Accounting

1
Accounting Financial Analysis 11Lecture 2

• Source Documents

2
Introduction to Accounting

• Business Transactions
• Source Documents
• GST

3
What is a business transaction ?

• A business transaction is an activity that
  involves the receipt or payment of money
• Therefore every purchase or sale that a business
  makes is a transaction
• every time a business pays wages to its employees
  the business is completing a transaction.

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What is a business transaction ?

• Each business transaction requires an entry (to
  be written down) in the records (accounts) of the
  business.

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Keeping proper financial records

• If a business is to succeed it has to maintain
  proper accounting records which will provide
  information for the managers to make the correct
  decisions.

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Keeping proper financial records

• Calculate income and expenses correctly (Income
  expenses profit)
• Better control of the business.
• Understand and improve the business performance.

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Keeping proper financial records ctd.

• Plan business direction and expansion.
• Well kept records makes it easier to obtain
  finance.
• Provides warning to management in the event of
  business loss, theft, or other inappropriate
  activities.

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What are source documents?

• Source documents are the evidence that a business
  transaction has taken place.
• Any document that is back-up to an entry in the
  accounts is a source document.

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What are source documents ctd.?

• Source means The place from which things
  originate (start)
• The source documents help to record the
  transactions that take place within an
  organization (business) and it is from the source
  documents that the Financial Records are
  developed.

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Are source documents important?

• Source documents are important to the business
  and should be checked carefully to confirm their
  accuracy and that they meet company and
  legislative requirements.
• All source documents relating to an individual
  transaction should be attached together and filed
  in proper order.

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Stock source documents

• The ordering of stock will involve various source
  documents that relate to the transaction
• The stores requisition
• The purchase order
• The supplier delivery note
• The stores receipt note
• The tax invoice

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Document Procedures

• Businesses should have established procedures
  indicating the process to create and authorise
  documents.
• Before processing documents all details have to
  be checked to make sure that they are correct.

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Document Procedures - points to look for

• Purchase invoices
• Type of document to be processed Tax Invoice,
  Credit note, etc.
• Name and address of supplier including ABN
• Date and invoice number
• Does tax invoice match the purchase order
• Is the quantity and price correct

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Document Procedures Purchase Invoices ctd.

• Is GST included in the charge or separate
• Is the total charge correct
• What are the terms of trade
• Check receipt details if goods are purchased for
  cash
• If paid by cheque confirm details on cheque butts
  are accurate

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Document Procedures - points to look for

• Sales invoices
• All sales invoices have to be checked to confirm
  they meet customer order and are mathematically
  correct.
• Sales invoices have to be printed in duplicate
  (one for customer and the other for business
  records)
• Confirm customer requirements
• Confirm quantity and price charged
• Confirm GST charged

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Document Procedures Sales Invoices ctd.

• Confirm totals inclusive of GST
• Confirm the trade terms
• Confirm dispatch of goods
• Confirm credit status of customer (no accounts
  outstanding beyond trade terms).
• Sales invoices should be authorised for issue
  (validated, checked and signed)

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Sales invoices ctd.

• If a sales invoice is found to be incorrect it
  should be corrected before posted to customer.
• If the invoice has already been posted a manager
  or supervisor should contact the customer in
  accordance with the company policy and procedures.

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Access and review financial information

• Financial information is developed from source
  documents that are processed to the JOURNALS and
  summarised in the GENERAL LEDGER under
  appropriate account headings.
• It is the allocation of expenses to account
  headings that makes it possible to monitor
  business activity and to compare the actuals to
  the budget forecast.
• When comparing certain activity reports we may
  need to re-visit the source documents in order to
  confirm the data in the financial reports.

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Therefore financial information is

• Collected from source documents.
• Analysed according to their nature.
• Processed to the journals.
• Organised under appropriate account headings.
• Develop report for management review.
• Maintain timelines in accordance with
  organizational policy and financial reporting
  periods.

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Source Documents

• Source documents are the evidence that a business
  transaction has taken place. Any document that is
  back-up to an entry in the accounts is a source
  document.
• Source means The place from which things
  originate (start)
• The source documents help to record the
  transactions that take place within an
  organization (business) and it is from the source
  documents that the Financial Records are
  developed.
• Source documents are therefore important to the
  business and should be checked carefully to
  confirm their accuracy and that they meet company
  and legislative requirements. All source
  documents relating to an individual transaction
  should be attached together and filed in proper
  order.

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Examples of source documents

• Stores requisition order
• Business Purchase Order (issued to supplier)
• Suppliers Delivery note (to be signed as
  evidence of receipt)
• Suppliers Tax Invoice.
• Suppliers Statement of Account.
• Cheque Butts to confirm payment of invoices or
  expenses.
• Customer Purchase Order.
• Business Tax Invoice (issued to customer).
• Statement of Account issued to customer.
• Cheque Deposit Listing (list of cheques being
  deposited into bank account)
• Bank Statement (to pick-up direct entries by bank
  eg. Bank charges, bank interest paid/earned,
  direct debits etc.)

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Checking source documents

• If a source document is not correct it has to be
  given to the supervisor/manager to
• Check the reason for the error
• Check quantity and price
• Confirm receipt of items
• Adjust the error if internal
• Contact supplier if external error
• Authorise adjustment by company authorised
  person
• Process document

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Adjusting Source Documents

• Any adjustments to source documents have to be
  authorised by an appointed person as per the
  Policy Procedures of the company. There is
  usually a list of authorised persons indicating
  their
• Name
• Position
• Sample of signature
• Limit of authorisation

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Examples of source documents

• an invoice received after shopping is a source
  document,
• a purchase order is a source document,
• a cheque book,
• a deposit book,
• a cheque requisition,
• a bank statement,
• all expense vouchers,
• credit notes,
• these are all source documents.

