INTRODUCTORY PAPER RECORDING FINANCIAL TRANSACTIONS (INTERNATIONAL) BPP is the official provider of training materials for the ACCA's CAT qualification This Interactive Text forms part of a suite of learning tools, which also includes CD-ROMs for tuition and computer based assessment, and the innovative, internet-based Learn Online This text has been specifically written to the current syllabus and Teaching Guide • Clear language and presentation • Plenty of questions, examples and quizzes to demonstrate and practise techniques • A question and answer bank prepared by BPP Learning Media authors FOR EXAMS IN DECEMBER 2008 AND JUNE 2009 I N T E R A C T I V E T E X T First edition 2003 Sixth edition June 2008 ISBN 9780 7517 4830 (Previous ISBN 07517 3577 2) British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by BPP Learning Media Ltd BPP House, Aldine Place London W12 8AA www.bpp.com/learningmedia Printed in Great Britain by WM Print 45-47 Frederick Street Walsall West Midlands WS2 9NE Your learning materials, published by BPP Learning Media Ltd, are printed on paper sourced from sustainable, managed forests ii All our rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media Ltd We are grateful to the Association of Chartered Certified Accountants for permission to reproduce past examination questions The suggested solutions in the exam answer bank have been prepared by BPP Learning Media Ltd, unless where otherwise stated © BPP Learning Media Ltd 2008 Contents Page Introduction How to use this Interactive Text Approach to examining the syllabus The computer based examination Tackling multiple choice questions v vi vii viii Part A Introduction to transaction accounting Business transactions and documentation Assets, liabilities and the accounting equation` Statement of financial position and income statement Recording, summarising and posting transactions Completing ledger accounts 31 45 53 87 Part B Recording and accounting for cash transactions 10 11 12 Receiving and checking money Banking monies received Recording monies received Authorising and making payments Recording payments Maintaining petty cash records Bank reconciliations 117 135 157 169 197 211 247 Part C Recording and accounting for credit transactions 13 14 15 16 17 Sales and sales returns day books The receivables ledger Purchase and purchase returns day books The payables ledger Control accounts 263 285 309 333 351 Part D Payroll 18 Recording payroll transactions 363 Exam question bank 401 Exam answer bank 408 List of key terms 413 Index 415 Review form and free prize draw Contents iii iv How to Use this Interactive Text Aim of this Interactive Text To provide the knowledge and practice to help you succeed in the examination for Paper Recording Financial Transactions (International) To pass the examination you need a thorough understanding in all areas covered by the syllabus and teaching guide Recommended approach (a) To pass you need to be able to answer questions on everything specified by the syllabus and teaching guide Read the text very carefully and not skip any of it (b) Learning is an active process Do all the questions as you work through the text so you can be sure you really understand what you have read (c) After you have covered the material in the Interactive Text, work through the Question Bank, checking your answers carefully against the Answer Bank (d) Before you take the exam, check that you still remember the material using the following quick revision plan (i) Read through the chapter topic list at the beginning of each chapter Are there any gaps in your knowledge? If so, study the section again (ii) Read and learn the key terms (iii) Look at the exam alerts These show the ways in which topics might be examined (iv) Read the chapter roundups, which are a summary of the fast forwards in each chapter (v) Do the quick quizzes again If you know what you're doing, they shouldn't take long This approach is only a suggestion You or your college may well adapt it to suit your needs Remember this is a practical course (a) Try to relate the material to your experience in the workplace or any other work experience you may have had (b) Try to make as many links as you can to other papers at the Introductory and Intermediate levels Introduction v Approach to examining the syllabus Paper is a two-hour paper It is taken as a computer based examination The questions in the computer based examination are multiple choice questions (See page vii for frequently asked questions about computer based examinations.) Important