Chapter # 1

Business Transactions
Contents

 Introduction to business
 Types of Business
 Transactions
 Types of transactions
 Documentation
 Types of documentation
 Flow of Documentation
 Other terms
 Questions
 Answers

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1. Business
1.1 Definition
“Business is an activity undertaken to make profit” or it can be defined as
“An activity in which resources are gather to make profit”
Broadly speaking it is a commercial organization, large or small, which exist to make money or profits
for its owners.
Examples
 Oil companies
 Mobile telephone operators
 Super markets chains
 Plumber
 Window cleaner
The common activity between them is that they all sale goods or services

1.2 Types of business

Business can be classified as:
 Sole trader
 Partnership
 Limited companies

Sole trader
An individual run his or her own business, either alone as a one person operation or as a business with
several employees.

Advantages Disadvantages
 All profits relates to owner only  All losses relates to owner only
 Full control of business  Lack of investment
 No chances of fraud  Lack of expertise
 No load sharing

Partnership
A business arrangement in which two or more people working together with the idea of generating
profit is known as Partnership.

Advantages Disadvantages
 Losses will be shared  Profit will be divided
 More investment  Chances of fraud
 Sharing of knowledge and ideas  Loss of control
 Workload sharing

Company
Offers the benefits of limited liability.
There are two types of companies
 Public companies
 Private companies

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2. Transaction
2.1 Definition
Whenever property changes hands, a transaction takes place.

2.2 Types of transaction

Transaction could be classified as:

Cash transaction Credit transaction

The buyer pays cash to the seller ate the time The sale or purchase occurs some time earlier than
the goods and services are transferred cash is received or paid

Examples
 Purchase of goods
 Sales of goods
 Payment of salaries
 Payment of utility bills

3. Documentation
When the business sells and buys each stage in the transaction is documented.
Why: We need to produce business document for several reasons
 As evidence of the transaction and its details
 As evidence of the stage that the transaction has reached.
 For checking and confirmation.
 For recording the transaction details
 Record of sales and purchases are useful in the event of a query or dispute with a customer or supplier
 To measure whether a business is making profit or loss
 To keep track of how much it owes to its suppliers and how much it is owed by its customers

3.1 Types of documentation

External documentation Internal documentation

Documentation used outside the business Documentation used within the business
organization with customers and suppliers. organization to help manage the business
effectively and efficiently
3.2 Flow of documentation

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 External documentation

Customer Supplier
Inquiry Letter to get information about availability, Price, Time of availability, Quality of product

To give the required information, mean answer the inquiry by customer(Price) Quotation

Purchase Order Agree to purchase on quoted price

Conformation and acceptance of order Acknowledgement

Send with goods to get signed by him, So as an acceptance by customer and kept by supplier Delivery Note
OR

Send when goods are dispatched through any Cargo, includes details about Name and possible time of arrival Dispatch note

Bill / Demand of payment of with in agreed time period, Include Name, Quantity and Price Invoice

Debit Note For return of goods and request of credit note includes Name, Quantity and Reason

Acceptance of return / Reduces the value of invoice also called negative invoice Credit Notes

Remittance Details of payments / List of invoices covered by payments

Advice

Details of payments / list of invoices covered by payments Supplier

Statement

 Advice
Note: .................................................................................................................................................................
............................................................................................................................................................................
...........
 Performa
Invoice: .............................................................................................................................................................
............................................................................................................................................................................
...............

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 ABC Ltd
77 North Road
Newcastle
Tel: 0141 88 9944 44

Black Castel wholesales Supplies Ltd

Oak Hampton Industrial Estate

STATEMENT OF ACCOUNTS
Date: 15 Feb 20X9
Date Description £ £ Balance (£)
1,500
11 Jan Balance B/f

15 Jan Invoice 314 4,000 5,500

18 Jan Invoice 3314 1,500 7,000

22 Jan Cheque received 3,000 11,000

25 Jan Invoice 1534 1,000 12,000

12,000

ABC Ltd
77 North Road
Newcastle
Tel: 0141 88 9944 44

CREDIT NOTE
Customer: John Skipper wholesales Supplies Ltd
Oak Hampton Industrial Estate

Date: 15 Feb 20X9

Order No: O2135 Account: 545456
Item Description Quantity Unit Value (£) Total (£)

17584 Box Files 50 3.00 150.00

11255 Ring binder 100 1.75 175.00

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 Internal Documentation

Supplier

Store Department Purchase Department

 Inventory/Stock list  Suppliers list
3 Inquiry letter
 Purchases requisition 2
 Goods received note
4 Quotation
 Material issue note  Cheque Requisition
Form
5 Purchase order

7
1

Production Department Accounts Department

 Material requisition 8 Purchase Invoice
Note  Wages and salaries
 Goods transferred
note

Admin Department
Sales Department  Expanse claim form
 Sales price

 Material Requisition
Note: .................................................................................................................................................................
............................................................................................................................................................................
...........