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Purchase invoices

• We are all familiar with the receipt of invoices
  (bills) such as telephone bills, electricity
  bills, gas bills, invoices for purchases such as
  stationery, service/repairs to motor vehicle,
  etc.
• Each one of these bills/invoices is a source
  document and relates to our expenditure
• It shows the cost, the GST amount, and the total
  amount paid or owing to the creditor (accounts
  payable).

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Purchase Order

• A business writes out a purchase order each time
  it requires a Service or to purchase an item. The
  purchase order will show
• The reference number of the purchase order.
• Name of the business making the order.
• The person authorising the issue of the order.
• The name of the supplier.
• The quantity ordered.
• The price per item (service) as agreed
  beforehand.
• The total charge inclusive of GST.
• Other comments such as date of delivery

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Why use a Purchase Order?

• The purchase order will be used to confirm the
  accuracy of the tax invoice when received and
  will be attached to the invoice for filing.

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Sales invoices

• In the same way, if we are in business and sell
  our products we issue a tax invoice showing
• the amount of sales,
• the GST and
• The total amount paid to us or owing by the
  debtor (accounts receivable).

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Sales invoices ctd.

• A sales invoice should be issued as close to the
  sale date as possible since most
• Credit terms indicate required payment after a
  certain number of days from date of invoice.

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Outstanding Accounts

• All accounts receivable need to be checked
• Regularly to confirm that they are within their
  trading terms.
• If accounts receivable are left uncollected the
  business will suffer negative cash flow and will
  not be able to pay its own expenses such as
• wages, rent, suppliers etc.

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Outstanding Accounts ctd.

• If accounts receivable are left uncollected the
  business
• will suffer negative cash flow and
• will not be able to pay its own expenses such as
  wages, rent, suppliers etc.

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Outstanding Accounts ctd.

• The business will lose its credit rating with its
  suppliers and will not be allowed credit on
  future purchases.
• It will also have to pay interest on overdue
  accounts affecting its profit margin

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Credit notes

• A credit note is issued to a customer when the
  goods sold do not meet the
• expectations of the customer and they are
  returned to the store.
• The goods could have been damaged not according
  to specifications( wrong model, colour etc), or
• in excess of requirements.
• In the same way a credit note can be received by
  the business for goods that the
• Business returned to the supplier.

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Evidence of payments

• Other source documents relate to evidence of
  payment, such as
• cheque book butts,
• credit card vouchers,
• EFTPOS
• receipts, written receipts for cash payments,
• bank a/c statements Showing the direct debits to
  the account.

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Evidence of receipts

• Are documents that record cash or cheques
  received by the business
• listings of cheques deposited to our bank a/c
• the bank a/c statements that show direct credits

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Evidence of receipts ctd.

• the cash till roll,
• the receipt book which is a copy of the receipt
  given to the customer

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What is GST ?

• GST stands for Goods and Service Tax
• it is a TAX imposed by government on all
  commercial transactions and
• is payable to the Australian Tax Office (ATO)

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Who does the GST belong to?

• The GST amount that the business collects on all
  of its sales does not belong to the business it
  is merely collected by the business on behalf of
  the ATO and it is a debt owing to the ATO
  (liability).

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Is GST deductible?

• Any GST that the business pays on expenses for
  business use is allowed as a deduction from the
  amounts owing to the ATO.

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How much is the GST?

• The current rate of GST is 10 on sales value.

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How do I work out GST?

• If the sales value is inclusive of GST then you
  have to divide the total amount by 11 in order to
  get the GST amount.

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How do I account for GST?

• GST payable a/c GST owing to ATO (on sales)
• Liability Credit
• Input Tax Credits a/c GST owing to the business
  by the ATO (on purchases)
• Assets - Debit

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Example of GST

• If a business sells a computer for 1,800 what is
  the amount of GST that the business has to
  collect?
• What if the computer is sold for 2,300?
• If you purchased an MP3 for the total cost of
  418 how much GST did you pay?
• If you purchased a pair of shoes for 110 how
  much GST did you pay?

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How does a business make a profit ?

• An individual will open a business, or invest in
  a business, for the purpose of making a PROFIT.
• The reason a person opens a restaurant is not to
  feed people but to make a profit from the sale of
  meals and beverages.
• The success of the business depends on the
  quantity of sales, the more sales (number of
  meals) the more income (revenue) the business
  receives.
• Of course, in order to earn the income the
  business will also have expenses.

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Expenses

• Example The restaurant must buy the meat, fish,
  vegetables, fruit, tea, coffee, wine, must pay
  the wages of the chef, kitchen staff and waiters,
  must also pay the rent for the restaurant, the
  gas, electricity and telephone etc.

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What is profit?

• Revenue expenses PROFIT
• All the revenue and expenses will have to be
  recorded in the Ledgers in order to be able to
  calculate the profit.
• The system for recording these transactions is
  known as ACCOUNTING

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What is the scope and purpose of Accounting ?

• Accounting is a means of
• recording financial transactions, and
• summarising the effect of these transactions in
  the Financial Reports with the aim of
• calculating the profit earned during the
  accounting period and
• showing the financial stability of the entity

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Where do we record the financial transactions ?

• All the financial transactions are recorded in
  the JOURNALS
• at the end of the month the totals are
  transferred to the GENERAL LEDGER.

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What is a general ledger ?

• A general ledger is a combination of accounts
  that make up the financial statements of a
  business.
• It is where all business transactions are
  recorded under their appropriate account
  headings.