1.1 Bookkeeping and Accounting in Business

Question 1

1.1.1 What is a Business?

Answer 1

A business is an organisation that aims to make a profit for its owner.

Profit is the difference between a business’s income and expenses.

Income is derived mainly from a business’s sales of goods or services. Expenses are the amounts that a business pays to operate.

Question 2

1.1.2 Ownership and Recording of Transactions

Answer 2

Owners introduce assets into the business as capital.

The business’s records should only include transactions specifically related to its operations, not transactions concerning the owner’s personal expenses.

A business can be owned by one person or by many.

Question 3

A sole trader =

Answer 3

FA1 assumes that the business is owned and controlled by one person

Legally, there is no distinction between a business and its owner as a sole trader.

A sole trader may withdraw assets (i.e. cash) from the business as drawings.

Question 4

Bookkeeping is the act of

Answer 4

recording financial transactions wholly and accurately. A bookkeeper records the past activities of the business.

Question 5

Accounting is the use of

Answer 5

the information compiled by the bookkeeper to prepare the financial statements of an organisation.

Bookkeeping and accounting in a business record the entire transaction process, from the transactions to the creation of financial statements.

Question 6

1.1.4 Accounting for Business Transactions
1. Business Transactions

Answer 6

Business transactions such as sales and purchases must be correctly and accurately recorded in the accounting systems.

Question 7

2. Financial documents

Answer 7

Financial documents provide evidence that a business transaction took place. For each financial transaction, a document with details of the transaction must exist.

For example, an invoice (document) is evidence of a sale (transaction), and remittance advice (document) that has been received is evidence of a payment receipt (transaction).

Financial document details are recorded in the computerised accounting system by the bookkeepers of a business.

Question 8

3. General Ledger Accounts

Answer 8

Once details of financial transactions are recorded in the accounting system, the amount is classified into the relevant general ledger accounts using DOUBLE ENTRY.

For example, a cash sale transaction will be recorded in the cash and sales ledger accounts.

Question 9

4. Trial Balance

Answer 9

The total balances from each general ledger account are summarised and compiled in a trial balance at the year-end. The trial balance is investigated to ensure no errors in recording the transactions.

Question 10

5. Financial Statements

Answer 10

Information is taken from the trial balance to prepare the business’s financial statements: Statement of Profit or Loss and Statement of Financial Position.

Question 11

the STATEMENT OF PROFIT OR LOSS is a

Answer 11

high-level summary of the business’s activities during the year.

Question 12

the STATEMENT OF FINANCIAL POSITION highlights

Answer 12

the current position of the business’s assets, liabilities and capital.

Question 13

1.1.5 Users of Financial Information
Financial statements are the summary of the accounting records prepared by the accountant. Who are the 4 users of financial statements?

Answer 13

1. TAX AUTHORITIES - may look through a business’ records to determine if the tax expense has been correctly calculated and paid.
2. FUTURE INVESTORS - may look at available financial info to determine how well the business performs before investing money
3. BANK MANAGERS - may enquire about the business’s financial statements before authorising a bank loan
4. SUPPLIERS - may ask to view financial statements before giving the business a credit account (purchase and pay later).

Question 14

1.2.1 Types of Business Transactions
Sales - exchanging goods or services for money
Sale returns – faulty or incorrect goods returned from a customer
Purchases - buying goods or services using money
Purchase returns – faulty or incorrect goods sent back to the supplier
Payments - transfer of money to a third party
Payment receipts - receiving money from a third party
Petty cash payments - paying for low-value items using a small fund of cash
Payroll payments - money paid to employees for wages and salaries

Answer 14

All financial transactions must have a valid FINANCIAL DOCUMENT with details of the transaction. For example, a sales transaction is recorded using an invoice.

Question 15

1.3.1 Types of Financial Documents
QUOTATION =

Answer 15

a document sent by the seller with details of the price for each item.

Question 16

PURCHASE ORDER is

Answer 16

a document completed by the customer and sent to the supplier, highlighting the items they want to order.

Question 17

DELIVERY NOTE is

Answer 17

a document that accompanies the delivered goods. The customer signs the delivery note to confirm proof of delivery when the goods are delivered. The supplier also checks that the correct goods are being sent

Question 18

GOODS RECEIVED NOTE (GRN) is

Answer 18

an internal document completed by the customer to ensure everything ordered has been received

Question 19

INVOICE is a

Answer 19

document sent to customers with details of the items purchased on credit. Details include the date, quantity, price, parties involved

Question 20

CREDIT NOTE is

Answer 20

a document issues by the supplier to reduce the value of the previously issued invoice due to faulty or damaged goods being supplied

Question 21

DEBIT NOTE is a

Answer 21

a document issued by the customer to the supplier to request a credit note.

