Presenting and Recording Financial Information

1. Presenting and Recording Financial Information HNC Accountancy

2. Wednesday 25 September • Welcome • Introduce Recording Financial Information Unit • The Main Business Documents • The Books of Original Entry Activities • SAQ 1.1 – Cash • SAQ 1.2 – Sales and Purchases, • SAQ 1.3 – Returns • SAQ 1.4 – Cashbook • SAQ 1.5 – The Journal • SAQ 1.6 – Summary • T1.1 - Summary

3. The Concept of Accounting • Identifying and recording information A garage will identify and record details of cars sold, fuel sold or repairs carried out • Classifying and measuring The garage will group car sales, fuel sales, repair income, cars purchased, fuel purchases or spare parts purchased for repairs and total them for the trading period • Communicating and explaining The results of identifying, recording, classifying and measuring to interested parties

4. The Books of Original Entry The books of original entry include: • purchases day book • purchases returns day book • sales day book • sales returns day book • cash book • petty cash book also see: gorf.it/daybooksandledgers

5. Purchases Day Book The purchases day book records details of credit purchases – goods bought on credit (to be paid at a later date) – from suppliers. • Date Date of invoice (source document which details cost of goods purchased) • Supplier Person(s) who supplied the goods • Net Cost of goods before VAT* • VAT VAT calculated at standard rate of 17.5% • Gross Total cost of goods purchased = net + VAT

6. Purchases Returns Day Book The purchases returns day book records details of goods returned to the supplier by the business. For example, goods may be damaged or surplus to requirements. • Date Date of debit note (source document which details cost of goods returned) • Supplier Person(s) who supplied the goods • Net Cost of goods before VAT • VAT VAT calculated at standard rate of 17.5% • Gross Total cost of goods purchased = net + VAT

7. Sales Day Book The sales day book records details of goods sold to customers. These are credit sales where the customer is given a period of time to pay. • Date Date of invoice (document which details cost of goods sold) • Customer Person(s) to whom the goods are sold • Net Cost of goods sold before VAT • VAT VAT at standard rate of 17.5% • Gross Total cost of goods sold = net + VAT

8. Sales Returns Day Book The sales returns day book records details of goods returned to the business by the customer, for example because they are damaged or not required. • Date Date of credit note (document which details cost of goods sold) • Customer Person(s) to whom the goods are sold • Net Cost of goods sold before VAT • VAT VAT at standard rate of 17.5% • Gross Total cost of goods sold = net + VAT

9. Cashbook The cash book records money received and paid out by the business. These transactions can be in the form of cash – notes and coins, or cheques. • The cash book contains two accounts, the cash account and the bank account. • The cash account records details of all receipts and payments made in cash and the bank account records details of all receipts and payments made by cheque. • The cash book is a book of original entry and a ledger.

10. Cashbook Examples • Entries on the debit side of the cash book may include: • cheques received from customers • cash sales (goods sold and payment received immediately) • interest received on investments • commission received • Entries on the credit side of the cash book may include: • cheques paid to suppliers • wages paid in cash • rent paid by cheque • cash purchases (goods purchased and paid for immediately) Debit Credit

11. Petty Cash • Petty cash is the cash used by a business to pay for small items such as postage stamps, travel expenses (train fares or taxis), petrol and magazines required for the office. • Petty cash vouchers are completed for each transaction and this is then recorded in the Petty cash book. • A member of staff is responsible for handling the petty cash and must ensure that vouchers are completed, signed and recorded. Cash is drawn from the bank and given to the person in charge of the petty cash; this is called a ‘float’. Normally money is paid into the petty cash each week to replenish the money paid out (imprest system).

12. Petty Cash Procedures When a payment is made from petty cash the following procedure is followed: • Obtain a receipt from the person (claimant) claiming the expenses. • Complete a petty cash voucher. • Obtain a signature from the claimant. • Obtain a signature from the person authorising payment. • Attach the voucher to the receipt. • Enter details in the petty cash book. • Issue cash to the claimant.

13. Petty Cash Book The petty cash book is analysed into columns with different headings. This allows businesses to identify the different expenses and how much was paid. • Receipts – money received • Details – expense details • PCV – petty cash voucher number • Total payment – amount paid (inc VAT) • Analysis columns – shows what the payment was for (net value) • *VAT – many companies show VAT analysis • Net value + VAT = Total payment

14. The Journal • The journal is used to record details of non-routine transactions that are not entered in any of the other books of original entry. • It is similar to a diary and serves the purpose of being able to check and locate transactions that have been corrected.

