FA1 Notes

Chapter 1 Business Transactions & Documentation

Contents overview • Types of business transaction • Documenting business transactions • Invoices and credit notes • Discounts, rebates and allowances • Sales tax • Contract law • Storage of information • Data protection

Types of business transaction • What is a business? – Uses economic resources to create goods or services which customers will buy – Provides jobs for people to work in – Invests money in resources in order to make even more money for its owners

• Business transactions? – Property changes hands – Two main types: sales and purchases

By cash or on credit • Sales – By cash: goods or services given in exchange for immediate payment (in notes, coins, cheques) – On credit: cash received later

• Purchases: – For cash: payment made immediately – On credit: cash paid later

Other business transactions • • • • •

Payment of wages Borrowing money Lending money Offering a discount Receiving a discount

Documenting business transactions



Binding point b/w seller and buyer?

Discussion • Documentation to expect (i) You buy a CD from a shop, paying cash (1) A receipt

(ii) You have air-conditioning system installed (1) A letter of enquiry (2) A quotation (3) An order (4) An order acknowledgement (5) A delivery note (6) An invoice (7) A credit note

More documents • Inventory lists: check availability of all the parts • Supplier lists: where to buy parts • Staff schedules: plan for human resource • Timesheet: record the actual hours staff spent • Goods received notes • Expense claims: Employees may incur expenses which need to be reimbursed Accounting system: records, summarizes and presents the information contained in these documents

Sales order

Purchase order

Purchase order vs. sales order

Invoice vs. credit note vs. debit note • Invoice – A demand for payment – Settled immediately in cash: receipt – Paid on receipt of goods: cash on delivery (COD) invoice – Paid later: credit invoice – Invoice illustration – How many copies needed?

• Credit note – Negative invoice: cancel part or all of previously issued invoice – Amount payable: unpaid invoice’s value minus the credit note’s

• Debit note – Customer to supplier requesting a credit note – Supplier to customer to adjust upwards the amount of issued invoice

How much is the payable?

Illustration

Discounts, rebates and allowances Trade discount

Cash discount

• $1 per unit, but 95p for 100 units or more • Given on invoice • Permanent

• 10% 0 days, 5% 7 days, net 30 days • Financing matter

Rebate

Allowance





A reduction in the bills for the following year A cheque for the calculated rebate amount



Buy 1 get 1 free

Sales Tax Many business transactions involve sales tax, and most invoices show sales tax charged separately. Input and Output sales tax  Output sales tax is charged on sales  Input sales tax is incurred on purchases Usually output sales tax (on sales) exceeds input sales tax (on purchases). The excess is paid over to the government. If Output sales tax is less than input sales tax in a period, the government will refund the difference to the business. In other Words, if a business pays out more in sales tax than it receives from customers it will be paid back the difference.

Retention policy • Sets down how long different kinds of information are retained – Master files and reference files: charter agreement, legal documents – Temporary or transitory files – Active files: invoices, GRNs files – Non-active file: purchase invoices of previous years

No long needed info and data • Will you throw it away??? • Ways to deal: – Microfilmed or microfiched – Stored elsewhere (archiving) – Securely destroyed

Retention Policy Files of data may be permanent, temporary, active and non-active. Permanent Master files and reference files are usually permanent, which means that they are never thrown away or scrapped. They will be updated from time to time, and so the information on the file might change, but the file itself will continue to exist. Temporary A temporary or transitory file is one that is eventually scrapped. Many transaction files are held for a very short time, until the transaction records have been processed, but are then thrown away. Other transaction files are permanent e.g. Cashbook, or are held for a considerable length of time before being scrapped. Active An active file is one that is frequently used, for example, sales invoice files relating to the current FY, or correspondence files relating to current customers and suppliers. Non-Active A non-active file is one that is no longer used on a day-to-day basis. For example, files that contain information relating to customers and suppliers who are no longer current, and purchase invoices relating to previous financial periods. Semi-active files are those that contain information that is still active, but are on their way to becoming inactive, for example, as a contract

nears completion, it will not be used so frequently, but should be kept on hand for reference is so needed.