Question 22

STATEMENT OF ACCOUNT is a document

Answer 22

sent to a customer with details of all transactions between the parties. The statement also highlights the balance owed to the supplier at the end of the month.

Question 23

REMITTANCE ADVICE is a document

Answer 23

sent to the supplier to show that payment has been made.

Question 24

CHEQUE is a written document authorising

Answer 24

the bank to transfer a stated amount from the drawee’s account to the named account holder.

Question 25

PETTY CASH VOUCHER a document slip that fits within

Answer 25

the petty cash tin to record any payment from the petty cash fund.

Question 26

2.1.1 Cash Transactions
CASH PURCHASE(S)
- Occur when….
- definition

Answer 26

occur when goods or services are received from a supplier in exchange for immediate cash payment.
- A business may enter a shop and buy goods or services using cash. This is a cash purchase (goods are received from the shop with money payment).

Question 27

CASH SALES
- Occur when
- definition

Answer 27

occur when goods or services are given to customers in exchange for immediate cash payment.
- From the shop’s point of view, a customer goes into the shop and exchanges cash for goods or services. The shop business is making a cash sale.

A cash sale occurs when the customer does not have an account with the supplier and pays immediately for the goods or services.

Question 28

2.1.2 Credit Transactions
CREDIT PURCHASES occur when

Answer 28

goods or services are received from a supplier for future payment.

As no cash has changed hands at the point of sale, the transaction is called a credit purchase or sale. The seller has made a credit sale, and the customer has made a credit purchase.

Question 29

CREDIT SALES

Answer 29

occur when goods or services are given to customers in exchange for a future receipt.

Question 30

a PURCHASE INVOICE will be received from the supplier for

Answer 30

credit purchases, while a sales invoice will be sent to the customer for credit sales when goods or services have been delivered.

Invoices received or sent will record details of the customer, the items sold, the sale date and the transaction’s value.
It will also state the credit term (how long before the customer has to make full payment for the product).

Question 31

Credit customers have AN ACCOUNT in a business’s accounting system.

Answer 31

It will include all transaction details between the two parties.Each credit customer is given a set number of days to pay for the goods.

Cash sales customers do not have an account with the business and must pay immediately before they can have the goods.

Question 32

3.1 Characteristics of Accounting Data
For the accounting information to be useful, it should have these characteristics:

Answer 32

Relevance
Faithful Representation
Comparability
Verifiability
Timeliness
Understandability

Question 33

RELEVANCE - information is relevant when it can

Answer 33

influence the economic decisions made by users.

Information is also relevant if it can be used to confirm past historical trends and predictions and predict future conditions and direction.

For example, the amount and ageing of a receivable from a customer, and the customer’s repayment history, are relevant to deciding whether to make additional credit sales to that customer.

Question 34

FAITHFUL REPRESENTATION - Information should faithfully represent the transactions and events of the business. It should be:

Answer 34

Complete: all transactions and balances have been recorded
Neutral: unbiased and free from manipulation
Free from error
For example, if the closing balance in the Cash account is $420, it should mean that the business has cash of $420, not more or less.

Question 35

COMPARABILITY - Useful financial Information of a business can be compared to prior period information and different businesses in the same industry. Comparisons can be analysed to identify trends and similarities. To achieve comparability….

Answer 35

similar items must be treated consistently.

For example, the sales transactions recorded for April 20X2 should be for April 20X2 (not before or after) to be comparable to April 20X1.

Question 36

VERIFIABILITY MEANS..

Answer 36

that the information can be supported by evidence. This usually means having supporting financial documentation or a means to count physical items (i.e. purchased goods or cash).

For example, petty cash held by a business is counted at the premises to ensure it agrees to the Petty Cash account balance in the general ledger.

Question 37

TIMELESSNESS means

Answer 37

receiving up-to-date information in time for it to be useful. Generally, the older the information is, the less valuable it becomes.

For example, it is essential to know the up-to-date cash balance available before making a significant cash transaction.

Question 38

UNDERSTANDABILITY

Answer 38

Information needs to be of sufficient quality to enable users with a reasonable knowledge of business and accounting to understand its meaning.

Financial transactions should be classified and information presented clearly and concisely with limitations on jargon used.