 Inventory/Stock
list: .....................................................................................................................................................................
............................................................................................................................................................................
.......

 Purchase Requisition:
............................................................................................................................................................................
............................................................................................................................................................................

 Suppliers list:
............................................................................................................................................................................
..........................................................................................................................................................................

 Goods Received Note:

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 ............................................................................................................................................................................
...........................................................................................................................................................................

 Material Issue Note:

............................................................................................................................................................................
............................................................................................................................................................................

 Goods Transferred Note:

............................................................................................................................................................................
............................................................................................................................................................................

 Cheque Requisition Form:

............................................................................................................................................................................
............................................................................................................................................................................

 Expense Claim Form:

............................................................................................................................................................................
............................................................................................................................................................................

 Wages and Salaries Documents:

............................................................................................................................................................................
............................................................................................................................................................................

Other Terms

 Free On Board (FOB):

............................................................................................................................................................................
............................................................................................................................................................................
............................................................................................................................................................................
............................................................................................................................................................................
............................................................................................................................................................................

 Ex works:
............................................................................................................................................................................
............................................................................................................................................................................
............................................................................................................................................................................
............................................................................................................................................................................
............................................................................................................................................................................

 E & OE:
............................................................................................................................................................................
............................................................................................................................................................................
............................................................................................................................................................................
............................................................................................................................................................................
............................................................................................................................................................................

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MULTIPLE CHOICE QUESTIONS
1) In which form of business are profits and losses shared between the owners in accordance with the agreement between them?
A. Partnership
B. Private limited company
C. Public limited company
D. Sole trader/proprietor
2) Why do business organizations keep accounting records?
A. In order to know profit
B. To have control of the organization
C. To get loan
D. To pay tax
3) Jack runs a stationery business and has sold computer supplies to Peter for payment in one month. Which of the following are
true in respect of this transaction?
(i) It is a cash transaction
(ii) The expenditure must be authorized by Jack
(iii) A record of the transaction must be kept in case of future query
(iv) Jack will need to ensure payment is received in one month
A. (i) Only
B. (ii) And (iii)
C. (iii) And (iv)
D. All of the above
4) Which document is used to correct an overcharge on an original invoice?
A. Credit note
B. Debit note
C. Dispatch note
D. Goods received note
5) Which of the following is true for capital?
A. All those things which the owner has invested
B. The fund that is invested by its owners
C. The objects that the owner has bought for resale
D. All those things which the owner has invested outside the business
6) The types of documentation that might accompany a complex transaction for a piece of equipment include three of the
following. Which is the odd one out?
A. Invoice for outstanding amount from manufacturer
B. Initial enquiry letter from manufacturer
C. Price quotation for machinery from manufacturer
D. Deposit remittance from purchaser
7) Jack is given a haircut by Jill, who owns his own business. Jack pays with a $10 note. What kind of a transaction is this?
A. Sale of goods by Jill
B. Sale of a service by Jack
C. Purchase of goods by Jill
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 D. Purchase of a service by Jack
What kind of transaction is this from Jill’s point of view?
A. Cash sale
B. Credit sale
C. Cash purchase
D. Credit purchase
What is Jill’s business?
A. Partnership
B. Private company
C. Public company
D. Sole trader
8) Which of the following terms would be used to classify a payment for electricity to heat the business premises of a firm of
plumbers?
A. Expense
B. Purchase
C. Receipt
D. Sales
9) Which of the following statements is correct?
A. Business is a place where money is received and paid.
B. Business is a process where resources are mixed together for the purpose of benefits.
C. Business is an activity, which results in profit alone.
D. Business is only the process of selling and buying commodities.
10) Which of the following does not contain any monetary value?
A. Delivery note
B. Quotation
C. Pay slip
D. Receipt
11) The document used by a supplier to correct an earlier overcharge is known as:
A. Advice note
B. Credit note
C. Debit note
D. Invoice
12) Following is the list of situations where an invoice has been sent, choose one that would not require a credit note to be raised:
A. A customer has returned some or all of the goods because they are damaged or faulty
B. A customer has returned some or all of the goods because they are not the ones that were ordered
C. A customer has never received the goods although an invoice was sent out
D. Postage and packaging was omitted on the original invoice
13) Which of the following is the best description of goods received note?
A. It is a formal request, sent by a business to a supplier requesting the delivery of the goods specified on the purchase
order
B. It is an internal check document that serves as a record of the quantity and condition of goods that have been
delivered to the business
C. It is a discount that is offered to a customer if the invoice is paid by a certain date
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 D. It is a means of identifying a transaction as being of a particular type by allocating to it an appropriate reference
number
14) Which of the following correctly describes the function of a credit sales invoice which a customer has received from a supplier?
A. It is a receipt for money paid
B. It is a demand for immediate payment by the supplier
C. It is a record of goods purchased by the customer
D. It is a demand for payment within an agreed time from the supplier
15) Which of the following is called as sales invoice by a supplier?
A. Credit note
B. Debit note
C. Purchase invoice
D. Receipt
16) Fleming & Co wishes to buy goods from Paddington & Co. Which of the following is the most likely flow of documents to
complete the purchase?
A. Purchase order, delivery note, goods received note, cheque requisition, invoice
B. Purchase order, delivery note, goods received note, invoice, cheque requisition
C. Goods received note, purchase order, delivery note, invoice, cheque requisition
D. Purchase order, goods received note, delivery note, cheque requisition, invoice
17) Which document lists the invoices; credit notes and amounts sent and paid from a supplier to customers monthly?
A. Delivery note
B. Purchase order
C. Quotation
D. Statement
18) What is the purpose of a remittance advice?
A. To pay a supplier
B. To remind a customer to pay
C. To match a customer’s payment with the invoice
D. To send goods back to a supplier
19) Which of the following documents would NOT come across in dealing with sales to customers?
A. Purchase order
B. Delivery note
C. Goods received note
D. Statement
20) Beta Ltd, a credit customer of Alpha Ltd, returns faulty goods to Alpha Ltd. Which document will Alpha raise to reduce Beta’s
debt in respect of these goods?
A. Credit note
B. Purchase order
C. Debit note
D. Remittance advice
21) Which of the following is the correct chronological sequence for sales documents?
A. Enquiry – Order – Invoice – Payment