note Past papers refer to 'doubtful debts' and the 'provision for doubtful debts' From the December 2005 examination, these have been referred to as 'receivables allowances' or 'allowances for receivables' and this is the terminology we use in this text The written examination consists of three sections, structured as follows: 50 compulsory multiple choice questions of two marks each Number of marks 100 Analysis of past papers Pilot paper and all past papers Fifty multiple choice questions covering various topics 100 It is important that you practice as many multiple choice questions as possible before your exam There are questions for you to at the end of this text and over 200 questions in the Practice and Revision Kit for CAT Paper BPP I-Pass will then give you further practice in a computer environment See over for important advice on tackling multiple choice questions Student Accountant 2006 has a useful article: Five steps to multiple choice success by Steve Widberg You can access this article via the ACCA website vi Introduction The Computer Based Examination The ACCA has introduced a computer based examination (CBE) for CAT Papers 1–4 (in addition to the conventional paper based examination for papers and 4) Computer based examinations must be taken at an ACCA CBE Licensed Centre How does CBE work? • • • • • • Questions are displayed on a monitor Candidates enter their answer directly onto the computer Candidates have two hours to complete the examination When the candidate has completed their examination, the computer automatically marks the file containing the candidate's answers Candidates are provided with a certificate showing their results before leaving the examination room The CBE Licensed Centre uploads the results to the ACCA (as proof of the candidate's performance) within 48 hours Benefits • • • • • Flexibility as a CBE can be sat at any time Resits can also be taken at any time and there is no restriction on the number of times a candidate can sit a CBE Instant feedback as the computer displays the results at the end of the CBE Results are notified to ACCA within 48 hours Extended closing date periods (see ACCA website for further information) CBE question types • • • • Multiple choice – choose one answer from four options Multiple response – select more than one response by clicking the appropriate tick boxes Multiple response – select a response to a number of related part questions by choosing one option from a number of drop down menus Number entry – key in a numerical response to a question CAT CBE You will have two hours in which to answer a number of questions, which are worth a total of 100 marks See the ACCA website for a demonstration and up to date information (www.acca.org.uk/colleges/cbe_demo) Introduction vii Tackling Multiple Choice Questions MCQ's are now part of all CAT exams Papers and are examined by CBE, Papers and can be taken by CBE or by a written paper which is 40% MCQs Paper is now 50% MCQ's and Papers 6-10 are 20% MCQs All MCQs carry marks The MCQs in your exam contain four possible answers You have to choose the option that best answers the question The three incorrect options are called distracters There is a skill in answering MCQs quickly and correctly By practising MCQs you can develop this skill, giving you a better chance of passing the exam You may wish to follow the approach outlined below, or you may prefer to adapt it Step Skim read all the MCQs and identify what appear to be the easier questions Step Attempt each question – starting with the easier questions identified in Step Read the question thoroughly You may prefer to work out the answer before looking at the options, or you may prefer to look at the options at the beginning Adopt the method that works best for you Step Read the four options and see if one matches your own answer Be careful with numerical questions as the distracters are designed to match answers that incorporate common errors Check that your calculation is correct Have you followed the requirement exactly? Have you included every stage of the calculation? Step You may find that none of the options matches your answer • • • Re-read the question to ensure that you understand it and are answering the requirement Eliminate any obviously wrong answers Consider which of the remaining answers is the most likely to be correct and select the option Step If you are still unsure make a note and continue to the next question Step Revisit unanswered questions When you come back to a question after a break you often find