This is especially important for users from non-finance backgrounds.

For example, it is essential to understand and distinguish between assets and expenses, even though they are both debit balances in the accounts.

Question 39

3.2.1 Locating Accounting Data
For users to find the accounting data they need efficiently, it is crucial that …

It would be challenging to search for information if no tags or codes are assigned that allows for searching and queries.

Coding is covered in Section 4.

Users looking for data will query the accounting system for the necessary information

Answer 39

.the data is correctly categorised and coded (tagged) and that databases are kept up to date.

Question 40

Standardised (pre-built) reports

Answer 40

Most accounting systems have standardised reports that users can use to locate and extract information from the system.

For example, monthly purchasing or sales reports containing all associated transactions could be produced quickly.

Question 41

Dashboard (drill-down)

Answer 41

Some accounting systems present essential information in the form of a dashboard. Users may then select the indicator to examine the source information in more detail (drill-down).

Question 42

Direct Search

Answer 42

Users may use a search function to find a specific transaction or document by its code or by using keywords to see all entries related to that keyword.

Some examples are:

A search for a supplier called “JR Co” within a business’s accounting system may present all the transactions and master data about JR Co.
A search for a document code “12445” will present the document from the system for viewing.
Knowing the coding system for documents and transactions would be helpful for this function.

Question 43

Custom Query

Answer 43

Users may build custom queries to extract meaningful data from the system. A query will inform the system what information the user wants and in what format.

Queries will enable the system to generate information sets and tables that present the information to the user meaningfully and may provide necessary data for management reports.

For example, a user may query a system to display all credit sales transactions exceeding $100,000 for the previous quarter that have not been paid within 60 days.

Queries that are often used can be saved and standardised.

Question 44

3.2.2 Displaying Accounting Data
3 ways commonly displayed as:

Answer 44

1. Tables
2. Reports
3. Graphs

Question 45

Tables

Answer 45

Most accounting information is presented in tables with headers to provide meaning to the data points.

Tables allow users to quickly view, filter, sort, and manipulate data and often form the source information for producing graphs.

Question 46

Reports

Answer 46

Reports present information with formatting that assists management in identifying and understanding the essential information they need.

Reports may include tables, graphs, narration, appendices, and attachments that provide further insight into the presented data.

Question 47

Graphs

Answer 47

Graphs are visual representations of data, enabling users to identify trends and patterns and make comparisons quickly.

Question 48

Dashboard

Answer 48

Dashboards present essential information that management needs in a format that is easily understandable at a glance. The presented information is usually summarised and visually presented.

The perspective and type of information shown on a dashboard may be configured according to the user’s needs.

Question 49

3..2.3 Checking Accounting Data - verify correctness
4 ways

Answer 49

1. Comparing to source financial documents
2. Querying personnel on:
3. Analysing trends: patterns and ratios
4. Verifying transaction trails
5. Verifying categorisation and coding

Question 50

Comparing to source financial documents
eg…..

Answer 50

For example, comparing sales transactions posted to accounts with supporting documents (sales order, invoice, delivery note).

Question 51

Querying personnel on:
- Requisition =
- Authorisation =

Answer 51

Req = the person that initiated the transaction
Auth = The person that approved the transaction

Question 52

Analysing trends, patterns and ratios

Answer 52

Trends: Consistent changes over time. (i.e. revenue growth)
Patterns: repeated movements in data (i.e. revenue is higher than average every July)
Ratios: relative comparison between two data points (i.e. gross profit margin)

Question 53

Verifying transaction trails eg.

Answer 53

For example, ensuring that the necessary authorised documents for a sale are present and created correctly.

Question 54

3.2.4 Data Entry Errors
As humans may perform inputs into a computerised accounting system, omissions and errors can still be made during the data entry stage, leading to inaccurate processing and outputs.

Examples of inaccurate data entry are:

Answer 54

Transposition errors where the number 560 is entered into the system as 650
Clerk or intern does not have adequate training
Poor handwriting on source documents may lead to incorrect entries
Source documents may be overlooked and omitted from the system records
Fraud and malicious intent
Although data entry is correctly entered into the computerised system, this does not necessarily mean the processing and output are entirely accurate. Accounting software may also be susceptible to glitches and viruses that may cause pervasive inaccuracies.

Question 55

Data entry errors may be avoided by implementing the following:

Answer 55

Training employees on the correct procedures, such as double-checks and tick boxes.

Ensure supervisors are available to routinely review work done

Testing samples of entries for correctness.