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 B. Order – Enquiry – Invoice – Payment
C. Enquiry – Order – Payment – Invoice
D. Enquiry – Invoice – Order – Payment
22) Mary buys goods on credit from Lisa but finds that some of them are faulty. What document would Mary return to Lisa with the
faulty goods?
A. Statement
B. Debit note
C. Sales invoice
D. Purchase invoice
23) Which of the following transactions occurs on a daily basis in a large business?
A. Credit sales
B. Payroll
C. Purchases of equipment
D. Payment of suppliers
24) A credit note is a document which:
A. Acknowledging a purchase on credit
B. Giving a reference from an agency detailing the creditworthiness of a new customer
C. Issued when a deposit is paid on goods
D. Cancels out all or part of a sales invoice
25) Which one of the following is not an internal document for purchases?
A. Supplier list
B. Delivery note
C. Goods received note
D. Purchase order
26) Remittance advice is:
A. To indicate items now paid
B. To identify goods received
C. To advise remittances received
D. For notification of goods dispatched
27) Which of the following are the purposes of a purchase invoice?
(i) To claim back the VAT
(ii) To identify the goods bought
(iii) To record how much is owed to the creditor
(iv) To record how much is owed to the debtor
A. i, ii and iii only
B. All
C. ii and ii only
D. i and ii only
28) In the purchasing procedure, the document following the goods received note is:
A. Delivery note
B. Invoice
C. Statement
D. Advice note
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29) King receives a document from Queen’s Stationery Suppliers for 8 reams of paper which they supplied three days ago. King
would refer to this document as a:
A. Goods received note
B. Receipt
C. Purchase invoice
D. Credit note
30) Which of the following is authorized by a business to settle an outstanding invoice?
A. A credit note
B. A debit note
C. A remittance advice
D. An internal cheque requisition
31) Which business document provides proof of payment for a business transaction?
A. Invoice
B. Receipt
C. Claim
D. Debit note
32) Which of the following best describes an invoice?
A. A document produced by a purchaser detailing items purchased
B. A document produced by a seller detailing items sold
C. A document produced by a seller following the return of goods
D. A document produced by a seller listing monthly transactions
33) Which of the following correctly describes a debit note?
A. It is issued by a customer to a supplier to cancel an invoice received
B. It is issued by a customer to a supplier to request a credit note
C. It is issued by a customer when goods are delivered
D. It is issued by a supplier to a customer to demand payment in full for goods supplied
34) The term ‘FOB shipping point’ may appear on export or import items. What does this mean?
A. No carriage costs will be payable by the customer
B. The supplier pays carriage costs to the point of shipping, the customer pays any subsequent charges
C. The invoice price includes carriage costs
D. The supplier will pay for delivery to the customer

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