Data Protection Information stored about Individuals is regulated by DPL Without adequate data protection policies, risks include: Access to personal information by unauthorized parties Using data for other purposes than originally intended.

     

Automatic data entry such as scanning. Well-designed forms that are easy to read Using tick boxes or drop-down lists Avoid long sequences of numerical character Validation technique Verification by entering the data twice and checking for inconsistencies  Well-designed forms that are easy to read Validation Techniques Validation of data ensures that it is reasonable and possible but not that it is necessarily correct. 1. Field presence – Essential fields cannot be left blank e.g. the name of a customer 2. Field length – Data has the correct number of characters (Min/Max) Data must be a Min of 6 char 3. Range – Data value is within a predetermined range eg months of the year must be btwn 1 and 12 4. Format – Individual characters are valid eg Acc num must be in a certain for AAA/999 (three letters and three numbers) 5. Batch Header – Where batch processing is used, the computer calculates totals that can be matched to the totals of the documents in the batch. 6. Check Digit – Code numbers such as bank acc numbers are prone to data entry errors. Check digits are extra digits in a code, calculated by the computer using an algorithm to check that the other digits in the code are correct.

Assets, Liabilities and the Accounting Equation

Chapter 2

Contents Business definition

Assets

Liabilities

The accounting equation

Illustration

Business definition 1

2

3

An organization which uses economic resources to create goods or services which customers will buy.

A business is an organization providing jobs for people to work in.

Invests money in resources (eg it buys buildings, machinery etc; it pays employees) in order to make even more money for its owners.

• A business owns assets and owes liabilities.

A business from different perspectives Business

Legal:

Accounting :

•Separate legal entity •No distinction with its owners.

•Must always be treated as a separate entity from its owners.

Assets

Noncurrent assets

Text

Assets

Current assets

Text

Something valuable which a business owns or has the use of.

Items belonging to a business and used in the running of the business.

Assets classification Classified by period of holding Non-current assets

•Held and used in operations for a long time, normally more than 1 years. •E.g.: factories, office building, plant and machinery, cars, etc.

Current assets

•Held for only a shorter time. •E.g.: Cash and banks, inventories, receivables, etc.

Liabilities

Noncurrent Liabilities Text

Liabilities

Current Liabilities Text

Something which is owed to somebody else.

Sums of money owed by a business to outsiders

Liabilities classification Classified by period of liabilities Non-current liabilities

•Payable in a long time, normally more than one year. •E.g.: long term loans or borrowings from banks, etc.

Current liabilities

•Payable in a shorter time. •E.g.: short term borrowings from banks, overdrafts, payables to suppliers, etc.

The accounting equation A Business

Assets

(Cash Receivables Buildings Cars)

Liabilit ies

Capital =

(Owners’ equity Retained earnings)

+

(Bank loans, Trade payables Tax payables)

• Very simple equation to keep in mind

Accounting equation 2 A Business

Assets

=

Capital introduc ed + earned profit drawing s

+

Liabiliti es


Assets

=

Capital introduced + profit retained in previous periods+ profit earned in current period drawings

+

Liabiliti es


Assets

=

Capital introduced in previous periods + Profit retained in previous periods + Profit earned in current period + Capital introduced in current period – Drawings in current period

+

Liabiliti es

The business equation

Profit earned in current period

=

Increase/d ecrease in net assets in current period

+

Drawings in current period

Capital introduce d in current period

Credit transactions A sale or a purchase which occurs some time earlier than cash is received or paid.

Credit sales

Purchases on credit

•Creates an account receivable

•Creates an account payable

•Settled when cash is received from customer

•Settled when cash is paid to supplier

Double entry bookkeeping Duality: Every transaction has two accounting entries, A business a debit and a credit.

Debit:

Credit:

•Increases assets •Decreases liabilities •Decreases capital •Decreases income •Increases expenses

•Decreases assets •Increases liabilities •Increases capital •Increases income •Decreases expenses

Means left hand side

Means right hand side

Chapter 3

Statement of financial position and income statement

Contents

Introduction to financial statements

Statement of financial position

The income statement

Organisational structure

Users of accounts

Introduction to financial statements

The statement of financial position


The cash flow statement

Basic accounting statements

Statement of financial position A statement of the assets, liabilities and capital of a business 'as at' a particular date.

