Business transactions and documentation

FA1 BPP Chapter 1

Topic List:

1 Types of business transaction

2 What is a business?

3 A business is separate from its owner(s)

4 Documenting business transactions

5 Invoices and credit notes

6 Discounts, rebates and allowances

7 Sales tax
 1. Types of Business Transactions

– When property changes hands, there has been a business transaction.

– Business transactions occur in two different ways:

Cash transaction Credit transaction

Cash transaction is one where the buyer Credit transaction is a sale or purchase
pays cash to the seller at the time the which occurs some time earlier than
goods or services are transferred cash is received or paid.

Indicators of cash transactions: Indicators of credit transactions:

 Receipt of deposit  Sending out invoice

 payment in cash, by cheque,

plastic card

Main types of cash transaction: Main types of credit transaction:

Cash sale (occurs when goods or Credit sale (occurs when goods are
services are given in exchange for ordered and delivered before
immediate payments) payment is received)

Purchase for cash (occurs when Purchase on credit (occurs where the
goods and cash exchanges hands) business received the goods
accompanied by an invoice from
supplier. Cash is paid later)
– Two main types of business transactions:

1. Sales (exchanging a good or service for money)

a) Cash sale (occurs when goods or services are given in exchange for
immediate payments)

b) Credit sale (occurs when goods are ordered and delivered before
payment is received)

2. Purchase (buying a good or service)

a) Purchase for cash (occurs when goods and cash exchanges hands)

b) Purchase on credit (occurs where the business received the goods

accompanied by an invoice from supplier. Cash is paid later)

Now practice: Kaplan Exam Kit Q1

BPP Exam Kit: 7.2

– Other types of financial transactions include:

 Payments – transfer of money to someone else (for example, for purchases

or for wages to employees)

 Receipts – getting money from someone else (for example, from customers)

 Petty cash – paying for low value items with a small fund of cash

 Payroll – wages and salaries paid to employees, and any payroll taxes.

These transactions are entered in the accounting records of the business,

which are also known as the 'books' / daybooks / books of prime entry.

Now practice: Kaplan Exam Kit Q1, 2 page 39

 2. What is a business?

A business is an organisation that aims to make a profit for its owner. It can do
this through buying or making and selling goods or services.

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

Income comes mainly from the sales of goods or services by a business.

Expenses are the amounts that a business pays in order to run the business
(including buying the items that it will sell, as well as the other costs of running the
business, like electricity for the lights).

When expenditure exceeds income, the business is running at a loss.

A business can be small, medium or large.

 3. A business is separate from its owners

Entity = any organization including charity (broad concept)

Business = any organization excluding charity (not as broad as entity)

The accounting convention (Business entity concept)

The business must always be treated as separate entity from its owners.

Types of business entity

Sole trader Partnership Limited liability
companies
Accounting Separate Separate Separate
purpose

Legal purpose Not separate Not separate Separate from owner

from owner from owner

Sole trader is Partners jointly Owners / Members /

personally and severally are Shareholders are
responsible. responsible. NOT responsible.

The company itself

is responsible.

The dual effect of financial transactions

Double entry bookkeeping is based on the premise that every financial transaction has
a dual effect – a debit and a credit. Every financial transaction will demonstrate this
duality; one account is debited, and another is credited.
Debit and credit entries in the account must equal each other in order for the
accounting equation to balance.

Scenario – examples of financial documents

Today you are working in the receivables ledger department with R Fashion. The
receivables ledger department deals with customers placing orders on credit. A
customer, the owner of Ocean View Restaurant, wants to order five suits as
uniforms for their waiting staff, and you need to respond to their query.

Quotation: A document that shows how much an item or items will cost.
 Purchase order: The
document that is
completed by the
customer and sent to
the supplier showing
what they would like
to order.

B (R S Fashion) 2 B (Ocean View Restaurant)

Delivery note

This document
accompanies the
goods that are
delivered and is
signed by the
customer when
delivered. It can also
be used by the supplier
to check that the
correct goods are
being sent.

Goods received note (GRN)

This is an internal
document that the customer
would complete as an extra
check that everything has
been received that was
ordered.

Invoice
Shows the customer how
they much they owe the
supplier for goods purchased
on credit.

An invoice is a demand for

payment.
Three types of invoices:
1) Receipt: invoice marked by
business as 'paid with thanks'
2) Cash on delivery (COD)
invoice
3) Credit invoice

Debit note

A debit note is issued by a

customer to a supplier as
a means of formally
requesting a credit note.
A supplier might also issue
a debit note instead of an
invoice in order to adjust
upwards the amount of an
invoice already issued.
Credit note
A document to show a reduction
in the amount owing to a
supplier due to faulty or
damaged goods being supplied.

A credit note is used by a seller

to cancel part or all of
previously issued invoice(s).

Credit notes can be treated like

negative invoices.

Statement
Sent to a customer to
remind them how much they
owe the supplier, usually at
the end of the month.

Remittance advice
 Sent by the customer to the supplier to show that payment of their account has
been made.

 It provides details of amount being paid.

Pro-forma invoice: If goods are to be paid in advance, the seller may issue a pro-forma
invoice
Quotation (price list – external)

Purchase order (internal)

Delivery note (external)

Goods received note (internal)

Invoice (external) – Purchase invoice (internal) and sales invoice (external)

Debit note (is normally issued by customer – internal)

Credit note (is normally issued by supplier – external)

Internal cheque requisition + Remittance advice (internal)

Statement (external)
 4. Documenting Business Transactions
Business document can be evidenced by internal and external documentation.