15. The Journal The entries made in the journal tend to be one-off and do not occur on a regular basis • Opening entries – these are entries recorded when a business starts up, for example the capital invested by the owner. • Correction of errors – where entries have been wrongly recorded in the bookkeeping system the journal is used to record the correction of the error. • Adjustments – adjustments are often made at the end of a financial year, for example if a customer fails to pay a debt, the debt may be treated as a bad debt and recorded in the journal.

16. The Journal - Entries Information to be included in the journal: • date of entry • name of account to be debited and amount • name of account to be credited and amount • written explanation for entry

17. Source Documents • Source business documents are issued by businesses on a day-to-day basis and provide evidence that a transaction has taken place. • Source business documents include: • invoices • credit notes • cheque payments • receipts • petty cash vouchers.

18. Overview of Books of Original Entry The following daybooks are constructed by the use of each of the following source documents:

19. Wednesday 2 October • Review & Socrative • Double Entry Introduction • Ledger Accounts Activities • SAQ 1.7 – Gains/Loses • SAQ 1.8 – Gains/Loses • SAQ 1.9-1.11 – Ledgers • SAQ 1.13 and 1.14 issued for completion at home

20. Double Entry • Business transactions have a dual aspect • eg business pays cash to purchase new stock which means the Value of Stock increases but amount of Cash decreases • Each transaction is entered into 2 ledger accounts • An account contains details of transactions within a particular area (Sales, Cash, Purchases etc) also see: gorf.it/doubleentry

21. Rules of Double Entry • All transactions have two entries. • Each transaction has one debit (left) and one credit (right) entry • Every debit entry must have corresponding credit entry and vice versa – these will be entered into separate ledgers

22. Terminology • Capital – money invested by owner(s) • Assets – what the business owns • Liabilities – what the business owes • Fixed assets – buildings, machinery etc (not for resale) • Capital expenditure – money spent to buy fixed assets • Revenue expenditure – expenses incurred on day-to-day basis • Debtors – customers who buy on credit • Creditors – suppliers who provide goods on credit • Income – money received

23. Assets, Liabilities and Capital Remember that Debit is on the left, Credit is on the right

24. Accounting for Purchases and Sales Increases in stock Purchases account - stocks of goods bought by the firm for resale Purchase returnaccount - stocks previously sold that is returned by the customer due to the goods being unsuitable (e.g. they are damaged, the wrong type of goods, etc.) Decreases in stock Sales account - stocks of goods sold to customers Sales Returns account - stocks previously purchased by the firm which is returned to the original supplier The normal double entry rules apply to all these stock accounts. Stock is an asset therefore, increases in stocks will always be debited to the relevant account and decreases will always be credited.

25. Accounting for Revenue and Expenses • All firms will have expenses to pay as part of normal business activity. This will occur on a frequent basis. • Each separate expense will have its own account. Expenses do not fall into the classification of 'asset', 'liability' or 'capital', but we can still work out the rules for making entries in the expense accounts. • Any expense will require either cash or a cheque payment. Therefore, this will require a credit entry in either the cash or the bank account. As a result, the debit entry must be in the expense account - it cannot be a credit entry as it would not fit the rules of double entry bookkeeping.

26. Accounting for Drawings • Anything injected into the business for use in the business by the owner is known as capital. However, it is perfectly possible for the owner to withdraw resources (money or stock for example) from the business. This would be represented by a decrease in capital. These reductions are known as 'drawings'. • These 'drawings' are kept in a separate drawings account - which is another form of capital account and follows the same double entry rules.

27. Accounting for VAT on vehicles • When you buy a car you generally can't reclaim the VAT. There are some exceptions - for example, when the car is used mainly as one of the following: • a taxi • for driving instruction • for self-drive hire • You can reclaim all the VAT charged on vehicle repairs and maintenance so long as: • your business pays for the work • there is some business use of the vehicle For further information see: gorf.it/vatonvehicles

28. Wednesday 9 October • Review SAQ 1.13 and 1.14 • Outcome 1 and 2 Criteria Explained • Trade Discounts • Cash Discounts • Total Daybooks & Balance Cashbook Activities Assessment Style Questions FOR NEXT WEEK: NO CLASS IN COLLEGE • Review all materials • Check the website gorf.it/hnc • Complete all activities up to p55 – and check answers (and any additional issued)

29. Recording Financial InformationOutcome 1: Criteria

30. Recording Financial InformationOutcome 2: Criteria

31. Trade Discounts A reduction on the price of the goods being sold and is offered by the seller to the buyer because the buyer is: • in the same trade • and/or buying in bulk Trade discount is usually expressed as a percentage and is deducted from the purchase price of the goods Eg 20% trade discount on goods worth £330 … a £66 discount … the Net Goods Value is £264

32. Cash Discounts • A firm may accept a smaller sum in full settlement of an account if payment is made within a certain period of time. • The amount of the reduction of the sum to be paid is known as a cash discount. • The rate of discount is usually stated as a percentage. • The typical period during which discount may be allowed is one month from the date of the original transaction.