CAPITAL ASSETS

EQUAL LIABILITIE S

Also called the Balance sheet

Typical statement of financial position BUSINESS NAME STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X8 $ $ Non-current assets Land and buildings X Plant and machinery X Fixtures and fittings X X Current assets Inventory X Receivables X Cash at bank and in hand X X X Capital Proprietor's capital X Retained profits X X Non-current liabilities X Loan Current liabilities X Bank overdraft Payables X X X

Assets Assets Non-current assets •

•

Current assets

Acquired for long-term use within the business Strictly, more than one accounting period

•

Expected to be converted into cash within one year

Text

Text Classification depends on the nature of the business

Example Assets Noncurrent assets Land •Office building •Factory •Machinery •Office equipment •Etc.

Current assets Cash •Inventor y •Receivab les •Etc. •

•

Text

Discussion •

Current or non-current?

Asset

Current or Business non-current

Van

Delivery firm

Cement mixer Car

Builder Car trader

Laptop

Audit firm

Laptop

Laptop trader

Non-current

Non-current Current Non-current Current

42

Liabilities Liabilities Noncurrent liabilities

Current liabilities Debts payable within one year.

•

Debts not payable within the 'short term

•

E.g: longterm bank loans.

E.g.: shortterm loans, bank overdrafts , trade payables, etc.

•

•

Text

Text Long-term loan is split to: -Amount due within one year -Amount due beyond one year

Discussion • Classification: (a) PC used in the accounts department of a retail store Non-current asset (b) A PC on sale in an office equipment shop Current asset (c) Wages due to be paid to staff at the end of the week Current liability

Discussion • Classification: (d) A van for sale in a motor dealer's showroom Current asset (e) A delivery van used in a grocer's business Non-current asset (f) An amount owing to a bank for a loan for the acquisition of a van, to be repaid in 9 months Current liabilities

Capital Business capital account

Amounts invested by the owner(s) in the business

Profit earned and retained by the business.

Text

The make-up depends on the legal nature of the business


BUSINESS NAME INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20X8 $ Sales Cost of sales Gross profit Selling costs Distribution costs Administration expenses Profit for the year

$ X X X

X X X X X

Shows in detail how the profit or loss of a period has been made.

Income statement breakdown Income statement

Gross profit:

Net profit:

Compares revenue with cost of goods sold (direct costs)

Different between gross profit and total overheads (indirect costs).

Text

Capital expenditure vs. revenue expenditure

Capital expenditure

Revenue expenditure

Results in: •The acquisition of non-current assets; or •An improvement in their earning capacity.

Incurred in: •For the purpose of the trade of the business. •To maintain the existing earning capacity of non-current assets.

Balance sheet items

Income statement items

Exam focus

Capital and revenue income

Revenue income • The sale of trading assets

Capital income

• Proceeds from the sale of non-trading assets.

Profit/loss apprears on IS

• Rent, interest and dividends received from noncurrent assets held by the business Appears on income statement

Exam focus

Users of accounts Owners of the business

Managers of the business Tax authorities

Providers of finance to the business

Users of accounts

Employees of the business

Trade contacts

What’s what? (a) Freehold property Non-current asset (b) Payment of wages for a director with a two year service contract Expense (c) Payments into a pension fund Expense

What’s what? (d) A trade receivable who will pay in 18 months time Non-current asset (e) An irrecoverable debt written off Expense (f) A patent Non-current asset (g) A company car Non-current asset

What’s what? (h) Interest on a bank overdraft Expense (i) A bank loan repayable in five years Non-current liability (j) Petty cash of $25 Current asset (k) The portion of local taxes paid covering the period after the reporting date Current asset: prepayment

Mustafa Khuwaja - CAT Finalist

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Chapter 4

Recording and summarising transactions

Contents 1

Recording business transaction

2

Recording Sales

3

Recording purchases

4

The cash book

Contents 5

Cash registers and cash received sheets

6

The general ledger

7

Discounts, rebates and allowances

8

Sales tax

9

Posting cash cash receipts receipts to to the the general general ledger ledger Posting

