ACCA-Foundations-FA1
About Course
The starting point of a finance student which develops knowledge and understanding of the main types of business transactions and documentation how these are recorded in an accounting system up to the trial balance stage.
Course Content
Chapter 1: Introduction to Business and Recording Transactions
This chapter covers the following Learning Outcomes.
A. Types of Business Transaction and Documentation
Types of business transaction
Describe a range of business transactions including:
Sales
Purchases
Receipts
Payments
Petty cash
Payroll
Types of business documentation
Summarise the purpose and content of a range of business documents to include but not limited to:
Sales invoice
Supplier (purchase) invoice
Credit note
Debit note
Delivery note
Remittance advice
Prepare the financial documents to be sent to credit customers including:
Sales invoice
Credit note
Statements of account
Process of recording business transactions within the accounting system
Identify the characteristics of accounting data and the sources of accounting records, showing an understanding of how the accounting data and records meet the business’ requirements.
Describe the key features of a computerised accounting system, including the use of external servers to store data (the cloud).
Summarise how users locate, display and check accounting data to meet user requirements and understand how data entry errors are dealt with.
Summarise the tools and techniques used to process accounting transactions and period-end routines and consider how errors are identified and dealt with.
Identify risks to data security, data protection procedures and the storage of data.
Explain the principles of coding in entering accounting transactions including:
Describing the need for a coding system for financial transactions within a double entry bookkeeping system
Describing the use of a coding system within an accounting system
Describe the accounting documents and management reports produced by computerised accounting systems and understand the link between the accounting system and other systems in the business.
C. Banking system and transactions
Documentation
Explain why it is important for an organisation to have a formal document retention policy.
Identify the different categories of documents that may be stored as part of a document retention policy.
Chapter 2: The Accounting Equation and Double Entry
An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Generally, it will be something which a business owns.
Assets can be divided into Current Assets and Non-Current Assets.
Current assets are expected to be used up, sold or collected in a short period (less than a year). Non-current assets are expected to be used by a business over several years.
A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in a probable outflow of economic benefits. Generally, a liability is an amount that is owed by the business.
Liabilities can be divided into Current Liabilities and Non-Current Liabilities.
Current Liabilities are liabilities due for payment in a short period (within one year).
Non-Current Liabilities are liabilities which are not due for payment within one year.
Capital is the net assets of a business. The net asset is the difference between the Asset and Liability.
CAPITAL = ASSETS – LIABILITIES
Capital is the amount which the business owes to its owners.
The Accounting Equation describes a business’s total value of assets as the sum of the total value of the business’s liabilities plus capital.
A business generates income when a sale is made. It incurs expenses when it makes a purchase.
Income can be divided into revenue and gains.
Revenue is income that is generated from ordinary activities of the business.
Gains are additional income received from irregular (‘one-off’) transactions.
Expenditure can be divided into asset expenditure and expenses.
Asset expenditure is the purchase of non-current assets.
Expenses are the day-to-day costs of running a business.
Double entry is also known as the dual effect because every financial transaction gives rise to two accounting entries, a Debit and a Credit entry in different ledger accounts.
The Expanded Accounting Equation is:
Assets + Drawings + Expenditure = Capital Invested + Liabilities + Income
DEBIT to Increase CREDIT to Increase
Assets Captial
Drawings Liabilities
Expense/ Expenditure Income
Journal entries can be used to specify which accounts are debited and credited, and the value of the debits and credits for each transaction.
Chapter 3: Sales on Credit
A sale invoice is a financial document sent from a business to the customer, highlighting details of the sale transaction.
Tax authorities or governments impose sales taxes. A percentage of sales tax is charged on goods and services sold.
Sales tax can be divided into output tax or input tax.
Output tax is a tax charged on sales to customers. It is collected by the seller and subsequently paid to the tax authorities.
Input tax is a tax charged on the purchase from suppliers. It is collected by the supplier and subsequently paid to the tax authorities.
Input tax can be reclaimed from the tax authorities for registered businesses.
A trade discount reduces the cost of goods or services bought or sold.
A settlement discount or prompt payment discount is a discount offered to customers or given by suppliers for prompt payment.
A credit note is a financial document issued to customers from a business due to problems with goods delivered. The credit note will reduce the value of an invoice previously issued.
Relevant credit sales ledger accounts are:
Trade receivables account (asset)
Sales account (income)
Sales return account (expense)
Sales tax account (liability)
Bank account (asset)
The customer account statement is a financial document sent from the business to the customer at the end of the month detailing transactions between seller and customer. The transactions include sales, credit received, and customer payments.
Chapter 4: Purchases on Credit
A credit purchase transaction will make use of the following financial documents:
Purchase order
Delivery note
Goods received note
Purchase invoice
Credit note
Remittance advice
A purchase invoice is received from a supplier where the business has bought goods or services on credit.