Validating data by comparing the accuracy of data posted to the original document

Ensuring enough staff are hired to prevent overloading so data integrity can be maintained.

Implement automatic data entry procedures such as scanning to avoid transposition errors

Automating checklists to ensure verification procedures are followed.

Question 56

3.3 Tools and Techniques for Accounting Data Processing
3.3.1 Data Input

Answer 56

Typed entries: Bookkeeping staff will type up details of transactions (for example, purchase invoices) to enter them into the accounting system.
Barcode readers: Barcodes (which appear on many goods available to purchase in shops) contain data in the form of numbers and lines. Sales are recorded in the information system when a barcode is scanned using an electronic point-of-sale (POS) machine, such as in a supermarket.
Current coding systems could utilise QR codes or RFID tags; the use of Internet-of-Things (IoT) technology is also growing.

Online banking: Payments and receipts into an online bank account can be integrated into the accounting information system.
Smart cards: These might include credit and debit cards, which are used to make payments, and pay-as-you-go cards used for transport – for example, the Oyster card used in London in the United Kingdom or the EZ-Link card in Singapore.
Mobile devices: Data can be collected and entered into a management information system using mobile phones, tablets and other devices. For example, sales representatives often place orders for customers using tablets or laptops while they are with them.

Question 57

Data storage and processing
Servers, Portable data storage, spreadsheets

Answer 57

Servers:Data is usually stored on a server, a central computer that can be accessed by a network of other computers and devices.
Servers are now often accessible via ‘the cloud’, which means they are accessible from any device in any location using an internet connection. The mechanisms for data storage and access are constantly developing.

Portable data storage: Extracts from the complete data set may be saved onto external memory devices, such as memory sticks and solid-state drives.
Spreadsheets Spreadsheets are essential for analysing, processing, and presenting financial information. They can execute complex formulas and data processing processes to transform and analyse information.
Databases = Databases are specialised programmes with embedded processes and controls to maintain, store, and process large amounts of data with high levels of integrity and security.

Databases allow users to query for information suited to their needs.

Digitalisation and robotic process automation (RPA) - computerised - These processes could be automated to minimise the use of physical documentation and human resources, increasing data integrity and processing speed and minimising the risk of fraud and error.

Question 58

3.3.3 Period-End Routines
Reconciliations; Periodic Management reporting ; Account cloding and error/incident reporting

Answer 58

Reconciliations
Reconciliations clarify the differences between two sources of information. Regularly performed reconciliations are bank, payables, and receivables reconciliation.

Periodic management reporting
Management requires financial information for decision-making. Management reports produced by the accounting system will satisfy this need.

Some types of regular reports are sales reports and receivables ageing.

Account closing and error/incident reporting
Accounts will be closed, and balances brought forward to the next period, with any errors or unusual incidents identified and corrected to ensure the opening balance for the following period is correct.

Question 59

3.4 Dealing with errors
Investigating reconciliation differences
Implementing internal control procedures
Investigating abnormalities
Tracing audit trials and logs
Posting of corrections

Answer 59

Investigating reconciliation differences
Any irreconcilable differences between the accounts and external sources of information should be investigated.

Implementing internal control procedures
Procedures should be implemented and embedded to prevent errors from occurring.

For example, most accounting systems do not allow an unbalanced double entry to be posted to the system.

Also, there should be a secondary source of confirmation and record for transactions that have been keyed in (i.e. list of transactions signed off by the bookkeeper and filed).

Investigating abnormalities
Abnormalities such as suspected coding errors and unusual changes in account balances should be investigated for the cause.

Tracing audit trails and logs
Transaction input logs and document trails are inspected to verify the correctness of transactions.

Posting of corrections
Corrections should be collated and posted after being authorised by senior personnel, and a record kept for future verification.

Question 60

3.4 Accounting System Reports and Linkages
3.4.1 Data Output
Reports ; Dasboards ; Remote Access

Answer 60

Reports: Data is typically extracted in tables or spreadsheets. Regular reports can be scheduled and produced automatically.
Examples include interim financial statements and other reports management needs, such as sales reports and receivables ageing. These reports may also include comparators (i.e. previous period or previous corresponding period).

Dashboards: Modern management information systems may also produce data in a dashboard, an interactive visual interface that summarises key measures, data, ratios, and other information into easy-to-understand graphics.
Remote Access: Reports can be received on any device – for example, a desktop computer, a laptop, a tablet or a mobile phone. Reports produced by the management information system are usually spreadsheet documents or condensed into summarised reports or dashboards.

