CHAPTER 3

RECORDING FINANCIAL
TRANSACTIONS
Topic list

Source documents
Computerised for recording Recording bank
accounting system financial transactions
transactions

Petty cash book The payroll

Computerised system

Inputs Processes Outputs

• Source documents • Ledgers • Reports

• Standing data • Journals • Trial balance
• Calculations • Financial statement
• Record keeping
Computerised system
1

5
Co p sed sys em

Identify and Prevent Errors

Accounting software package

1. Standing 2. Account
data codes

3. Processing
• Real-time
processing 4. Controls
• Batch
processing
Cloud accounting
Cloud accounting is one application of cloud computing.
Accountancy software is provided in the cloud by a service
provider. The user accesses this software to process their
accounting transactions and run reports as they would if the
software was installed on their own computer.

The use of cloud accounting does not change the requirement for the bookkeeper to input information
from source documents into the system. The processing of transactions takes place in the software within
the cloud and outputs in the form of reports, or financial statements are extracted from the cloud.
Cloud accounting
The role of source document

TRANSACTIONS RECORDED BY SOURCE

OCCUR DOCUMENT

To support
EVIDENCE

Source documents are the source of all information

recorded by a business
Invoice

An invoice may relate to a sales

or purchase order.

Invoices are source documents

for credit transactions.
Credit note

Credit note: A document

issued to a customer
relating to returned
goods, or refunds when a
customer has been
overcharged for whatever
reason.
It can be regarded as a
negative invoice.
Debit notes

A debit note might be issued to

a supplier as a means of
formally requesting a credit
note from that supplier.
A debit note is not a source
document.
Delivery notes

The delivery note is

most often prepared with
reference to the sales
order.
Goods received notes
A goods received note (GRN) records a receipt of goods purchased, most commonly in
a warehouse.
Sales system
• When a customer places an order, a sales order is created detailing the goods or services required and
the agreed price. While sales orders are very important from a practical point of view, they are not
Customer treated as source documents for recording financial transactions in the business accounts.
order

• When the goods or services are delivered to the customer, they are usually accompanied by a delivery note prepared by
the seller. This sets out the goods/services delivered, the quantities delivered, the date of delivery and the delivery
address. A delivery note is not a source document.
Dispatch • The delivery note is most often prepared with reference to the sales order. Once the delivery is complete the delivery
goods note is used to provide information for creating the sales invoice. The delivery note is not a source document for credit
transactions.

• The seller will then prepare and send an invoice to the customer to request payment for the goods or
Raise services delivered. Invoices are source documents and need to be recorded in the accounting system.
invoice

• The customer will then settle the invoice either by bank transfer or by cheque or cash. More detail is
Receive given in section 3 below.
payment
Purchases system
• A business will identify the goods it requires from its supplier and raise an purchase order
which is sent to the supplier. The supplier will generate sales order (see sales system at 2.3
Purchase
above) based on the purchase order received. A purchase order is not a source document.
order

• Once the goods are received, a goods received note (GRN) is raised by the business to record
the receipt of goods. The accounts department will often ask to see the GRN to confirm the
Receive
goods were delivered before paying a purchase invoice. A GRN is not a source document.
Goods

• Sometime later, the business will receive an invoice from the supplier to request payment
for the goods delivered. Invoices are source documents and need to be recorded in the
Receive
accounting system.
invoice

• The business will then settle the invoice by transfer to the supplier's bank account or by
Make cheque or cash. More detail is included in section 3 below.
payment
Record bank transaction
The transaction report is the source document for transactions through the business cash
at bank account.
The data on the transaction report is uploaded into the computerised accounting system
Transaction report Upload Accounting system Match Matches to transactions –
Deposits Withdrawals system can suggest or manual
£650 Sales invoice 001
Customer ABC £650
Once matched, accounting
system processes
Purchase invoice supplier
(£900) XYZ £900
Unmatched items require
investigation
(£1,220) Purchase invoice supplier Accountant discovers that
JKL £1,300 prompt payment discount
taken hence amount paid is
less than invoice total
Recording bank transactions
• Businesses have constant and instant access to their bank accounts via electronic banking.
Electronic banking allows a business to create a transaction report at any point in time.
Transaction reports are source documents for transactions through the cash at bank
account.
• Some businesses have accounting software packages which are integrated with electronic
banking systems, allowing banking transactions to be recorded directly in the business’s
accounting system.
• Many accounting software packages use AI to automatically match receipts and payments
on the transaction report to information within the system regarding purchases, sales and
other transactions, and account for the receipt or payment accordingly.
• Less sophisticated software packages will require a transaction report to be downloaded
from the electronic banking system which can then be used by a bookkeeper to enter
transactions into the business’s accounting system.
Electronic banking
Cash at bank account

The cash book is used to record money received and paid out by
the business through the business bank account.