Recording business transactions Text

To record

Source documents

Books of prime entry

Source documents Invoices Credit notes Petty cash vouchers Cheques received Cheque stubs (for cheques paid out) – Wages, salary and employee tax records – – – – –

Books of prime entry

Discussion 61

Which of books of prime entry is used if: • Your business pays a supplier $5,000? – Cash book • You send a customer an invoice for $1,320? – Sales day book • You receive an invoice from J Sunderland for $1,750 – Purchase day book

Discussion • You pay Hall & Co $1,000 – Cash book • Sarti (a customer) returns goods to the value of $100 – Sales returns day book • You return goods to Elphick & Co to the value of $2,400 – Purchase returns day book

Summarising source documents

Full processes

Recording Sales Sales invoices

Sales credit notes

Sales day book

Cheques received

Cash book

Bank account Sales tax control account Receivables ledger

Receivables ledger control account

Sales day book

• The sale to Jones Co for $105 is also recorded on page 14 of the receivables ledger. • Invoice number is unique generated by the business's sales system.

Recording Purchases Purchase invoices

Purchase credit invoices

Purchase day book

Cheques paid

Cash book

Bank account Sales tax control account Payables ledger

Payables ledger control account

Purchase day book

The purchase from Cook Co for $315 is also recorded on page 31 of the payable ledger.

The cash book C a s h b o o k

C a s h r e c e i p t s d a y b o o k

C a s h

p a y m e n t b o o k / C h e q u e p a y m e n t d a y b o o k

C a s h c o n t r o l a c c o u n t i n G / L

The cash receipts book What you expect to see? J Bloggs – Cash receipts Date 1.10 3.10 8.10 11.10 12.10 13.10

Narrative

Total

Cash sales

Capital injection Cash sales Cash sales A Smith Capital injection B Brown

$ 1,000 90 50 200 500 300

$ 90 50 -

Total

2,140

140

Capital Cash from introduced debtors $ $ 1,000 200 500 300 1,500

500

The cash payments book What you expect to see?

J Bloggs – Cash payments Date 1.10 12.10 18.10 20.10 26.10 29.10 30.10

Narrative

Total

BT C Jones D Davies Cash purchases Cash purchases Cash purchases BT

$ 100 1,200 300 200 50 100 140

Total

2,090

Cash Cash to purchases creditors Telephone $ $ $ 100 1,200 300 200 50 100 140 350

1,500

240

Question Which of the following will not be entered in the cash book? (a) Cheque received (b) Payment to receivables ledger customers (c) Supplier's invoice (d) Credit note (e) Debit note (f) Bank charges debited to the bank account (g) Overdraft interest debited to the bank account (h) Payment for a non-current asset purchased on credit (i) Refund received from a supplier (j) Depreciation Answer: CDEJ

The bank statement Weekly/monhtly basis

Bank statement received from bank

Text To reconcile

Cash book (internally generated)

Investigate differences

The petty cash book • The book of prime entry which keeps a cumulative record of the small amounts of cash received into and paid out of the cash float • There are usually more payments than receipts, and petty cash must be ‘toppedup' from time to time with cash from the business bank account.

The general ledger The general ledger is the accounting record which summarizes the financial affairs of a business. It contains details of assets, liabilities and capital, income and expenditure and so profit and loss. It consists of a large number of different ledger accounts, each account having its own purpose or 'name' and an identity or code Another name for the general ledger is the nominal ledger

The general ledger

The ‘T’ format

The 'T' format accounts: On top of the account is its name Left hand side called debit side Right hand side called credit side

Example For example: Profit and Loss accounts

Note: No b/f or c/f for profit and losses accounts

Example For example: Balance sheet accounts

Note: There are always b/f or c/f for profit and losses accounts for balance sheet accounts

Double entry book-keeping

The Principles • Every transaction has a two fold effect!!!

Example – Cash transactions In the cash book of a business, the following transactions have been recorded. (a) A cash sale (ie a receipt) of $2 (b) Payment of a rent bill totalling $150 (c) Buying some goods for cash at $100 (d) Buying some shelves for cash at $200 How would these four transactions be posted to the ledger accounts? For that matter, which ledger accounts should they be posted to? Don't forget that each transaction will be posted twice, in accordance with the rule of double entry.