Question 61

3.4.2 Linkages
Sales System
Human resource management system
Procurement system
Production and service provision

Answer 61

Sales system
Information extracted from the accounting system includes sales reports identifying major customers and their transactions and comparative performance for the period.

Some accounting systems link directly with sales and customer relationship management (CRM) systems, providing sales agents and managers with financial information to manage their clients effectively.

Human resource management system
The accounting system furnishes payroll information (salaries, deductions, other remuneration) to the human resource department, enabling them to monitor the cost and performance of human resources.

Procurement system
The financial information from the accounting system helps the procurement department evaluate the effectiveness of their procurement operations, such as by providing a breakdown of their top suppliers and average prices paid.

This is especially important if there are limited financial resources available for procurement.

Production and service provision
Integrated accounting systems contain financial and cost information, making them crucial for monitoring and controlling production/service provision processes.

The information these managers would use include the cost of inputs, the current cost in work-in-progress, and cost information necessary to calculate unit costs and expected profit margins.

Question 62

3.5 Computerised Accounting Systems - ASSUME ITS USED
In a computerised system, activities are categorised into three processes:

Answer 62

Inputs – Inputs are data entered into the accounting system from the source documents.
Processing – Data entered is posted into the relevant ledger accounts
Output – Financial statements and other reports are produced for management use

Question 63

1.4.1 Features of a computerised system

Answer 63

A typical accounting computerised system comprises several modules to operate different business functions such as sales, purchases, inventory, receivables and payables.
Computerised information can be integrated with other management modules to update transaction trails. For example,
Sales invoices generated through the sales system are automatically posted into the receivables or cash ledger accounts. It can also update the inventory system to record its movement and reduce the quantity.
Details of purchase invoices are entered into the purchases system, and the relevant ledger accounts, such as the payables, inventory, and any other relevant general ledgers, are updated.
Back-ups of the data in a computerised system are available in the event of lost files.
A computerised system allows you to amend transaction details and keep a log of the changes.
There is a reduced likelihood of errors and omissions as computer systems do not allow error data to be processed.
Real-time comprehensive and accurate management reports can be generated cost-effectively.
Examples of output reports from a receivables ledger system include:

Sales invoice
Customer statement
Receivables ageing list
Sales analysis report
Examples of output reports from a payables ledger system include:

List of outstanding supplier balance
Purchases analysis report

Question 64

1.4.2 Desktop vs Cloud accounting systems

Answer 64

a DESKTOP accounting (on-premise) software system is hosted on a computer’s hard drive. The software is initially installed on the business premise’s desktop and is maintained regularly.
Accessibility = Accessible on the desktop where software is installed
Users = Single access. Only one person can use the software at a time
Updates and backup = Updates and Backup need to be performed manually
Pricing = One-time fee until renewal
Installation = Needs installation
Security = Security tied to the desktop. Data can be lost if the computer crashes or breaks down.

A CLOUD accounting software system is hosted, updated, and maintained ONLINE
Accessibility = only with an internet connection
Users = Multiple users can use the software, even remotely.
Updates and back up = Automatically updates and backups data to an online server
Pricing = Monthly subscription fee
Installation = No installation required
Security = Security depends on the cloud software system, usually with multiple layers of encryption.

Question 65

3.6 Data Risks and Security

Answer 65

Data security is protecting data held by the business from unauthorised access. A business may be required by law, such as the HIPAA Act, to ensure that data gathered by the business complies with its regulations.

A breach of data security will not only impact a business financially; it may also affect its reputation and competitive advantage.

Question 66

3.2.1 Risks to Data Security

Answer 66

Examples of risks to data security a business may face include:

Accidents such as a fire may destroy computer hardware
The computer storing the information could get a virus and corrupt the data
A computer system could be breached and confidential information stolen
Employees accidentally or intentionally share data with unauthorised personnel

Question 67

3.2.2 Data Protection Measures
5
EMPLOYEE TRAINING
PHYSICAL SECURITY OF SYSTEMS, HARDWARE, USER DEVICES
MANAGEMENT ACCESS AND CONTROLS
SECURITY FOR APPLICATION SYSTEMS
ESTABLISH GOOD DISPOSAL PRACTICE

Answer 67

Employee Training
Employees should be trained on good security processes, such as regularly updating passwords and recognising fraudulent emails or behaviours.

Physical security of Systems, Hardware, and User Devices
Control computers need physical security, such as an access tag to log in. For cloud accounting systems, the cloud provider will assume protective measure responsibility.

