Business documentation
Flow of Source documentation
Purchase order
Send by buyer to order goods form supplier
Invoice
Sent by suppier to buyer when goods are delivered and advising of amount owed
Credit Note
Sent by supplier to buyer to credit buyer for the return of goods
Statement
Sent by supplier to buyer showing transactions to month end and amount due
Remittance
Accompanies payments by cheque or via BACS and gives details of the payment
Purchase Order
When a business or organisation decides to buy goods or engage the services of another company it usually issues a purchase order. This document contains the following information:
1. name and address of supplier
2. Purchase order number
3. Date of order
4. Quantity required
5. Delivery date
6. Authorised signiture of a senior member of the company such as the buyer
7. Detail of the goods or services ordered including part numbers or catalogue references
Invoice
An invoice is a ducment prepared by the seller whenever it sells goods or provides services on credit. The invoice is usually numbered for easy identification and for filing in a suitable storage system. It contains the following information:
1. Seller's name and address
2. Seller's VAT registration number
3. Purchaser's name and address
4. Purchaser's order number and date
5. Date of delivery
6. Description of goods and services supplied including part number and catalogue reference
7. Quantity
8. Price per item
9. VAT payable
10. Total amount due
11. Terms and conditions of sale
Credit Note
Once the supplier has decided to give credit then a credit note will be reised for the value of the returned goods including the applicable amount of VAT. The note will be sent to the customer.
It contains similar information to invoice but some details will be differ. e.g. The customer may only have returned a part of a consignment and this will nedd to be clearly identified on the credit note.
Credit notes are important documents which need to be entered in the books of account as the amount owed by the buyer will be reduced by the amount of the credit note.
Statement of account
At the end of each month businesses send out a document known as a statement of account. This statement contains details of all the customenr's transactions during the previous month, starting off with the opening balance outstanding from the previous month plus the amounts owing from the current month's invoices. Any amounts that are paid are deducted together with any credit note allowances. This gives the total amount outstanding which is then due for payment at the end of month.
Remittance Advice
When payment is made from one business to another it is important that the recipient of the money has details of the payment so that the money may be correctly allocated. Therefore, the business making the paymen usually includes a remittance advice. This document is rather like a statement, and may in fact be prepared at the same time, in that it shows details of the business's most recent transactions and final balance outstanding which is represented by accompanying cheque or advice if the payment is made by Bankers' Automated Clearing Service(BACS).
If any invoice has not been paid for any reason it will be left outstanding and can the be queried.
Sales Day Book - For Credit Sales
The sales day book is a manually-maintained ledger in which is recorded the key detailed information for each individual credit sale to a customer, including:
Customer's name
Invoice number
Invoice date
Invoice amount
This information is usually added to the sales day book at the end of each business day, based on the company's copies of all customer invoices issued. The daily total of the sales listed in the sales day book is then transferred into the sales ledger. Thus, the most detailed recordation of credit sales is the sales day book, with only daily totals of credit sales appearing in the sales ledger. The sales day book is only used in manual accounting systems. It is not used in computerized accounting systems, since accounting software automatically stores and aggregates all customer invoices prepared through the computer system; there is no need to prepare a sales day book.
Sales Ledger
Once the invoices have beeed entered into the sales day book the next step is to post each invoice into the idividual customer's account in the sales ledger. At the end of the period, usually each month, the totals in the sales day book are then poested to the " Sales Account" and " VAT Account" in the general ledger. The Double entry requirements are now shown below:
1. Debit each customer's account in the sales ledger with the total of each individual invoice (The goods go "IN" to their account)
2. Credit the sales account with total of the "Net Sales" (The sales come "OUT" from the supplier)
3. Credit the VAT account with the total of the "VAT" charged (This is a liability and is owed to HMRC).
Once the invoices have been entered into the purchases day book the next step is to post each invoice into the individual supplier's account in the purchase ledger. At the end of the period, usually each month, the totals in the purchases day book are then posted to the "Purchase Account" and "VAT Account" in the general ledger. The double entry requirements are now shown:
1. Credit each supplier's account in the purchases ledger with the total of each individual invoice (The goods have come "OUT" of each supplier)
2. Debit the purchases account with the total of the "Net Purchases" (The purchases have come "IN")
3. Debit the VAT account with the total of the "VAT" column (This is the amount of VAT paid by the business on their purchases which can be offset against the liability incurred on sales)
Sales invoices - sequence of entries
Purchase Day Book - For credit purchases
Sales Returns Day Book
If goods supplied are unsuitable then the supplier will need to rectify the situation. Since the customer (Debtor) will have already been sent an invoice at the time the goods were delivered, they will be in debt to the supplier (Creditor) for the value of the goods.
