IOB/CH1: Introduction to Business Flashcards
the types of financial recording documents and the purposes of business documents
what are the three main types of businesses?
sole trader, partnership and limited company
what are the characteristics of a sole trader?
*business is not a separate legal entity from sole trader
*very small commercial enterprise
* the business is owned by a single owner, they take on the risks and debts of the business
*legal terms = business and owner are not separate
what are the characteristics of a partnership? (similar to sole traders)
- several individuals own the business together, contributing skills and investing capital to finance the business
- not always equal shares, and the shares tend to dictate the way any profits are shared
- all partners take on the risk and debts of the business
what are the characteristics of a limited company?
*‘incorporation’ a separate legal entity is created
* the company is owned by shareholders who have ‘limited liability’ for any business debts
* in the case of bankruptcy, shareholders will only lose the value of their invested shares, and will not be responsible for any other debts
what are the stages of the ‘sales cycle’?
*QUOTATION: quote requested by customer
*SALES ORDER: order placed by customer
*DELIVERY NOTE: goods delivered to customer
*INVOICE/CREDIT NOTE: invoice raised for goods
*REMITTANCE ADVICE: payment received from customer
at each stage of the process, documentation will be prepared and kept as records, what does this start?
‘the flow of information’
what is the importance of financial documentation?
*provides detail of every transaction
*every transaction is accurately reflected in accounts at the end of the financial year
what are the characteristics of cash sales?
*settled immediately
*settling the payment straight away
*credit/debt can be ‘cash sales’
*sales made by businesses to individuals are often ‘cash sales’
what are the characteristics of credit sales?
*settled in a period of time
*businesses often give customers 30 or 60 days credit as a way to attract custom
*risks of late payments
*sales from business to business are often ‘credit sales’
what happens during the ‘quotation’ step?
*this is before purchasing
*customers often get multiple quotes from different suppliers
*includes title and description of goods/services, price and terms and conditions
*if a customer has a quote from a business from years ago, they do not have to honour that price
what happens during the ‘sales order’ step?
*the start of the process of supplying goods to a customer
*communicates the type of goods, quantity and total value
*this may include additional info on specific designs or delivery requirements
what happens during the ‘delivery note’ step?
*accompanies the goods being delivered
*an important document that will be signed by the customer on delivery, one copy remains with the customer, the other returns to the supplier
*‘proof of acceptance’ of the quantity and quality of the goods and shows liability for the customer to pay
what happens during the ‘sales invoice’ step?
*after goods have been delivered and a copy of the delivery note has been returned to the supplier, a sales invoice can be raised
*a request for payment
*includes details of the goods, services, units, prices, delivery charge and VAT
*also shows terms and conditions of payment
an invoice is a request for payment, what else is this used for?
an invoice is required by a VAT registered business in order to pay or claim VAT from HMRC
what are the characteristics of a sales invoice?
*unique sequential number
*sellers name and address
*sellers VAT number
*invoice date/time of supply ‘tax point’
*customers name and address
*description of goods
*rate of any discounts
*total amount of VAT
*total amount owing
what must each item on a sales invoice include?
*unit price excluding VAT
*quantity of goods
*rate of VAT
*total amount payable including VAT
what is a sequential invoice number?
a businesses way of numbering invoices to recognise missing files when being stored
why must invoices be checked?
incorrect invoices can delay payment
what should you check on a sales invoice?
*name and address
*description and quantity of goods
*delivery was signed by the customer
*invoice number and date
*unit prices are as agreed on the quote and sales order
*all calculations are correct, including VAT
*correct payment terms are displayed
what is the purpose of a credit note?
*incorrect or faulty items
*returned goods should be accompanied by a goods return note
*a credit note is essentially a negative invoice and cancels it out
*when the customer pays, the credit note will be deducted and they will pay the difference
what happens during the ‘remittance advice’ step?
*a remittance is proof of payment
*details what payment is for which invoice
*payment should be made by credit before invoices are overdue
what is ‘the purchases cycle’?
*the purchase of goods on credit by the business for either resale or for consumption, will generate financial documents
*each document will be checked and authorised
what is a petty cash voucher?
businesses hold small amounts of actual cash to pay for small incidental expenses, such as paying the milkman or taxi fares. this generates a petty cash voucher