External document Internal document

 Quotation  Supplier list

 Sale order  Purchase order

 Delivery note  Goods received note (GRNs)

Now practice: Kaplan Exam Kit (page 39) 3, 4, 5, 6, 7, 8, 11, 13,

BPP Exam Kit: 1.1, 1.2, 1.3, 1.6, 5.1, 5.12, 6.2, 6.3, 7.1,

Kaplan Exam Kit 3 (page 2) Credit note and debit note

Customer, supplier, credit note, debit note, invoice
1. Supplier, customer, an invoice
2. Customer, supplier, credit note

Kaplan Exam Kit 23 (Specimen paper)

Kaplan Exam Kit 49 (Specimen paper)

 6. Discounts: Trade discount vs Cash or settlement Discount

Trade discount Cash or settlement discount

Trade discount is a reduction in the
invoice by the supplier because of the
nature of the business with an
individual customer.
Trade discount is usually given bulk
purchase.
Trade discount is permanent.
Trade discount is related to the trading
policy or terms of trade.
Trade discount is given on list price /
original price / purchase price before
giving cash discount.
Cash discount is a reduction in the
amount payable to the supplier in return
for immediate payment or early payment
in cash.
Cash discount is usually given for prompt
payment.
Cash or settlement discount is optional.
Cash discount is related to the financing
policy.
Cash discount (if taken) must be given
after trade discount.

Pro-forma for discount related maths

$
List price / Original Price / Purchase price X 1,000
Less: Trade discount (Amount x trade discount %) (1000 x 10%) (X)(100)
Subtotal X 900
Cash or settlement discount (amount after trade discount x cash (X) (90)
discount%) (900 x 10%)
Amount payable X 810
 BPP Exam Kit: 1.4, 1.8, 5.11, 5.41, 6.2, 7.4, 7.11, 7.41

BPP Exam Kit 1.4 D

BPP Exam Kit 1.8

X Co purchases goods with a list price of $100,000 subject to a 5% trade discount. X Co
is allowed 2.5% cash discount for payment within 30 days from invoice date. Assuming
the discount is taken, how much will X pay? (Ignore sales tax).
A $92,625
B $102,375
C $97,500
D $95,000

$
List price / Original Price / Purchase price 100,000
Less: Trade discount (amount x trade discount %) (100,000 x 5%) (5,000)
Subtotal 95,000
Cash or settlement discount (amount after trade discount x cash (2,375)
discount%) (95,000 x 2.5%)
Amount payable 92,625

Answer: D 92,625

BPP Exam Kit 5.11

$
List price / Original Price / Purchase price 3,500
Less: Trade discount (amount x trade discount %) (2,000 x 20%) (400)
Subtotal 3,100
Cash or settlement discount (amount after trade discount x cash (155)
discount%) (3,100 x 5%)
Amount payable 2,945

Answer: B
BPP Exam Kit 7.11

$
List price / Original Price / Purchase price 6,200
Less: Trade discount (amount x trade discount %) (3,000 x 15%) (450)
Subtotal 5,750
Cash or settlement discount (amount after trade discount x cash (230)
discount%) (5,750 x 4%)
Amount payable 5,520

Answer: B
 7. Sales tax: Output tax vs Input tax

 Sales tax (International terminology) = VAT (UK terminology)

 Sales tax is levied / collected by the registered business on the sales of goods
and services which is administered by the government or tax authority. Sales tax
is an indirect tax.

 Sales tax is suffered by the final consumer.

 Types of sales tax:

1. Output sales tax (= Sales tax on sales) – payable to government. (Money out
– Credit)

2. Input sales tax (= Sales tax on purchases) – is reclaimable or refundable from

government. (Money in – Debit)

Purchase:
Agora purchased a box of Chocolates from supplier costing $60, Sales tax rate=20%
Sales tax (Input tax) = $60 x 20% = $12 (refund from government)

Sales:
Agora sold the same box of Chocolates to customer for $100, Sales tax rate=20%
Sales tax (Output tax) = $100 x 20% = $20 (payable to government)

The excess of ($20-12) = $8 is payable to government.

Output tax received Input tax paid Total Treatment

$20 $12 8 received Pay to government
$80 $140 $60 paid Refund from government

If output tax ($20) exceeds input tax ($12), then the excess ($8) is payable to the
government.

If input tax exceeds output tax, the difference is refundable from the government.

Now practice: Kaplan Exam Kit 118, 119, 124 BPP Exam Kit 1.5, 1.22

Kaplan Exam Kit 118 B

Kaplan Exam Kit 119 D

Kaplan Exam Kit 124 C

BPP Exam Kit 1.22

Output tax received Input tax paid Total Treatment
$240 $40 200 received Pay to government
Answer: A

Calculation of sales tax:

(a) When net price (exclusive of sales tax) is given:

Sales tax = net price x sales tax rate%

(b) When gross price (inclusive of sales tax) is given:

Sales tax = Gross price x sales tax rate / (100+ sales tax rate)

Question (BPP Study Text Chapter 1 page 22)

Product A
When gross price is given:
Sales tax = Gross amount x sales tax rate / (100+ sales tax rate)
Sales tax = 705 x 20/120
Sales tax = $117.5

Or
Sales tax = 20%
Sales tax 20 Net 100 Gross 120
Gross 120 Sales tax 20
1 20 /120
 705 20/120 x 705
= $117.50
Product B
When net price is given:
Sales tax = net amount x sales tax rate%
Sales tax = $480 x 20% = $96

Example 1
A company sells goods for $1440 inclusive of sales tax. Assume sales tax rate is
20%.Calculate the sales tax.

Sales tax = Gross amount x sales tax rate / (100+ sales tax rate)
Sales tax = $1440 x 20 / 120
Sales tax = $240

Example 2
A company purchases goods for $200 exclusive of sales tax. Assume sales tax rate is
20%. Calculate the sales tax.

Sales tax = net amount x sales tax rate%

Sales tax = 200 x 20%
Sales tax = $40