These transactions will all be shown in the bank transaction

report and are recorded in the accounting records

Some cash, in notes and coins, is usually kept on the business

premises in order to make occasional payments for odd items of
expense. This cash is usually accounted for separately in a petty
cash book.
Petty cash book
Petty cash book: The book or spreadsheet in which payments and receipts of petty cash
aremrecorded. The petty cash book is the source document for petty cash.

Most common, petty cash use the imprest system reimburse/ refund the total amount paid out in a
period (i.e. if on 1 Dec petty cash paid out $100 under imprest system, on 2 Dec accountant will draw
$100 to top-up the amount paid in yesterday).
Under what is called the imprest system, the amount of money in petty cash is kept at an agreed sum
or 'float' , so that each toping is equal to the amount paid out in the period.
Petty cash transactions – including VAT on payments where relevant – need to be recordedAlthough the
amounts are small, petty cash transactions still need to be recorded to prevent fraudulent or misuse
of funds (i.e. IOU).
There are usually more payments than receipts in petty cash
Petty cash book
Interactive question 3: Petty cash imprest
Mitchell maintains a petty cash float with an imprest amount of £250. At the end of June, vouchers in the
petty cash box totalled £112 and the amount of cash remaining in the box was £91.

Requirement
Which of the following would explain the difference?
A. A petty cash voucher totalling £47 is missing.
B. An employee received £47 too little when being paid from petty cash.
C. A voucher for £47 was put in the petty cash box but no cash was taken.
D. The amount of cash remaining was miscounted and was overstated by £47.
Journal

The final book of original entry is the journal. This is the record of transactions which do not appear in any
of the other books of original entry.

Non-current asset purchases are usually recorded via the journal.

Journal is also ONE of the books of original entry.
Journal keeps a record of unusual movement between accounts
Record any double entry made but do not arise from other books of original entry (i.e. Journal
entries are made when corrected errors or adjustment like prepayment…)
The payroll
• Payroll: The record of wages and salaries costs
• The book of original entry for recording staff costs.
• Gross pay is not the amount paid to the employee. The employer needs to make deductions from gross pay before
paying net pay to the employee.
The payroll
Interactive question 4: Payroll
Fantab Ltd has 10 employees who had gross pay of £190,000 per annum between them in 20X4. In that
year, Fantab Ltd made net pay payments to employees of £129,200 and paid £20,900 to the pension plan.
Its total payroll cost was £220,400.

Requirement
How much did Fantab Ltd pay to HMRC in respect of NI and PAYE?
1. Company cost = Gross pay + NIC by employer + Pension by employer

2. Net pay = Gross pay - Deduction of employee

Deduction of employee include:
Income Tax + NIC paid by employee + Pension by employee

1 → NIC by employer = Company cost – Gross pay – Pension bay employer

= 220,400 – 190,000 – 20,900 = 9,500
2 → Net pay = Gross pay - NIC by employee
→ NIC by employee = Gross pay – Net pay = 190,000 – 129,200 = 60,800
Total NIC pay to HMRC = 9,500 + 60,800 = 70,300
 Multiple choice questions

1. 'Transactions are processed in the computerised

accounting system at the point at which they
occur' is a description of 'batch processing' in a
computerised accounting system. True or false?

2. Sales orders are source documents that are

recorded in the accounting system. True or
false?
 Multiple choice questions

3. When an entity returns goods to a supplier it

will expect to receive from the supplier?

A. An invoice

B. A credit note

C. A purchase order

D. A goods received note

 Multiple choice questions

4. Which of the following are source documents

for credit purchases?

A. Suppliers' invoices and credit notes

B. Invoices and credit notes to customer

C. Delivery notes

D. Goods received notes

 Multiple choice questions

5. Which of the following documents would be

issued by a supplier if it was discovered it had
overcharged its customer by £400?
A. A remittance advice
B. A debit note
C. A credit note
D. A supplier invoice
 Multiple choice questions

6. Sepi downloads a report of her bank transactions for the day.

The report shows a deposit of £150 which the computerised
accounting system has not been able to match to a transaction.
Which of the following transactions may have resulted in the
cash receipt?
A. A direct debit payment in respect of telephone expenses
B. A receipt from a customer who had purchased goods on credit
C. The purchase of a new office chair
D. The payment of a supplier invoice
 Multiple choice questions

7. Expenditure that has been incurred via petty

cash does not need to be recorded in the
accounting system. True or false?
 Multiple choice questions

8. Petty cash is controlled under an imprest system. The

imprest amount is £100. During a period, payments
totalling £53 have been made. How much needs to be
reimbursed at the end of the period to restore petty cash
to the imprest account?
A. £100
B. £53
C. £47
D. £50
 Multiple choice questions

9. The cost of employer's NI is part of a

company's?

A. Net pay

B. Gross pay

C. Gross wages and salaries cost

D. Income tax charge