BUSINESS TRANSACTIONS

AND DOCUMENTATION

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Business

Business :
Is a commercial organization existing to invest money
into resources in order to earn even more money for
owners.
Purpose of business:
To make profit for the owner
Profit
Excess of income over expenditure. The opposite
being Loss.

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Types of business transaction
Business transaction
 is an event involving an interchange of goods,
moneys or services between two or more parties.
Two main types of business transaction
Sales
Purchases
Two different ways in which sales and purchases occurs
Cash transactions: Where the buyer pays cash to the
seller immediately when goods are transferred.
Credit transactions: sale or purchases which occur
earlier than cash is received or paid

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Types of business transaction continued….
 Other types of business transactions
 Payment
 Outflow of cash from the business
Receipts
Inflow of cash to the business


Borrowing money
Offering discounts
Payroll
 Payment of wages and salaries

Petty cash
 Small cash transactions

Dual effect of transactions

 Double entry
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Business entity concept
This is an accounting concept which states that a
business should always be treated separately from
the owner(s)
This is the concept that states that business entity
should always be treated separately from the owner(s)
It is applied when recording accounting transactions of
any business irrespective of whether such business is
legally treated as separate from the owner or not.
The result of this concept is that FS prepared for a
business present only performance or position of entity
and transactions between the owner and the entity are
shown under the equity/capital section in the SFP

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Business entity concept……
There are two conventions to this concept;
1. Accounting convention – this conventions states that
each and every business should be treated as a
separate entity from the owner.
 This conventions requires such treatment irrespective of
whether a business is a sole trader, partnership or a
company.
2. Legal convention – this convention states considers
only companies to be treated as separate entity from
the owner(s).
That is in the legally sole trade and partnerships are not
seen as separate from the owners.
NB: So, for the purposes of accounting conventions will
always apply
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Documenting business transaction (Source document)
Source documents – original records of business transactions or source of
all information recorded by the business.
Two type of business documentation
External documentation
Internal documentation
External documentation:
Enquiry ( by phone or by letter) – used to find about availability of goods
or services.
Quotation – Used to establish cost from various suppliers and cross refer to
purchase order. Is issued by the supplier
Order (sales order or purchase order)
An order acknowledgement
Delivery note/dispatch note
Invoice
Credit note

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Invoices and credit notes
Invoice: A demand for payment.
Three uses of the invoice
Receipt: invoice given as evidence of payment
when a transactions has been settled
immediately in cash.
Cash on delivery invoice: Invoice which is paid
on receipt of goods or services.
Credit invoice: Invoice which is sent sometime
after goods have been delivered, with request
for payment time.

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 Invoices and credit notes
Details shown on the invoice
Other information on the invoice
FOB (free on board): means the supplier pays
all costs of carriage up to the point of shipping
and the customer will then bear all
subsequent carriage costs.
EX Works: means that the price excludes the
cost of delivery.
E & OE: errors and omission excepted

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Invoices and credit notes continued…….
Invoice copies
Sent to the purchaser
Kept in as file copy
Delivery note (signed and retained by the
seller)
Advice note ( signed and kept by the
purchaser)
(example of invoice) and information shown on
the invoice

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Invoices and credit notes continued…….
Credit notes: Is used by the seller to cancel part or all of the
previously issued invoice
Reasons for issuing credit note
 Customer returning goods

 If a customer is Overcharged

Debit note:
 Issued by a customer to a supplier as a means of formally
requesting a credit note
 At times is issued by a supplier to adjust upwards the amount of
the previously issued invoice.
Goods received note(GRNs)
Are used to record a receipt of goods in warehouse or store.

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Documenting business transaction (Source
document) continued…….
Internal documentation:
Purchase order
Staff booking sheets – Used to check for availability of stock in
store/warehouse
Lists of parts in stock – Used to check if part to be used on a certain job
are available internally.
Suppliers’ address list
Goods received notes - Produced by the business receiving goods as proof of receipt.
Checked against despatch note from the supplier as well as purchase order
Cheques
Expenses claims – used/filled in by employees who have incurred
expenses on behalf of the business and need to be reimbursed
Timesheets
Job sheets

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Documenting business transaction (Source document) continued…….
SUMMARY OF MAIN TYPES OF SOURCE DOCUMENTS (BUSINESS DOCUMENTATION)
DOCUMENT CONTENTS PURPOSE
Quotation Quantity/description/details of Issued by the supplier
goods required To establish cost from various
suppliers and cross refer to
purchase order
Purchase order Supplier’s details, e.g. name, Issued by the customer
address. Sent to supplier as request for
Quantity/description/details of supply. Check against quotation
goods required & price. Terms & and delivery note.
conditions of delivery, payment
etc

Sales order Quantity/description/details of Issued by the supplier.

goods required & price. Cross checked with the order
placed by the customer.
Sent to the store/warehouse for
order processing
Documenting business transaction (Source document) continued…….
SUMMARY OF MAIN TYPES OF SOURCE DOCUMENTS (BUSINESS DOCUMENTATION)
DOCUMENT CONTENTS
Goods despatch note (GDN) Details of supplier. Quantity &
description of goods.
Goods received note(GRN) Details of supplier. Quantity &
description of goods.
Invoice Name & address of supplier &
customer; details of goods, e.g.
quantity, price, value, sales tax,
terms of credit.
Statement (statement of Details of supplier. Include
account) date, invoice numbers & values,
payments made, refunds &
amount owing.
PURPOSE
Provided by supplier. Checked
against goods received and
purchase order
Produced by the business
receiving goods as proof of
receipt. Checked against
despatch note from the supplier
as well as purchase order.
Issued by supplier as demand
for payment. Supplier treat it as
sales invoice & the customer
treat it as purchase invoice.
Issued by the supplier. Checked
against other documents to
ensure that the amount owing is
correct
Documenting business transaction (Source document) continued…….
SUMMARY OF MAIN TYPES OF SOURCE DOCUMENTS (BUSINESS DOCUMENTATION)
DOCUMENT CONTENTS PURPOSE
Credit note Details of supplier. Details of Issued by the supplier to cancel
goods returned, e.g. quantity, part or all of the previously
price, value, sales & terms of issued invoice. Issued mostly
credit when goods have been returned.
Checked against other
documents regarding goods
returned.

