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ACCA – FOUNDATIONS IN ACCOUNTANCY (FIA).
FA 1 – RECORDING FINANCIAL TRANSACTIONS
LECTURER : MR. MIKE BANDA
CHAPTER 1 – BUSINESS TRANSACTIONS AND
DOCUMENTATION
WHAT IS A BUSINESS?
A "business" is an organization that provides goods or services to customers with the intention
of making a profit by selling them; essentially, it's an activity undertaken to earn money through
the exchange of products or services.
The primary motive of a business is to generate profit by selling goods or services above the
cost of production.
Typical business ventures include manufacturing, trading, providing professional services, or a
combination of these.
Business types include sole proprietorships/sole traders, partnerships and corporations, or
limited liability companies.
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WHAT IS A BUSINESS TRANSACTION?
A "business transaction" is any exchange of goods or services between two
parties, resulting in a change in value or quantity, typically recorded for
accounting purposes, such as a purchase, sale, payment, or transfer of assets,
marking a distinct event in a company's operations.
The core element is the exchange of something of value, whether it is a
product, service, or money.
Businesses typically document transactions in their accounting system to
maintain financial records and monitor their financial health.
Examples of business transactions:
Sales transaction: When a company sells a product to a customer.
Purchase transaction: When a company buys goods or services from a
supplier.
Payment transaction: When a customer pays for a purchase.
Loan transaction: When a company borrows money from a bank.
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Cash Versus Credit transactions
A cash transaction is an immediate exchange of physical money for
goods or services, meaning you pay with your own money at the
time of purchase
While a credit transaction involves borrowing money to buy
something now and paying it back later
Separate entity concept
A business is separate from its owners when it's structured as a separate legal
entity.
This means that the business has its own rights and obligations, and is
considered a distinct entity from its owners.
The separate entity concept is an accounting principle that treats a business as
a distinct entity from its owners.
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Dual effect of financial transactions
This concept assumes that every transaction has a dual effect, i.e. it
affects two accounts in their respective opposite sides.
Therefore, the transaction should be recorded at two different
account.
The Dual Aspect Concept is fundamental in accounting.
It states that every financial transaction has two equal and
opposite effects.
Documenting business transactions:
Internal and External Documentation
When documenting business transactions, "internal
documentation" refers to records created and used solely within a
company, like purchase requisitions or employee timesheets.
“External documentation" includes documents shared with outside
parties, such as customer invoices or vendor statements.
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Internal documentation
Used for internal management, tracking processes, employee training, and decision-making
within the company.
Examples:
Purchase orders
Sales orders
Inventory reports
Payroll records
Meeting minutes
Department budget trackers
Goods Received Notes (GRNs)
External documentation:
Used to communicate details of a transaction with external parties like customers,
vendors, or banks.
Examples:
Invoices
Credit Notes
Debit Notes
Bank Statements
Delivery Notes
Sales Contracts
Receipts
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Invoices are requests for payment
Credit notes are used to adjust an invoice.
An Invoice is a document sent by a vendor to a buyer specifying the
product delivered and the amount to be paid
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Credit Note
A document sent by a vendor to a buyer
States that a certain amount has been credited to the buyer's account
It is used to correct billing mistakes, goods returned,overpayments,
discounts, rebates, or promotions
A credit note can be used to cancel an invoice while issuing a new one
For example, if a product is incorrectly invoiced, the vendor can issue a
credit note for the difference
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Debit Note
A debit note is a document that adjusts the amount owed between
a buyer and a seller.
It can be used to request a refund, or to increase the amount due.
Debit Notes are used to request a refunds for example, if goods are
returned or there is an overcharge.
They are a source document to the purchase returns journal.
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Discounts, rebates and allowances
Discounts, rebates, and allowances are all ways to save money on a
purchase.
Discounts
A price reduction that a customer receives at the time of purchase
Can be a percentage, dollar amount, or volume discount
Can also be a "buy one, get one" (BOGO) deal
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Rebates
A refund or portion of a purchase price that a customer receives after the
purchase
A sales promotion technique that rewards customers for their purchase behavior
Allowances
Deductions granted for damage, delay, shortage, imperfection, or other causes
Vendors may offer allowances in conjunction with opening a new store, such as
free or reduced price merchandise, or product shelving
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Storage of information: Retention Policy
A document retention policy is a set of guidelines that a company establishes to manage how
documents, records, and other important information are stored, saved, and ultimately
destroyed, outlining which documents need to be kept, for how long, and who is responsible for
managing them throughout their lifecycle, from creation to disposal; it often includes
procedures for both physical and electronic documents and is crucial for legal compliance and
data governance.
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Why is a document retention policy
important?
Legal compliance:
Many industries have regulations that require companies to retain certain
documents for specific timeframes.
Litigation support:
In case of legal disputes, a well-maintained document retention policy helps
identify relevant documents quickly.
Data security:
Proper document retention practices can help protect sensitive information
from unauthorized access.
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Data Protection
Data protection refers to the practice of safeguarding sensitive information
from unauthorized access, loss, corruption, or misuse, ensuring its
confidentiality, integrity, and availability by implementing security measures and
adhering to legal regulations governing data handling; essentially,.
It entails protecting personal data to maintain privacy and comply with data
protection laws.
The guiding legislation for data protection in the UK is the UK General Data
Protection Regulation (UK GDPR), which is implemented through the Data
Protection Act 2018.
Both regulations work together to set out the legal framework for how
personal data must be handled within the UK.
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Examples of data protection practices:
Encryption: Transforming data into a scrambled format that can only be
accessed with a decryption key.
Access controls: Limiting who can access specific data based on their
permissions.
Data anonymization: Removing identifiable details from data to protect
individual privacy.
Data minimization: Collecting only the necessary personal data for a
specific purpose.
Regular backups: Creating copies of data to prevent loss in case of
system failure.
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