Management Access and Controls
Only privileged personnel have access and control over the database and administrative accounts.

Security for Application Systems
All software systems should be updated with the latest version with upgraded protective security encryption for more robust security.

Establish Good Disposal Practice
Documents or online data that are no longer required are disposed of securely, and any backup of the information is thoroughly discarded. Only information that is relevant and up-to-date is stored.

Question 68

3.2.3 Data Storage

Answer 68

Data in a business should be stored with data protection measures in place.

Data stored on paper is securely held in a locked cabinet or drawer.
Data stored digitally is given appropriate security controls such as password protection and user access.
Access to confidential data is limited only to relevant parties with authorisation permissions.
Data stored online is protected with anti-virus and anti-malware software.
An ARCHIVE is where businesses store documents and correspondence for completed projects. It must be stored securely to protect the data and kept confidential.

Question 69

3.7 DOCUMENT RETENTION

Answer 69

Document retention is keeping paper or digital documents and business information for some time. A document retention policy manages documents and records from creation to destruction.

Business documents are kept for a specific number of periods to:

Comply with legislation.
Each country has legislation (For example, company and tax law) that requires a business to keep financial documents for a certain period.

Retrieve historical documents.
Information from the past can be referred to, such as emails containing critical information. Disagreements with customers or suppliers can be solved with the original transaction records.

Some information is required permanently. Such information is stored under the Master Files.

Question 70

3.3.1 Master files

Answer 70

Master files are permanent files and are updated periodically. They serve as an authoritative source of data. Information in master files rarely changes and may be needed often.

The master files will contain information such as:

Customer name, address and contact details
Supplier name, address and contact details
Employee file
Files which record the bank accounts held by the business
Details of the terms of business with the banks.

Question 71

4.1 What is Coding?
PROPER CODING SYSTEMS

Answer 71

Financial documents provide evidence of business transactions. Since a business may encounter multiple documents daily, these documents should be well organised and categorised using proper coding systems.

Coding is the process of assigning a unique group of numbers and letters to identify an account or document.

An account code is a unique group of numbers and letters used to identify and classify an account into a particular group.

A business can assign a unique number to identify each of its customers.
For example, Dahlia’s Limo Drivers is a customer of RFashion. In RFashion’s books, Dahlia’s Limo Drivers is assigned the account code SL210.
Account codes are also used for each type of general ledger account.
Each ledger account is assigned a unique account code. For example, GL2632 is the account code for the Trade Receivables Ledger Account (Asset).

Question 72

4.2 Examples of Coding Systems
Individual businesses can decide how they code information and documents. Every financial document will have its unique code.
4 types

Answer 72

ALPHABETICAL CODE - Codes will contain only alphabets. For example,
Code for business Allday Airways is ALL.

SEQUENTIAL/NUMERICAL CODE - Codes will contain only numbers. The numerical codes will be sequential. For example,
Code for business Allday Airways is 001.

ALPHANUMERIC - One or more letters from a document or name, followed by a number. For example,
Code for the Purchase Ledger Account is PL001

FACETED CODE - A faceted code is made up of group codes. Each of the group codes identifies a unit of information. For example,
Group/Facet 1 (Industry) Key T = Transport, Key C = Catering
Group/Facet 2 (Transaction) Key 005 = Expenses, Key 009 = Sale
Code for Catering sale is C009
Code for Transport expenses is T005

Question 73

4.3 - Benefits of Coding
4 benefits
TIME EFFICIENCY
TRANSACTION CLASSIFICATION
REDUCTION IN ERRORS
EASY LOCATION OF INFORMATION

Answer 73

Time Efficiency
Assigning codes reduces the time it takes to process each transaction. It is easier to type a short code than a long business name.

Transaction classification
Codes are given according to the classification of transactions.

For example, purchased paper and calculators can be classified as stationery items. We can easily search for stationery account codes to view the expense details.
Reduction in errors
Codes reduce the risk of making errors.

For example, businesses can avoid confusion between organisations with similar names. The business looks at the account codes to verify between the organisations.
Different types of ledger accounts have different coding styles. For example, Expense account codes will start with GL-5XXX, and an Asset account code will begin with GL-1XXX.
· The coding system assigned will reduce the likelihood of entering transactions into an account of different nature.

Easy location of information
Codes can improve filing accuracy and reduce the time it takes to search for a particular transaction or document. A document can be easily identified by looking for the document number rather than every transaction.