Input tax can be reclaimed from the tax authorities for registered businesses. Therefore, the input sales tax amount is categorised as a current asset at purchase.
The journal entry to record a credit purchase is:
Dr. Purchases account Expense
Cr. Trade payables account Liability
The journal entry to record a credit purchase with sales tax is:
Dr. Purchases account Expense
Dr. Sales tax account Asset
Cr. Trade payables account Liability
The journal entry to record a purchase return is (with sales tax):
Dr. Trade payables account Liability
Cr. Purchase return account Income
Cr. Sales tax account Asset
The journal entry to record a supplier payment is:
Dr. Trade payables account Liability
Cr. Bank account Asset
The journal entry to record a supplier payment with settlement discounts is:
Dr. Trade payables Liability
Cr. Cash Asset
Cr. Discount received Income
A remittance advice is a document slip showing evidence of a supplier’s payment. The remittance advice highlights the amount paid and the invoice for the related payment.
The purchase system is integrated with the business’s accounting system. As purchase transactions occur, the general ledger accounts and the individual supplier account are updated automatically.
A supplier statement account is a financial document from a supplier to a business at the end of each month detailing all transactions between the two parties.
A business performs trade payables reconciliations monthly by comparing the balances between the individual supplier account and the received supplier statement account.
The steps to prepare for individual supplier account reconciliation are:
Enter the individual supplier account balance
Adjust for unmatched items in the reconciliation
Calculate the final figure to match the balance to the supplier statement account
Chapter 5: Cash and Bank
A bank is a licensed financial institution where the public can deposit and borrow money.
Three types of banking institutions are retail banks, investment banks, and central banks. Each of them provides different services.
Retail banks provide services such as:
providing individuals or businesses with bank accounts to deposit money
issuing loans, overdraft facilities or credit cards facilities
making payments to organisations in other countries
supplying financial insurance
Investment banks provide services such as:
advisory services on stock market fluctuations and mergers and acquisitions
trading financial instruments such as bonds, derivatives, and shares for clients or their own profit.
Arranging capital raising and initial public offering (IPO) for corporate clients
A Central bank is an institution that exists within a country to manage a country’s money supply and ensure financial stability. They are in charge of implementing the government’s monetary policy and setting the currency rate daily.
A current account facilitates receipts and payments from business activities. It pays a low rate of interest or none at all.
A savings account is where a business usually keeps its surplus funds as it pays a higher interest than a current account.
An overdraft account offers access to cash for short-term needs, with interest charges on the balance owed.
There are different ways a business can receive money from our customers and make payments to our suppliers, such as:
Cash payments
Cheque payments
EFTPOS payments - credit or debit card
Electronic Bank Transfers – standing order, direct debit or direct credit
A receipt is a financial document that confirms a cash receipt/payment has been made in exchange for goods or services.
When making payments or receiving cash, security measures need to be in place, such as keeping cash in a locked safe and exercising caution when depositing money in the bank.
A cheque is a written instruction from the drawer/ payer to their bank to pay the payee a sum of money from the drawer's account.
A cheque clearing system works this way:
Once a cheque is received, the payee will deposit it with their bank. The bank then passes it to a clearing centre, which transfers it to the drawer's bank. The drawer's bank has a legal responsibility during this time (for example, three working days) to either pay the funds into the payee’s account or return the cheque with reasons for non-payment.
Reasons for non-payment can be insufficient funds in the drawer’s account, the cheque being filled incorrectly, or the cheque being a fraud risk. The returned cheque is called a dishonoured or bounced cheque.
When making payments or receiving cheques, security measures need to be in place, such as ensuring all details in a cheque are entered correctly and cheque requisition forms are authorised.
A banker’s draft is a guaranteed cheque from a bank.
EFTPOS uses credit cards or debit cards to make sale payments.
Payments using debit cards will transfer an amount from the account holder’s bank account to the merchant.
Payments using credit cards will transfer the amount to a merchant, and the customer will later be billed the total amount spent.
Security measures needed for EFTPOS payment include signing the back of the card right away and using strong 4-digit pins
Bank transfer payments can be made with standing orders, direct debits or credits.
A standing order is a way to set up regular payments. It is arranged between the business and its bank. The amount and intervals of the transfer are fixed.
A direct debit is set up by the payee (person receiving payment). This transfer makes regular but variable amounts from the business bank account.
Direct credit is a way to transfer money directly from one bank account to another for one-off payments.
Security measures needed for bank transfer payments include updating bank account passwords regularly and ensuring text alerts are in place
To reconcile customer payments, businesses will compare the remittance advice and the sales invoice and, if any, credit notes
To reconcile supplier payments, businesses will compare the supplier (payable ledger) account and the supplier statement of accounts.
Chapter 6: Petty Cash
Petty cash is the money (notes and coins) a business holds to pay for low-value items and deal with any other transactions requiring cash.