you are able to answer it correctly straight away If you are still unsure have a guess You are not penalised for incorrect answers, so never leave a question unanswered! After extensive practice and revision of MCQs, you may find that you recognise a question when you sit the exam Be aware that the detail and/or requirement may be different If the question seems familiar read the requirement and options carefully – not assume that it is identical viii Introduction P A R T A Introduction to transaction accounting 27 D Provided that the cash receipts have been correctly posted to the cash book, then the fact that they have incorrectly been posted to trade payables instead of cash sales or trade receivables will not affect the bank reconciliation 28 D All the other options would have the bank account $250 less than the cash book 29 B $ Cash book Unpresented cheques Uncleared deposit Bank balance $ 500 6,000 5,000 500 6,000 6,000 30 B The sales tax element of the invoices will go to the sales tax account in the statement of financial position 31 C This will be debited to irrecoverable debts in the income statement 32 D Debits will exceed credits by × $48 = $96 33 C Trade discounts are not included in the cost of purchases 34 C Credit sales = $80,000 – $10,000 + $9,000 = $79,000 35 B All other options would lead to a higher balance in the supplier's records 36 C Debits total $32,750 + $125,000 + $1,300 = $159,050 Credits total $1,275 + $122,550 + $550 = $124,325 ∴Net balance = $34,725 debit 37 A The other options would make the credit side total $50 more than the debit side 38 A $8,500 – (2 × $400) = $7,700 39 A Opening balance Credit purchases Discounts Payments Purchase returns 40 410 Exam answer bank ⏐ B The cost to the business consists of gross wage plus employer's NI $ 34,500 78,400 (1,200) (68,900) (4,700) 38,100 List of key terms and index 411 412 Account payable, 39 Account receivable, 39 Accounting system, 10 Age analysis of payables, 345 Age analysis of receivables, 301 Agency, 140 Asset, 33 B Gross pay, 367 Gross profit, 49 Imprest system, 216 Income statement, 49, 50 Income tax, 365 Internal check, 352 Invoice, 10 ank reconciliation, 248 Bank statement, 249 Banker, 139 Basic pay, 367 Batch processing, 103 Bonus, 372 Books of prime entry, 55 Journal, 88 Capital, 35 Long-term liabilities, 48 Capital expenditure, 50 Cash, 124 Cash book, 60, 248 Cash discount , 17 Cash transaction, Cheque, 125 Cheque requisition form, 172 Clearing, 136 Code, 271 Commission, 373 Compensating errors, 94 Computer programs, 104 Control account, 77 Control totals, 104 Credit note, 14 Credit transaction, Current assets, 47 Current liabilities, 48 Customer, 139 Module, 106 Data controllers, 29 Discount, 15 Double entry book-keeping, 41 Drawings, 37 Duty, 141 EFTPOS, 129 Error of commission, 94 Error of omission 93 Error of principle, 93 Error of transposition, 93 Expenses claim form, 174 Float, 143 Journal voucher, 90 Liability, 33 N et assets, 36 Net profit, 49 Nominal ledger, 64 Non-current asset, 47 Overtime pay, 370 Payables ledger, 77, 334 Payables ledger control account, 78 Payroll, 364 Personal accounts, 75 Personal data, 29 Petty cash book, 64 Posting, 64 Profit, 32 Purchase day book, 59, 310 Purchase returns day book 59, 312 R eceipt, 121, 123 Receivables ledger, 75, 287 Receivables ledger control account , 275 Remittance advice, 120 Retention policy, 28 Revenue expenditure, 50 Sales day book, 58, 264 Sales returns day book, 58, 269 Sales tax receipt, 230 Source documents, 54 Statement of financial position, 46 Suspense account, 95 ⏐ List of key terms 413 Total payables account, 78 Total receivables account, 78, 275 Trade account payable, 39, 335 Trade account receivable, 39 Trade accounts payable Trade discount, 17 Trial balance, 90 414 List of key terms ⏐ relief, 305 and sales tax, 305 Bailor/bailee relationship, 140 Balancing ledger accounts, 91 Balancing the cash book, 61 Bank charges, 248 Bank giro credits, 181 Bank of England, 136 Bank reconciliation, 158, 198, 248, 253 Bank statement, 63, 249 Banker, 139 Banker's draft, 122, 131, 153, 175, 182 Banking and EFTPOS, 153 cash, 142 cheques, 145 credit card transactions, 151 system, 136 plastic card transactions, 148 Basic pay, 367 fixed rate per period, 367 hourly rate, 368 Block codes, 272 Book of prime entry, 88, 158 Bought ledger, 315 Business, 32 Cash account, 274 Cash book, 76, 158, 199 Cash cycle, 47 Cash discount, 16, 178 Cash flow, 310 Cash payment, 388 Cash received sheets, 158, 159 Cash sale, 282 Central bank, 136 Charge cards, 127 Checks on