83

• How much cash is left?

Posting from the day books

Posting cash receipts

J Bloggs – Cash receipts Date 1.10 3.10 8.10 11.10 12.10 13.10

Dr Cr Cr Cr

Narrative

Total

Cash sales

Capital injection Cash sales Cash sales A Smith Capital injection B Brown

$ 1,000 90 50 200 500 300

$ 90 50 -

Total

2,140

140

Cash Account Sales Capital Account Debtors Control Account

Capital Cash from introduced debtors $ $ 1,000 200 500 300 1,500

500

2,140 140 1,500 500

87

Impersonal vs. personal account • Impersonal accounts: Accounts in the general ledger • Personal accounts: – Include details of transactions which have already been summarized in ledger accounts. – Do not form part of the double entry system – Memorandum accounts only. • Control accounts: – Used chiefly for receivables and payables. – Should agree with the total of the individual balances

Accounting for sales tax If a business sells goods for $600 + $105 sales tax, ie for $705 gross price, the sales account should only record the $600 excluding sales tax. DEBIT Cash or AR $705 CREDIT Sales $600 CREDIT Sales tax account (output) $105

Accounting for sales tax If a business purchases goods on credit for $400 + tax $70 Tax is recoverable DEBIT Purchases $400 DEBIT Sales tax account (input tax) $70 CREDIT Trade AP $470 Tax is not recoverable DEBIT Purchases $470 CREDIT Trade accounts payable $470

When is sales tax accounted for? •Sales tax is accounted for when it first arises: – when recording credit purchases/sales in credit transactions – and when recording cash received or paid in cash transactions

Sales tax account Sales tax account B/f: Purchase day book xxx

xxx

(input sales tax)

Sales day book xxx

Bank

(out put sales tax invoiced)

xxx (input sales tax on cash purchase)

Bank xxx

C/f: xxx

(out put sales tax on cash sales)

Chapter 5 Completing ledger accounts

Contents • • • •

The journal The trial balance Methods of coding data Manual and computerized systems • Batch processing and control totals • Accounting systems • Accounting modules

The journal • One of the books of prime entry • Record of (not arise from the other books of prime entry) unusual movement between accounts

Date $ $ DEBIT Account name X CREDIT Account name X Narrative to explain the transaction

Example: Journal entries • 1 January Put in cash of $2,000 as capital DEBIT Cash 2,000 CREDIT Paul Brown – capital account 2,000 Initial capital introduced Purchased brushes and combs for cash of $50 DEBIT Brushes and combs account 50 CREDIT Cash 50 The purchase for cash of brushes and combs as noncurrent assets Purchased hair driers from Z on credit for $150 DEBIT Hair dryer account 150 CREDIT Sundry payables account * 150 The purchase on credit of hair driers as non-current assets

Example: Journal entries •

•

30 January Paid three months rent to 31 March of $300 DEBIT Rent account CREDIT Cash 300 The payment of rent to 31 March Collected and paid in takings of $600 DEBIT Cash CREDIT Sales (or takings account) 600 Cash takings 31 January Gave Mrs X a perm, highlights etc on credit $80. DEBIT Receivables account

CREDIT Sales account (or takings account) 80 The provision of a hair-do on credit

300

600

80

The trial balance • List of ledger balances shown in debit and credit columns • The debit should equal credit balances

Illustration – TB

TB not balance – Why (a) The complete omission of a transaction, because neither a debit nor a credit is made (b) Posting a debit or credit to the correct side of the ledger, but to a wrong account (an error of commission) (c) Compensating errors (eg debit error of $100 is exactly cancelled by credit $100 error elsewhere) (d) Errors of principle (eg cash received from customers being debited to the total receivables account and credited to cash instead of the other way round) (e) Errors of transposition (eg $11,729 written as $11,279)

Errors in detail Errors of transposition • Two digits in an amount are accidentally recorded the wrong way round • Detect: the difference can be divided exactly by 9 Errors of omission • Fail to record a transaction at all • Making a debit or credit entry, but not the corresponding double entry