Debit note Details of supplier. Details of Issued by the business

goods returned, e.g. quantity, purchasing the goods as formal
price, value, sales & terms of request for credit note. Cross
credit referred to the credit note issued
by the supplier.

Remittance Advice Method of payment, invoice Accompanies payment and

number, account number, date shows which invoices the
etc payment covers. That is sent to
supplier as payment
notification.
Receipt Details if payment receipt Issued by supplier as proof of
payment.
Discounts, rebates and allowance
Discount – Is a reduction in the price of good
below normal price
Two kinds of discounts
Trade discounts
Cash discount
 Two type of cash discounts
 Cash discount received

 Cash discount allowed

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Trade and cash discount
Trade discounts Cash discount
A reduction in the Optional reduction in
amount of money the amount of money
demanded from a payable by the
customer. customer.
Resulted from buying Resulted from
in bulk (bulk discount) immediate or prompt
Given on supplier’s payment in cash
invoice Is not show on
supplier’s invoice
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 Trade and cash discount
continued……
Trade discount Cash discount
Normally given to other Withdrawn if payment not
business customers received within time
Permanent period given
Given to customer as Calculated as percentage
incentive to buy more of list price net of trade
goods discount
Given to customer as
incentive to pay early or
promptly

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Accounting for cash Discount
Accounted in accordance with IFRS 15
Estimate the probability of the customer accepting the
discount
Record the sales net of cash discount
DR receivable control account xxx
Cr sales account xxx
When the customer pays within the given period
record payment as follow
Dr bank account xxx
Cr receivables control account xxx
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Accounting for cash Discount
When the customer fail to pay within the given period
Dr bank account xxx
Cr Receivable control account xxx
Cr sales account xxx

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Accounting for cash Discount
Example:
J Ltd sold goods with a list Price of $2,000 on credit to
a customer. J Ltd has a 30 day payment period and has
offered the customer a 3% prompt payment discount if
payment is made within 15 days. Based on past
experience the customer is expected to take up the 3%
discount.

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Accounting for cash Discount
Solution:
The initial sales ,
Debit Receivables $1,940
Credit Sales account $1,940.
If the customer pays within the 14 day settlement period
Debit bank account $1,940
Credit Receivables control account $1,940.
If the customer does not pay within the 14 day period,
when payment is made A Ltd
Debit bank account $2,000
Credit Receivables control account $1,940
Credit sales account $60
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Discounts, rebates and allowance
continued…….
Rebates : where a business lowers its overall price
for customers who uses a certain number of units
per year.
Rebate can be given as:
A reduction in the bill for the following year
A cheque being given for a calculated rebate amount.
Allowances:
Arises where if a certain number of units are ordered
at the same time and then free extra units are given
free of charge.

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Sales tax
Sales tax – an indirect tax levied on goods or
services on sale.
It is administered by tax authorities
Two type of sales tax
Out put tax – tax charged on sales
Input tax – tax incurred on purchases
Sales tax and discounts
Sales tax is calculated on the invoice amount
net of discounts

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Sales tax continued…….
Calculating sales tax
Net price – Price of an item to the
supplier(amount exclusive of sales tax)
Sales tax – certain percentage of net price
Gross price – sum of net price and sales tax
Tax point – date on which a transaction took
place for the sales tax purposes

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Sales tax continued…….
Percentages examples:
Net price – 100% of the price of an item
Sales tax – 10%
Gross price – 110%

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Calculating sales tax
The gross price of the product X is $ 2,000 and net price
of product Y is $ 1,800. What is the sales tax charged on
each of these product if sales tax is charged at 20%

Solution
Product X = $2000 x 20/120 = $333.33

Product Y = $1800 x 20/100 = $360.00

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Storage of information
A company’s retention policy:
this is the policy which sets out how long different
kinds of information are retained.
Why should information be held properly?
To ensure security and availability
Kinds of information which require handling and
storage.
Record of past and current transactions
Information about performance
Information about past trends and current operations

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Retention policy
People who are entitled to the information and their
interests
Information that require handling and storage in
accounts department.
Types of data files:
Permanent: one which can never be thrown away
or scrapped
Temporary or transitory files: which are held till
the transactions in them are processed (held for a
very short period of time )and then thrown away
Active: one which is frequently used.

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Retention policy continued….
Non-active: which is no longer used on a daily
basis.
Ways in which information that is no longer needed
on daily basis can be dealt with:
Electronically scanned for longer storage
(Microfilmed or microfiched)
Archiving - moving data that is no longer actively
used to a separate storage device for long-term
retention
Securely destroyed

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Data protection
Data protection legislation (Act) : An act which
regulate storage of information about living
individuals.
Department mostly affect by this legislation:
Human Resource Department (personnel
department)
Personal data:
Information about a living individual, including
facts and expressions of opinion about him or
her.
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Data protection continued….
Data controller:
Organisations or individuals who control the contents of
files of personal data and the use of personal data which
is processed.
Data subjects:
An individual whom data about him or her is held.
Rights of data subject
Data Protection Principles
Risk facing organisations which does not have
adequate policies and procedure
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E- Commerce
Electronic way of carrying out business
transactions
Has let to reduction of traditional
documentation flow and increased volume
of transaction using debit and credit cards

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