petty cash, 221 Checks over payments, 344 Cheque books, 176 Cheque guarantee card, 125 Cheque requisition forms, 172 Cheque signatories, 345 Clearing or retail banks, 136 Clearing system, 136 Codes, 271 Coding, 101, 105, 271, 272 Coding data, 101, 271, 314 Coding in the payables ledger, 314 Coinage analysis sheet, 388 Commission, 373 Company credit card or charge card, 175 Compensating errors, 93 Completeness, 198 Computer cheques, 344 Computerisation of payments recording, 204 Computerised accounting, 104 Computerised cash book, 204 Computer-produced cheques, 176 Configuration of the system, 303 Contract law, 23 Control accounts, 353, 355 Control list, 200 Controls over payments, 170 Controls over recording payments, 198 Correction of errors, 89 Costing module, 107 Costs, 365 Credit card summaries, 148 Credit card vouchers, 148 Credit notes, 10, 14 Credit transfers, 181 Creditors, 33, 69 Creditors ledger, 315 Credits, 91 Crossed cheque, 242 Current assets, 33 Customer, 139 Customer mailing lists, 304 Cancelled cheques, 200 Daily time sheets., 377 Accounting equation, 35, 46 Accounting systems, 104 Accounts payable, 39 Accounts receivable, 39 Accuracy, 366 Acknowledgement, Active file, 28 Advantages and disadvantages of paying by cheque, 179 Age analysis of payables, 345 Age analysis of receivables, 301 Agency, 140 Allowance, 19 Analysed cash book, 60 Analysis of purchases, 313 Appearance and finish, 26 Archive records, 242 Attendance cards, 376 Audit trail, 105 Authorisation, 171, 215 Authorised signatures, 176 Automatic payment methods, 345 Automatic payments, 204 Bad debt Capital, 35, 48 Cash, 175 Data protection, 28 Data subjects, 29 ⏐ Index 415 Day book analysis, 73 Day book totals, 314 Debit note, 14 Debits, 91 Debtor/creditor relationship, 139 Debtors, 108 Deductions, 367 Delivery note, Differential piecework, 370 Direct debit, 123, 131, 175, 185, 251 instruction, 187 Discount, 16, 49, 63, 178 allowed, 294 received, 338 Dishonoured for payment, 147 Document, Documentation to go out with payments, 188 Double entry, 92, 315 bookkeeping, 32 recording of sales, 275 system, 274 Duality, 41 Durability, 26 Duties of a banker, 141 Duties of bankers, 141 Duties of customers, 141 E & O E, 12 E-commerce, 14 EFTPOS, 153 Electronic cash registers, 121 Employee, 366 Employer's costs, 393 Employer's legal responsibilities to collect income tax, 365 Entity, 33 Errors, 89, 248 of principle, 93 of transposition, 93 Evidence of payment, 122 Ex works, 12 Expenditure, 32 Expenses claim forms, 173 Expenses day book, 314 External documentation, Faceted codes, 273 False description, 26 Fiduciary relationship, 140 Fitness of goods for a disclosed purpose, 26 Fixed assets, 33 Float, 144, 237 Floor limit, 129 FOB, 12 Forgery, 124 416 Index ⏐ Format of a ledger account, 65 Fraud, 198 Freedom from minor defects, 26 Frequency of the reconciliation, 256 G iving change, 121 Goods received note, 8, 14 Gross pay, 367, 393, 394 Hierarchical codes, 272 High day-rate schemes, 369 Impersonal accounts, 75 Implied terms, 25 Imprest amount, 216 Income, 49 Income statement, 49, 80 Income tax, 365 Input, 103 Insufficient funds, 147 Integrated accounting, 107 Integrated software, 107 Internal check, 352, 355 Internal documentation, Inventory, 47 Invoice, 7, 10 IOUs, 221 Irrecoverable debts, 304 Job card, 380 Journal entries, 89 Journal vouchers, 90 Ledger account, 65 Ledger file, 108 Limited companies, 34 Limited liability, 34 List of balances, 90 Lost cheques, 179 Mail transfer, 123 and telegraphic transfer, 175 Management reports, 107 Master files, 28 Memorandum accounts, 288 Methods of payment, 343 Money consideration, 24 Mortgagor/mortgagee relationship, 140 N ational Insurance, 365, 381 Net pay:, 367 Net wages, 393 NICs payable by the employee,, 383 NICs payable by the employer, 383 Night safes, 125 Nominal ledger, 64, 111 Non-active file, 28 Omission of a transaction, 93 Operational balances, 137 Output, 103 Overdraft, 310 Overtime, 370 pay, 370 P assword, 106 Payables control account, 78 Payables ledger, 334 Payables ledger, 110, 337, 355 control account, 315 Paying-in slip, 143, 148, 150 Payments by banker's draft, 182 by cash, 175 by cheque, 176 to suppliers, 340 Payroll, 364 and the employee, 364 and the employer, 365 and the government, 365 department, 375 ledger accounts, 393 Periods of credit, 310 Permanent files, 28, 75, 286, 334 Personnel record, 376 record card, 375 Petty cash, 212, 389 book, 60, 64, 224, 226, 241 vouchers, 217 Petty cashier, 214 Piecework, 369 Posting document, 276 Posting from the day books, 73 