Compensating errors Errors which are, coincidentally, equal and opposite to one another

Errors in detail Errors of principle • Accounting entry breaks the 'rules' of an accounting principle or concept • E.g.: – Capital expenditure treated as revenue expenditure – Drawings treated as expenses

Errors of commission • Bookkeeper makes a mistake • E.g.: – Putting a debit entry or a credit entry in the wrong account – Errors of casting (adding up)

Correction of errors Journal entries • Requires a debit and an equal credit entry • Total debits equal total credits before a journal entry is made • They will still be equal after the journal entry is made

Suspense account • Why have? – A trial balance is drawn up which does not balance – Knows where to post the credit side of a transaction, but does not know where to post the debit (or vice versa)

Example - JE Suppose a bookkeeper accidentally posts a bill for $200 to the gas account instead of to the business rates account. A trial balance is drawn up, and total debits are $100,000 and total credits are $100,000. Journal entries DEBIT Business rates account $200 CREDIT Gas account $200 To correct a misposting of $200 from the rates account to electricity account.

Coding Each account in an accounting system has a unique code which is What will be used to identify the correct account for posting. Coding saves time because they are shorter than description. They also save space. In accounting systems, the most obvious examples of codes are as follows:  Customer account numbers  Supplier account numbers  General Ledger account numbers  Employee reference numbers  Inventory Item Codes External codes include Bank account numbers and bank sort codes. Significant Code The Account code incorporate some digits which describe the item being coded.

Data Entry Errors  Source documents can be damaged or destroyed.  Poor handwriting can make forms difficult to read  Malicious intent  Poorly skilled staff  Details can be omitted or incorrect in the source doc  Transcription error eg enetering 45 istead of 54

Reducing Data Entry Errors  Properly trained and experienced staff  Automatic data entry such as scanning.  Well-designed forms that are easy to read  Using tick boxes or drop-down lists  Avoid long sequences of numerical character  Validation technique  Verification by entering the data twice and checking for inconsistencies  Well-designed forms that are easy to read

Methods of coding data • Each account has a unique code for posting • Why need? – Used to identify the correct account for a posting – Saves time – Saves storage space

Example • A nominal ledger has the following codes.



State what type of code this is. Explain your answer

Solution • This is a significant digit code. • The digits are part of the description of the item being coded. • '1' in 100000 clearly represents non-current assets • '2' in 100200 represents plant and machinery etc.

Computerized systems • Perform the same tasks as manual systems • Differences: – How information is stored – How tasks are performed – How some package do things 'automatically'

Computerized systems • Input: Entering data from original documents • Processing: Entering up books and ledgers and generally sorting the input information • Output: Producing any report desired by the managers of the business, including financial statements

Batch processing and control totals • Batch processing – Similar transactions are gathered into batches, and then each batch is sorted and processed by the computer

• Control totals – Used to make sure that there have been no errors when the batch is input – Make sure that the total value of transactions input is the same as that previously calculated

• E.g. – A batch of 30 sales invoices with total value of $42,378.47. – When the batch is input, the computer adds up the total value of the invoices input and produces a total of $42,378.47. – The control totals agree – No further action is required

Validation Techniques Validation of data ensures that it is reasonable and possible but not that it is necessarily correct. 1. Field presence – Essential fields cannot be left blank e.g. the name of a customer 2. Field length – Data has the correct number of characters (Min/Max) Data must be a Min of 6 char 3. Range – Data value is within a predetermined range eg months of the year must be btwn 1 and 12 4. Format – Individual characters are valid eg Acc num must be in a certain for AAA/999 (three letters and three numbers) 5. Batch Header – Where batch processing is used, the computer calculates totals that can be matched to the totals of the documents in the batch. 6. Check Digit – Code numbers such as bank acc numbers are prone to data entry errors. Check digits are extra digits in a code, calculated by the computer using an algorithm to check that the other digits in the code are correct.

Accounting packages Advantages (a) The packages can be used by non-specialists. (b) A large amount of data can be processed very quickly. (c) More accurate than manual (d) Handling and processing large volumes of data.