The petty cash procedure is:
When money is taken out to make purchases for small value items, an I.O.U Note (I owe you) is put into the tin.
After purchasing the item, any change is returned to the tin.
The IOU is taken out and replaced with a petty cash voucher
A petty cash voucher records details of the petty cash payments. The voucher is included in the petty cash tin with the purchase receipt.
In the petty cash voucher, the net amount (amount before sales tax) is always 100%. The gross amount is 100% + sales tax %
Imprest and non-imprest systems are methods of replenishing the petty cash tin. A business may manage the level of cash by operating either the imprest or non-imprest system.
In an imprest system, there is a fixed amount of money in the petty cash tin at the beginning of each period. At the end of the period, the amount of cash in the tin is counted. The business then adds money to bring the cash total to the original fixed amount.
Non-imprest system is any other method of replenishing than imprest System.
The double entry to record petty cash payments for business expenses is:
General Ledger Account Category
Dr. Individual expense Expense
Cr. Petty cash Asset
The double entry to record petty cash receipts is:
General Ledger Account Category
Dr. Petty cash Asset
Cr. Individual expense Expense
The double entry to record petty cash reimbursements is:
General Ledger Account Category
Dr. Petty cash Asset
Cr. Bank Asset
Petty cash reconciliation compares the balances from petty cash tin (cash-in-hand) and petty cash records (petty cash ledger accounts)
Differences may arise between the two balances due to:
Errors when calculating cash-in-hand
Errors in petty cash ledger accounts
Theft and fraudulent activities
Chapter 7: Payroll
Payroll is the record a business keeps, listing employee expenses and their work.
The responsibilities of the payroll function include:
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Gross wage or salary is an employee’s earnings before deductions are made.
The types of gross pay are salary, wages, overtime, other additional earnings, holiday pay, sick/maternity pay and back pay. When referring to gross pay, it can be formed from any combination of the element listed.
An employee is paid their gross earnings after deductions. This is known as net pay.
The total cost of an employee is:
Employee gross pay + Employer contribution to employee state benefits / Pension funds (or any other employer contributions)
The payroll report shows a summary of the information such as:
Gross pay
Income tax deduction from employees
State benefit contribution deduction from employees
Pension fund contribution deduction from employees
State benefit contribution deduction from employer
Pension fund contribution deduction from employer
Net pay
Journal entries are created and subsequently entered into the accounting system from information obtained from the payroll report
The double entry for the total cost of employees is Dr. Employee Expense and Cr. Payroll Liability
The double entry for each deduction is Dr. Payroll Liability and Cr. Each deduction liability
The double entry for payments to employees is Dr. Payroll Liability and Cr. Bank
Payroll liability should balance to zero every period end.
Payment will be made to the tax authorities and pension fund in the following month. The double entry for this is Dr. Deduction Liability (liability decreased) and Cr. Bank (asset decreased).
Payslips are prepared by a company’s payroll function to be distributed together with payments to an employee.
There are 2 payment methods most organisations use to pay their employees: cash/cheque or bank transfer payments.
Cash or cheques are distributed to employees in envelopes with the respective employee’s name on the pay envelopes
Bank transfers (direct credit) are typically used to make payments to employees by informing banks to make transfers.
Payroll payment safeguards include:
Manager authorisation has been obtained for payroll payments
For larger organisations, ensure segregation of duties is in place.
For cash payments, employees need to produce identification cards or passports for verification
Employees to provide signatures in the payroll record after receiving pay envelopes
Only authorised payroll personnel can distribute pay envelopes to employees
In case of absent employees, pay envelopes should be stored in a locked safe
Payroll departments deal with private and sensitive information of business employees. The employer is legally responsible for keeping such information about employees safe per the data protection legislation.
Chapter 8: The Trial Balance
A trial balance is a list of all the closing debit or credit balances from each ledger account in the general ledger.
To create the trial balance, the following steps are made:
Close off each ledger account
Prepare the initial trial balance
Check for errors and make corrections via journals
Prepare a final trial balance
A journal is a record of accounting entries which need to be posted to the general ledger.
A manual journal entry is used to record financial activities such as:
Unusual or one-off transactions
Period-end adjustments
Correct errors in the trial balance
There are several types of errors that may exist in a trial balance
Error of reversal entry
Error of principle
Error of original entry
Error of commission
Error of omission
An error of commission occurs when a transaction has been posted to the wrong account of the same 'type'.
An error of principle occurs when a transaction has been posted to an account of a different 'type'.
An error of omission occurs when something is 'omitted' – left out or not posted to the accounts.
Reversal of entry occurs when transactions are posted to the wrong sides of the accounts.
An error of original entry occurs when a transaction has been posted with an incorrect amount to both sides of the Account.
Errors are corrected using the journal. The journal entries flow into the relevant general ledger accounts, and a new closing balance is calculated.
The final trial balance will include the updated closing balance from each corrected ledger account.
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