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Chapter 1 - Business Transactions and Documentation

Chapter 1 - Business Transactions and Documentation

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Lecturer: Tran Viet
Thang

ACCA
Certified Accounting Technician
(CAT)
Paper 1 - Recording Financial

Syllabus overview

Part A Introduction to transaction
accounting

1 Business transactions and documentation
2 Assets, liabilities and the accounting
equation
3 Statement of financial position and income
statement
4 Recording, summarising and posting
transactions
5 Completing ledger accounts

Syllabus overview

Part B Recording and accounting
for cash transactions

6 Receiving and checking money
7 Banking monies received
8 Recording monies received
9 Authorising and making payments
10 Recording payments
11 Maintaining petty cash records
12 Bank reconciliations

Syllabus overview

Part C Recording and accounting
for credit transactions

13 Sales and sales returns day books
14 The receivables ledger
15 Purchase and purchase returns day
books
16 The payables ledger
17 Control accounts

Part D Payroll

18 Recording payroll transactions

CHAPTER 1

Business transactions and
documentation

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

Types of business
transaction

What is a business?

Uses economic resources to create goods or
services which customers will buy
Provides jobs for people to work in

Invests money in resources in order to make
even more money for its owners

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

Other business transactions

Payment of wages

Borrowing money

Lending money

Offering a discount

Receiving a discount

Documenting business
transactions

Binding point b/w seller and buyer?

Discussion

Documentation to expect

1You buy a CD from a shop, paying cash

(1) A receipt

3You have air-conditioning system installed

(1) A letter of enquiry
(2) A quotation
(3) An order
(4) An order acknowledgement
(5) A delivery note
(6) An invoice

(7) A credit note

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

Purchase order vs. sales
order

Pu
rc
h
as
e
or

S
al
es
or
d
er

Invoice vs. credit note vs.
debit note

Invoice

A demand for
payment
Settled immediately
in cash: receipt
Paid on receipt of
goods: cash on
delivery (COD)
invoice
Paid later: credit
invoice
Invoice illustration
How many copies
needed?

Credit note

Negative invoice:
cancel part or all of
previously issued
invoice
Amount payable:
unpaid invoice’s
value minus the
credit note’s

Debit note

Customer to supplier
requesting a credit
note
Supplier to customer
to adjust upwards

Illustration

H
o
w
m
u
c
h
is
th
e
p
a
y
a
bl

Discounts, rebates and
allowances

$1 per unit, but 95p
for 100 units or more
Given on invoice

Permanent

10% 0 days, 5% 7
days, net 30 days
Financing matter

Trade discount

Cash discount

A reduction in the
bills for the following
year
A cheque for the
calculated rebate

Buy 1 get 1 free

Rebate

Allowance

Example

Trent Marcus has three major suppliers.
(a) Parker is in the same business as Trent and offers 5%
trade discount
(b) Scott offers a trade discount of 6% on amounts in
excess of $200 (ie the trade discount does not apply to
the first $200)
(c) Alan offers a 10% cash discount for immediate
payment or a 5% cash discount for all items paid for
within 30 days of purchase
Purchase transactions in Jan 20X8 worth the following
amounts before discounts have been deducted.

From Parker: $600

From Scott: $850

From Alan: $280 cash and $920 to be paid on 14.1.X8
for goods purchased on 3.1.X8
Calculate how much Trent has received as discounts in

Answer

Example

Product A is quoted at $10 per each. A lower
price of 95% per unit for buying 100 units or
more at a time. One company purchased
150 units.
What is accounting treatment?

Trade discount
The value of those goods recorded in
accounting book should be the net amount
after discount i.e, $1,425
($1,425 = 150*$10*95%)

Question

Champer purchases goods with a list price of
$30,000. The supplier offers a 10% trade
discount, and a 2½% cash discount for
payment within 10 days.
Required
Note. Ignore sales tax.
(a) Calculate the amount Champer will
have to pay if it delays longer than 10 days
before paying.

(b) Calculate the amount the company will
pay if it pays within 10 days.

Answer

List price

30,000

Less 10% trade discount

3,000

27,000

Less 2½ cash discount
27,000 x 2½%

675

26,325

Note: Trade discount first, cash discount
second

Example

Credit period allow: 60 days
Invoice price of the goods: $10,000
3% discount for immediate payment
Questions:

1.Should the customer take this option when
he has no money and has to ask money
from bank with interest rate 2% per month?
2.Should the supplier offer this option if he
can deposit the early payment in bank with
interest rate 1.8% per month?

Answer

The discount worth

= $10,000*3%

= $300
The interest paid to bank

= 2%*2*$10,000*97%
= $388
Customer should refuse this option

The interest income received from bank
= 1.8%*2*$10,000*97%
= $349.2
Supplier should refuse this option

Sales tax

Net price

= $120

Sales tax rate

= 17½%

Sales tax

= 17½% * $120 = $21

Gross price

= $141

Note:

Purchaser pays gross price

141
Government takes the sales tax (21)
Seller keeps net price

120

Input tax vs. output tax?

Sales tax return?

Illustration

The gross price of product A is $705 and
the net price of product B is $480. What is
the sales tax charged on each product if
the sales tax rate is 17½%?

Solution
(a) Sales tax for product A = 17.5/117.5 ×
$705 = $105. (So net price was $705 –
$105 = $600.)
(b) Sales tax for product B = 0.175 × $480

Question

A company sells goods for $127,350
including sales tax at 17 ½% in a quarter.
It buys goods for $101,290 including sales
tax. What amount will it pay to or receive
from the tax authorities for the quarter
(round to the nearest $)?

Solution

Example: Discounts and
sales tax

A company buys goods for sale costing
$6,000. A cash discount of 5% is offered
for payment within 10 days. If the sales
tax rate is 17½%, what is the sales tax
due? Is your answer different if the
company pays after 10 days?

Answer

Sales tax is calculated on the discounted
price regardless of whether the discount
is actually taken.

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