Disadvantages (a) Initial time and costs involved (b) Need for security checks (c) The necessity to develop a system of coding (see below) and checking. (d) Lack of 'audit trail'. It is not always easy to see where a mistake has been made. (e) Possible resistance on the part of staff to the introduction of the system.

• • • • • • • • • •

Modules Invoicing Inventory Receivables ledger Payables ledger Nominal ledger Payroll Cash book Job costing Non-current asset register Report generator

• Program which deals with one particular part of a business accounting system • Modules may be integrated with the others

QB 9 A credit balance of $917 brought down on Y Co's account in the books of X Co means that A X owes Y $917 B Y owes X $917 C X has paid Y $917 D X is owed $917 by Y Answer: A

Chapter 6 Receiving and checking money

Contents • • • • • • • • • •

Control over receipts Remittance advices Receipts given to customers Ways in which customers pay Cash: physical security considerations Cheques Receipt of cheque payments Receipt of card payments EFTPOS Other receipts

Control over receipts • Ensure a good cash flow – Banking (performed promptly and correctly) – Security (avoiding loss or theft) – Documentation (remittance advice)

Remittance advices • Trade customers usually send a remittance advice with their payment • A remittance advice shows which invoices a payment covers

Receipts given to customers 

• Till receipts – Issued by a cash registers or 'tills‘

• Written receipts – Or typed may be used if no cash register is used

Cash Register operation Store price info on all stocks  Record the value of the sale of each item and total  Calculate the required change to customer  Issue a till receipt showing the entire transaction  Sum up the transactions of the day at closing time 

Evidence of payment other than in cash

Receipt from customers

• Main types

• Other types

– Cash – Cheque – Credit or debit card

– Standing order – Direct debit – Mail transfer and telegraphi c transfer – Automate d credit services

Cash: physical security Problem

How to deal

• Forgery • Theft

 Careful examination  Cash register security, Safes  Protective glass ('bandit screen')  Frequent banking  Never be sent by post

Cheques Definition

New related words

• A cheque is 'an unconditional order in writing addressed by a person to a bank, signed by the person giving it, requiring the bank to pay on demand a sum certain in money to or to the order of a specified person or bearer

• Dishonored • Cheque guarantee cards

Cheque: procedures 1. Ensure details are correct (date, payee, amount) 2. Signature: on the cheque vs. guarantee card 3. Check the details on the cheque guarantee card. – – – –

'Expires end' date Amount of the guarantee Name agrees with that on the cheque Other details

4. Copy GC details on to the cheque’s back

Cheques: physical security • Customers are asked to keep cheque books and cards separate • The number of cheques in a book is kept to a minimum.

Plastic card • Most retail outlets which accept PLASTIC cards now use an electronic system known in the UK as EFTPOS (Electronic Funds Transfer at Point of Sale). • CREDIT vs. DEBIT cards Mustafa Khuwaja - CAT Finalist

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Credit cards • Credit card payment involves 3 transactions

• Debit card vs. Credit card

EFTPOS • Electronic Funds Transfer at Point of Sale: makes possible the automatic transfer of funds from a customer's bank account to a retail organization at the point in time when the customer purchases goods (or services) from it. • The EFTPOS terminal

Other receipts Banker’s draft

• Method of payment available from banks for a fee • When a customer needs a guarantee that the payment cannot be dishonoured

Standing orders and direct debits

• Regular payments – Standing order can only be changed by the payer – Direct debit can be changed by the receiver at will

Discussion Business: electricity company • 'I am a domestic customer, and receive a bill from you each quarter. I want to continue to pay quarterly, but I don't want to go the trouble of writing out a cheque or making a special trip (for example to a bank or your office) to pay the bill. However, I do need to know how much the bill is going to be before I am due to pay it. What method of payment would you suggest?‘ • 'You can pay by quarterly direct debit. You need to complete a direct debit mandate form which authorises us to debit amounts from your bank account. We will send you a bill in the usual way each quarter, and the amount due will be debited from your account 14 days after the date of the bill, so you'll know how much is to be debited well in advance. If an error is made, either the bank or ourselves must put it right.'

