Chapter 3 - Recording Financial Transactions

Question 1

What 3 things does an accounting system do? (3)

Answer 1

1. Allows a business to record
2. process
3. and store financial information

Examples of account systems e.g. Sage, and Xero

Question 2

Advantages of computerised accounting systems (4)

Answer 2

1. Speed of processing large volumes of transactions
2. In-built controls to reduce input errors
3. Storage and sharing vast quantities of data in easily accessible formats
4. Freeing up accountants time to focus on higher level skills, such as analysis and advice

Question 3

How does an accounting system operate? (3) with examples

Answer 3

1. INPUTS
   - source docs
   - standing data (e.g. customer address, payment info for suppliers)
2. PROCESSES
   - ledgers
   - journals
   - calculations
   - record keeping
3. OUTPUTS
   - reports
   - trial balance
   - financial statements

Question 4

What two ways can processing (recording of transactions) be done in an computerised accounting system? (2)

Answer 4

1. Real Time - each transaction is updated at the point it takes place
2. Batch Processing - Where groups of similar transactions are recorded in bulk at the end of a period (e.g. day/week)

Question 5

Define Cloud computing (1)

Answer 5

Cloud computing is a service that provides a business with access to software and data storage via the internet. Instead of being held locally on the user’s computer, the software and data are held in ‘the cloud’, which means they are held remotely on the computer servers of the software service provider. Examples of cloud computing include Amazon Web Services (AWS) which offers storage, computer power and networking services or Dropbox, which offers storage services.

Question 6

Define Cloud Accounting (1)

Answer 6

Cloud accounting is an application of cloud computing. Accounting software is provided in the cloud by a service provider. The user accesses this software to process their accounting transactions and run reports as they would if the software was installed on their own computer. The use of cloud accounting does not change the requirement for source documents to be input into the system, which, depending on the type of accounting software package used, may be done by a bookkeeper or may be automated. The processing of transactions takes place in the software within the cloud and outputs in the form of reports, or financial statements are extracted from the cloud.

Question 7

Cons of Cloud Accounting (3)

Answer 7

• Increase the risk of loss through hacking and relies on the security and back-ups provided by the service provider
• Cloud accounting requires access to the internet. If a business’s internet connection is unreliable, accessing its accounting records held in the cloud will be difficult.
• There may be server outages on the cloud that would mean that there were temporary restrictions on the ability to access data.

Question 8

Pros of Cloud Accounting (2)

Answer 8

• The main benefit of cloud accounting is that a business can access its accounting records from any computer (or tablet or phone) that has an internet connection.
• Additionally, because most of the processing and data storage is done on the service provider’s servers, and not the business’s computers, the business does not need to purchase expensive, sophisticated IT equipment in order to run specialised software or store large amounts of data. As the software is maintained by the service provider, the business may also be able to reduce IT support costs within its own business.

Question 9

What is a source document (1)

Answer 9

Source documents are the documents which are produced by, or input into, a business’s accounting system as the starting point to recording the transactions of a business for accounting purposes

Question 10

What is the source document in a credit sale (1)

Answer 10

Credit sales make use of sales orders, delivery notes to the customer (goods dispatched note GDN) and sales invoices (which is the source document that is then recorded)

Question 11

What is the source document in a credit purchase (1)

Answer 11

Credit purchases make use of purchase orders, goods received notes (GRN_ and purchase invoices (which is the source document recorded). The purchase invoice is received from the credit supplier

Question 12

What information does an invoice show?

Answer 12

Invoices show, among other things, what has been sold or purchased and at what price. Trade discounts, VAT and any early-settlement (cash) discounts are also shown, so that the total reflects the full amount that remains to be paid

Question 13

What is a credit note?

Answer 13

Credit notes are negative invoices

A document issued to a customer relating to returned goods, or refunds when a customer has been overcharged for whatever reason. It can be regarded as a negative invoice. It is a source document for credit transactions

Question 14

What is a debit note?

Answer 14

A debit note might be issued to a supplier as a means of formally requesting a credit note from that supplier. A debit note is not a source document.

Question 15

What are some examples of other source documents? (2)

Answer 15

So far, we have only considered source documents for sales and purchases on credit, ie, sales and purchase invoices and credit notes.

Other source documents are also used for transactions involving settlement of credit transactions (by digital wallet, card payment or bank transfer), cash, wages and other matters.

Question 16

Computerised accounting systems can download a transaction report from the bank which includes all receipts/payments and then upload it to the system. If a transaction can not be matched where can we find this? (1)

Give me some examples of these transactions (2)

Answer 16

If a transaction can not be matched we will find it in an exception report

Examples:
- Non-current assets or additional capital invested into the business
- Amounts that do not agree to the original transactions (for example where settlement discounts have been unexpectedly taken)

Question 17

What is a Petty Cash book? (1)

Answer 17

The book or spreadsheet in which payments and receipts of petty cash are
recorded. The petty cash book is the source document for petty cash.

Question 18

What is Petty Cash? (1)

Answer 18

Most businesses keep a small amount of ‘petty cash’ on the premises to make occasional small payments in cash, eg, staff refreshments, postage stamps, taxi fares, etc. This is often called the cash float or petty cash. There may be occasional small receipts that are not related to sales that are also recorded, but this would be fairly unusual. There are usually more payments than receipts, and petty cash must be ‘topped up’ from time to time with cash from the business bank account.

Question 19

What is the imprest system? (2)

Answer 19

Under the imprest system of managing petty cash, the amount of money in petty cash is kept at an agreed sum, the imprest amount or ‘float’

Cash still held in petty cash + vouchers for payments = petty cash imprest amount

Question 20

What is the payroll? (1)

Answer 20

The payroll is the record of employee wages and salaries and is the source document for expenses relating to employees.

Question 21

In the payroll source document what is shown?

Answer 21

The payroll records all the individual amounts that appear on employees’ payslips, namely:
* gross pay to employees:
– PAYE income tax
– employee’s NI contributions
– employee’s pension contributions
– net pay (cash paid to employees)

• additional costs for the employer:
  – employer’s NI contributions
  – employer’s pension contributions

Gross pay is not the amount paid to the employee. The employer needs to make deductions from gross pay before paying net pay to the employee.

The amount actually paid to employees is called net pay; this is less than gross pay since the employer pays over what the employee owes directly to HMRC (for income tax under PAYE, and employees’ NI) and the pension plan (for any employee pension contribution).

Question 22

Describe the Credit Sales system (4)

Answer 22

See image

1. Customer Order
2. Dispatch Goods
3. Raise invoice
4. Receive payment

Question 23

Describe the Credit Purchases system (4)

Answer 23

See image

1. Purchase Order
2. Receive Goods
3. Receive invoice
4. Make payment