. This sales tax paid can normally be reclaimed. Even though the organisation has to pay the supplier the full amount, if the sales tax is reclaimable then it does not affect the value of the item purchased.
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ExPress Notes
The sales tax paid is referred to as input sales tax. The double entry bookkeeping records need to show the goods sold and the sales tax value separately. Assuming a tax rate of 20% the above cash transaction will be recorded as follows: Dr: Purchases Dr: Sales tax Cr: Payables $1,000 $ 200 $1,200.
If the above credit transaction is subject to 10% trade discount, sales tax should be charged on the reduced amount as follows: Trade discount: 10%*2,000 =200 Dr: Purchases Dr: Sales tax Cr: Payables $1,800 $ 360 $2,160
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ExPress Notes
Chapter 7
Payroll

Its a fact of business, if a company has employees it has to account for payroll and benefits. Payroll and benefits include: Wages; Salaries; Bonuses and commissions; Overtime; Payroll taxes Employer paid benefits such as holiday pay.
A clear distinction should be made between gross and net pay. From gross pay of an employee statutory deductions are made by the employer for items like personal income tax and employee social security contributions. However, the employee may authorise his employer to make other deduction from their salaries called voluntary deductions- for items like sports club membership fee, pension contribution, trade union subscription, etc.
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ExPress Notes
Ledger entries for below pay details are as follows: Payroll details: Gross pay Social security tax employee Pension Income tax Social security tax employer Trade union subscription $1500 6% of gross pay 5% of gross pay $200 10% of gross pay $25
Dr: Wages expense account Dr: wages expense account Cr: Tax payable account
$1500 (gross pay) $150 (employers social security) $ 150 (employers social contribution) $ 200 (income tax) $ 90 (employees social contribution)
Cr: Pension payable account Cr: Trade union payable account Cr: Wages payable account
$ 75 $ 25 $1,110
KEY KNOWLEDGE Payroll processing

There are three common methods of payroll processing: 1. 2. 3. number of employees. Cash usually suitable for temporary employees; Cheque Automated payments -suitable for companies with large
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ExPress Notes
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ExPress Notes
Chapter 8
Control accounts and initial trial balance

A control account contains exactly the same information as in individual account in the ledger that it controls, using totals rather than individual transactions. They are sometimes referred to as total accounts. Common control accounts include the sales/receivable ledger control account and purchase/payables ledger control account. Receivables and payables accounts are always kept up to date, with transactions entered immediately as they arise. The daybooks are totaled periodically and can be used as a control mechanism.
KEY KNOWLEDGE Reconciling control accounts
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ExPress Notes
The control account must be checked on a regular basis against the total of balances in the relevant ledger and any arising difference between the two must be investigated. Any discrepancies found may be due to: errors in the individual ledger accounts; errors in the control account; errors in both the control account and ledger account.
KEY KNOWLEDGE Reconciling the cash book

The business records all transactions with the bank in the cash book. The bank records all transactions with the business in the bank statement. Therefore the content of the cash book should be exactly the same as the bank statement. Bank reconciliation should be performed at least monthly as part of control procedures over cash. When performing the reconciliation there are three main differences: unrecorded items like bank charges; timing differences like outstanding cheques; errors either in the cash book or in the bank statement.
KEY KNOWLEDGE Initial trial balance

After all transactions are recorded in the ledger accounts an initial trial balance is extracted. Since the balances in the ledger accounts are results of double entries the total of debit balances should equal the total credit balances. If this is not the case a suspense account is opened to make the debits and credits equal. The balance on this account is cleared after all errors are identified and corrected. Typical errors where the trial balance does not balance are: single sided entry: a credit has been entered without a corresponding debit; debit and credit entry have been made for different amounts; two entries have been entered on the same side; miscasting; opening balances ignored; extracting errors.
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ExPress Notes
Deliberate creation of suspense accounts A suspense account may be used deliberately where a transaction has happened but the bookkeeper is uncertain what it relates to. By recording the transaction in suspense, it can ensure that the records are at least partially correct, but can then be corrected fully when the information necessary is known.
(end of ExPress notes)
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About ExPress Notes

Sales and credit transactions

START About ExPress Notes

How to get the most from these ExPress notes

At the start of the learning phase

Your stage in study for each paper Practice phase

These ExPress notes

ACCA online past exams

The night before the real exam

At the door of the exam room before you go in.

Our ExPress notes fit into our portfolio of materials as follows:

START About The ExP Group

Business transactions and documentation

START The Big Picture

KEY KNOWLEDGE Source documents

Purchase order Goods received note

Goods dispatched note Invoice Statement

Receivables, payables and purchases.

KEY KNOWLEDGE Data sources / data capture

KEY KNOWLEDGE Books of prime entry

The most commonly used books of prime entry are:

Book of prime entry: Cash in book

Cash payments book Petty cash book

Sales day book

Purchases day book

Books of prime entry may be recorded in paper form, or using a spreadsheet.

KEY KNOWLEDGE Journal book

Financial statements and their elements

START The Big Picture

Statement of financial position of Sole Trader X at 30 June 20x1

(24,000) 91,700 16,000 (8,000) 99,700

Non-current liabilities Bank loans 32,000

Total equity and liabilities

Equally validly therefore:

Statement of comprehensive income for the year ended 30 June 20x1 $ $

(100,000) Gross profit 52,000

Sundry income Discounts received

3,000 2,000 57,000

3,000 6,000 1,000 4,000 2,500 500 2,500 9,000 1,500

Wages and salaries

Profit for the period before tax

KEY KNOWLEDGE Elements of financial statements

KEY KNOWLEDGE Relationship between the statements: the business equation

Closing net assets =

Double entry bookkeeping: the debits and credits

START The Big Picture

KEY KNOWLEDGE So why debits and credits?

KEY KNOWLEDGE Building up the rules

What happens to net assets:

And the reason for that increase in net assets:

Cash and bank

START The Big Picture

KEY KNOWLEDGE Documentation

KEY KNOWLEDGE Cash book and petty cash book

Sales and credit transactions

START The Big Picture

Dr Cash Cr Sales or Dr Receivables Cr Sales

$1,000 $1,000 for cash transactions

$2,000 $2,000 for credit transactions

KEY KNOWLEDGE Irrecoverable debts