The supplier will issue a credit note to the customer showing the amount of the agreed reduction.
Credit notes are source documents and are listed in a seperate day book called the "Sales Retruns Day Book", also called "Returns Inward Day Book".
After entering the credit notes into the Sales Returns Day Book, the next step is post each credit note into the individual customers' accounts. Again, at the end of the month the total "Net goods returned" and "VAT" are posted to Sales Returns and VAT accounts in the General Ledger. The book-keeping entries are:
1. Cedit each customer's account in the sales ledger with the total of each individual credit note
2. Debit the sales returns account with the total of "VAT" column
3. Debit the VAT account with the total of the "VAT" column
Sales Returns Day Book
The credit notes are listed in a "Purchase Returns Day Book", also called teh "Returns Outwards Day Book".Some goods received from two of the business's suppliers were not to specification ordered and had to be returned. The suppliers then issued credit notes rectify the situation. The credit notes have been entered below into the Purchase Returns Day Book.
After entering the credit notes into the Purchase Retruns Day Book. The next step is to post each credit note into the individual suppliers' accounts. Again, at the end of the month the toal "Net goods returns" and "VAT" are posted to the Sales Returns and VAT accounts in the General Ledger. The book-keeping entries are:
1. Credit each each customer's account in the sales ledger with the total of each individual credit note.
2. Debit the sales returns account with the total of " Net Goods Returned".
3. Debit the VAT account with the total of the "VAT" column.
Purchase Returns Day Book
After entering the credit notes into the Purchase Returns Day Book, the next step is to post each credit note into the individual suppliers' accounts. Again, at the end of the month the total " Net goods returned" and "VAT" are posted to the Purchase Returns and VAT accounts in the General Ledger. The book-keeping entries are:
1. Debit each individual suppliers' account in the purchase ledger with the total of each credit note.
2. Credit the VAT account with the total of the VAT column
3. Credit the purchase returns account with the total of the "net goods returned"
Cash Book
The cash book consists of the cash account and the bank account put together in one book. Initially, these two accounts were shown on different pages of the ledger, now it is easier to put the two sets of account columns together. This means that we can record all money received and paid out on a particualr date on the same page.
The use of folio columns
The details column in an account contains the name of the account in which the other part of the double entry has been entered. Anyone looking through the books should, therefore, be able to locate the other half of the double entry in the ledgers. However, when many books are being used, just to mention the name of the other account may not be enough information to find the other account quickly. More information is needed, and this is given by using folio columns.
In each account and in each book being used, a folio column is added, always shown on the left of the money columns. In this column, the name of the other book and the number of the page in the other book where the other part of the double entry was made is stated against each and every entry. The double entry must always be completed before the folio columns are filled in.
The journal
Occasionally, it is neccessary to record a much less common transaction like writing off a badd debt or perhaps when a debtor is unable to pay an outstanding invoice and offers fixed ass in full settlement of the debt. It is just important to record these transactions as it is to record the purchase of goods for resale. Such a transaction is therefore recorded in another book of original entry - the journal.
Typical uses of the journal
- the purchase and sale of fixed assets on credit
- writing off bad debts
- other items: adjustments to any of the entries in the ledger
- the correction of errors
VAT - Value Added Taxes
Value Added Tax is an indirect tax calculated on the sale of goods or services.
Calculation
VAT payable = OUTPUT tax (sales VAT) minus INPUT tax (purchases tax)
There are several types of VAT.
1. Standard rate
VAT at the standard rate applies to most of goods and services
2. Zero rate
VAT which is payable but the customers don't need to pay (baby clothes, certain books)
3. Reduced rate
Petty Cash
All businesses frequently incur low-value (petty) items of expenditure for cash by employees. Such expenditure could include train and bus expenses, car mileage expenses, postage, stationery, cleaning materials, hospitality expenses and so on.
The Inprest System
The imprest system simply means topping up a previously established petty cash allownce of.
Advantages of imprest system
1. The task of maintaining the imprest system is straightforward and can be carried out by a junior member of the finance department
2. The amount of cash can be checked at any time since the cash in the float plus tthe total of the vouchers should equal the original amount of the float
3. Using the petty cash book means many many small value items are eliminated from being entered in the main cash book and ledgers
Reconciliation
Reconciling an account often means proving or documenting that an account balance is correct.
Capital & Revenue Expenditure
Capital expenditures are for fixed assets, which are expected to be productive assets for a long period of time. Revenue expenditures are for costs that are related to specific revenue transactions or operating periods, such as the cost of goods sold or repairs and maintenance expense.