33. Discount Allowed and Received Discounts Allowed: Cash discounts allowed by a firm to its customers when they pay their accounts quickly Discounts Received: Received by a firm from its suppliers when it pays their accounts quickly.

34. Example: Discount Allowed W Clarke owed us £100. He pays on 2 September 20X8 by cash within the time limit laid down, and the firm allows him 5% cash discount. He will pay £100 - £5 = £95 in full settlement of his account.

35. Example: Discount Received The firm owed S Small £400. It pays him on 3 September 20X8 by cheque within the time limit laid down by him and he allows 2½% cash discount. The firm will pay £400 - £10 = £390 in full settlement of the account

36. Treatment in Cash Book The Discount Allowed and Discount Received accounts are in the general ledger with all the other revenue and expense accounts. In order to avoid too much reference to the general ledger an extra column can be used in the Cash Book.

37. Treatment in Cash Book Discount Allowed on debit side Discount Received on the credit side.

38. Treatment in Cash Book Discount Allowed Explained: A customer has already purchased goods from us (Customer £100 Dr, Sales £100 Cr) Customer receives 5% discount. Therefore owes us £95 if paid on time. Customer pays us by cheque (Bank £95 Dr, Customer £95 Cr). This leaves a balance on the Customer’s account of £5 Dr, which is the discount amount. In order to clear the account it must be credited with £5, which means the double entry has to be £5 Dr Discount Allowed. When entering the sale in the books of original entry the discount allowed amount is shown as an additional column on the debit side of the cashbook. This is on the same line as the customer’s cheque payment. This example ignores any VAT.

39. VAT on Cash Discounts When a cash discount is offered, VAT is calculated on the goods price less the cash discount. Remember VAT is always calculated on the lowest possible price. However, the price on the invoice will be Cost Price plus VAT – as the discount is only given if the invoice is paid on time.

40. Wednesday 16 October WORK AT HOME Remember you can email for advice: colin@gorf.it Activities • Review all materials • Check the website gorf.it/hnc • Complete all activities up to p55 – and check answers (and any additional issued)

41. Wednesday 23 October COLLEGE HOLIDAY Activities

42. Wednesday 30 October • Mock Assessment for Outcome 1 Activities NEXT WEEK: • Outcome 1 Assessment • Dealing with VAT in Double Entry • Trial Balances

43. Wednesday 6 November • Assessment for Outcome 1 Activities • VAT in Double Entry • Trial Balances NEXT WEEK: • Check understanding for Outcome 2 Assessment • VAT Returns (and Principles of VAT)

44. Trial Balances A trial balance is used to check the accuracy of double-entry book-keeping. Both the debit and the credit columns should balance! We will look at errors in detail later, in the meantime check that you have entered details in the correct column (debit/credit) and that your arithmetic is correct.

45. Wednesday 6 November • Assessment for Outcome 1 Activities • VAT in Double Entry • Trial Balances NEXT WEEK: • Check understanding for Outcome 2 Assessment • VAT Returns (and Principles of VAT)

46. Wednesday 13 November • Are you ready for Outcome 2 Assessment? • VAT Returns (and Principles of VAT) Activities VAT Return Calculations NEXT WEEK: Outcome 2 Assessment Time for Questions

47. Recording Financial InformationOutcome 3: Criteria

48. Where does VAT appear? Businesses add VAT to the price they charge when they provide goods and services to: • business customers - for example, a clothing manufacturer adds VAT to the prices they charge a clothes shop  • non-business customers (members of the public or 'consumers') - for example, a hairdressing salon includes VAT in the prices they charge members of the public

49. What is Value Added Tax (VAT)? • UK government tax on most goods and services • Businesses must register when taxable turnover is over £79,000 • VAT is charged by registered business on sales of their goods/services • VAT-registered business reclaim VAT paid on goods or services bought • VAT returns are made quarterly to HM Revenue & Customs (HMRC)

50. VAT Rates There are 3 rates of VAT, depending on the goods or services. The rates are: • standard – 17.5% • reduced – 5% • Zero – 0% There are also some goods and services that are: • exempt from VAT • outside the UK VAT system altogether