Posting the ledgers, 56 Preparing cheques, 176 Price, 24 Principal/agent relationship, 140 Procedures on receipt of a cheque, 126 Processing, 103 Processing copies, 149 Profit, 32, 36 Pro-forma bank reconciliation, 253 Proforma wages control account, 395 Programme controls, 258 Purchase day book, 310 Purchase order, Purchase returns, 338 day book, 311 Purchases and returns, 316 Quotation, R ebate, 19 Receipt, Receipts, 216 Receivables, 47 control account, 78, 292 ledger, 76, 274, 287 Receiving money into petty cash, 222 Reconciliations on a computerised system, 258 Reconciling items, 343 Record of attendance card, 376 Recording receipts, 158 Reference files, 28 Relationship between banker and customer, 139 Remittance advices, 188, 344 Retail receipts, 120 Retention periods, 28 Returned cheques, 206, 207 Right to sell the goods, 25 Rights and duties of bankers and customers, 141 Route cards., 377 Safes, 124 Safety, 26 Salami fraud, 366 Sale of goods, 24 Sales analysis, 58 reports, 303 Sales day book, 75, 76, 264 Sales ledger control account, 275 Sales ledger department, 120 Sales order, 13 document, Sales Order Processing (SOP, 271 Sales returns day book, 269 Sales tax, 80, 81, 230 account, 81 analysis, 303 in cash transactions, 81 in credit transactions, 80 Satisfactory quality, 26 Security, 366 and control of petty cash, 214 guards, 124 Segregation of duties, 118, 158 Seller's title, 25 Semi-active files, 28 Separate entity, 34 Sequence codes, 272 Settlement discount, 178 ⏐ Index 417 Significant digit codes, 272 Single entry, 93 Smaller retail banks, 136 Spreadsheet, 269, 270, 314 Staff schedules, Standing order, 123, 131, 175, 184, 207 mandates, 184 Statement of financial position, 355 Statements, 110 of account, 303 Stock lists, Stock module, 107 Stolen cheques and cheque guarantee cards, 148 Stopping cheques, 180 Strong box, 124 Summary voucher, 148, 150 Supplier lists, Supplier statement reconciliations, 342 Supply of services, 24 Suspense account, 95 T accounts, 65 Tax Office, 381 Telegraphic transfer, 123 Temporary files, 28 Terms of business, 310 The legal relationship (banker/customer), 139 418 Index ⏐ Theft, 124 Till receipts, 121 Time of performance, 25 Time sheets, 377 Timeliness, 366 Timing and methods of payments, 174 Total payables account, 78 Trade accounts payable, 335 Trade Descriptions Act 1968, 26 Trade-in arrangement, 24 Transaction files, 28 Transaction processing, 289 Transposition error, 356 Trial balance, 90, 355 Unclaimed wages, 389 Undue influence, 140 Updating the payment record, 391 V ariable data, 108 VAT (Value Added Tax), 19, 275 return, 22 VDU, 270 Wages analysis book, 392 Weekly time sheets., 377 Written receipts, 121 Wrong account, 93 Notes 419 420 Notes Notes 421 422 Notes CAT Paper – Recording Financial Transactions (International) (6/08) REVIEW FORM & FREE PRIZE DRAW All original review forms from the entire BPP range, completed with genuine comments, will be entered into one 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Yes No Please note any further comments and suggestions/errors on the reverse of this page The BPP author of this edition can be emailed at janiceross@bpp.com Please return this form to: Mary Maclean, CAT Range Manager, BPP Learning Media, FREEPOST, London, W12 8BR CAT Paper – Recording Financial Transactions (International) (6/08) REVIEW FORM & FREE PRIZE DRAW (continued) Please note any further comments and suggestions/errors below FREE PRIZE DRAW RULES Closing date for 31 January 2009 draw is 31 December 2008 Closing date for 31 July 2009 draw is 30 June 2009 No purchase necessary Entry forms are available upon request from BPP Learning Media No more than one entry per title, per person Draw restricted to persons aged 16 and over Winners will be notified by post and receive their cheques not later than weeks after the relevant draw date The decision of the promoter in all matters is final and binding No correspondence will be entered into ... business transaction is a cash transaction Documenting business transactions FAST FORWARD Business transactions can be evidenced by internal and external documentation 2.1 External documentation... should receive an acknowledgement Part A Introduction to transaction accounting ⏐ 1: Business transactions and documentation The above diagram gives a picture of the external documentation involved... Introduction P A R T A Introduction to transaction accounting Business transactions and documentation Topic list Types of business transaction Documenting business transactions Invoices and credit notes