Business: mail order company • 'I want to place an order with you. I don't have a bank account, building society account or a credit card, so I suppose that I'll need to send you the amount due by cash through the post. Is that OK?‘ • 'We do not advise you to send cash through the post, as we cannot accept responsibility if it is lost. We suggest that you pay by postal order, obtained from your post office. The post office will charge a fee for this service.'

Business: DIY retailer • 'I want to call in to your store to buy something costing $34 for a friend. I understand that you accept cheques supported by a cheque guarantee card. My friend has made out and signed the cheque and given me her cheque guarantee card. I'd like to bring the cheque and card in when I collect the goods.‘ • 'In order to pay by a cheque supported by a banker's card, it is necessary for the person whose signature appears on the card to sign and date the cheque in the presence of the payee – in other words, in our store. This rule is a standard rule of all of the banks. Please therefore ask your friend to call in to make the payment herself, unless you wish to pay by some other means, such as cash.’

Chapter 7 Banking monies received

Contents • • • • •

The banking system The banker/customer relationship Procedures for banking cash Procedures for banking cheques Procedures for banking plastic card transactions • Banking other receipts

The banking system • Central Bank: The Bank of England controls the banking industry • Clearing or retail banks – – – –

Barclays Lloyds – TSB HSBC NatWest

• Smaller retail banks – Co-operative Bank – Yorkshire Bank – Abbey National

• Clearing is the mechanism for obtaining payment for cheques • E.g. of the cheque clearing system

Clearing system principles Step 1 Receiving bank branches stamp their names and addresses in addition to the crossings on the cheques Step 2 Cheques from receiving bank branches sent to the head office Step 3 The head office delivers to the Bankers Clearing House Step 4 The Bankers Clearing House distributes these cheques to the head offices of the relevant paying banks. Step 5 The paying banks' head offices process the cheques using computers and distribute the cheques to the various branches of the banks on which the cheques are drawn.

The banker/customer relationship Banker

Customer

• Put money and • Bank opens an cheques received account for him in on a customer's his name. behalf into his • Bank accepts his account. instructions and • Take out all cheques undertakes to and orders paid provide a service from the account by the customer. • Keep accounts on the customer's behalf.

Contractual relationship

Procedures for banking cash Procedures for preparing a payingin slip Step 1 Count the cash Step 2 Add up, on a separate piece of paper Step 3 Compare: calculated total vs. cash register Step 4 Calculate any discrepancy Step 5 Enter the total for each denomination of note in the appropriate place on the paying in slip. Step 6 Add up the numbers again to check the total and enter it in the 'total cash' box.

Returned/dishonoured cheques • Insufficient funds: not be enough money in the customer's account to cover the cheque. Banks will honour a cheque in the following circumstances – Cheque amount lower than the cheque guarantee card limit – There is evidence that a check was made between the cheque and the guarantee card

• Stolen cheques and cheque guarantee cards: – Invalid and worthless even if a cheque is accepted with a cheque guarantee card and all details appear to agree

• Wrongly completed or out of date cheques

Cheque returned to you marked 'refer to drawer‘ and You will return the cheque to the drawer and request a replacement

Procedures for banking plastic card transactions • The card issuers require the business receiver of card transactions to summarise all transactions on a summary voucher. The summary voucher consists of an original or 'top copy' and two copies with carbon paper in between. The bottom copy is the processing copy, on the back of it is a place to list the vouchers. • The summary voucher has to be imprinted with the retailer's plastic card.

Queries arising from card transactions

Banking other receipts • Direct debits • Standing orders • Automated payments • Telegraphic transfers • Banker's drafts – same manner as cheques

• Bank giro credits – paid into a bank account by the customer of the business, in which case the amounts will appear automatically on the business's bank statement

Banking and EFTPOS • Credit, charge or debit card receipts via EFTPOS are credited directly to the retailer's bank account. He can agree the amounts received to the 'End of day' reconciliation produced by the terminal

Chapter 8 Recording monies received

Contents • Controls over recording receipts • Cash registers • Cash received sheets (remittance lists) • Posting cash receipts to the general ledger

Controls over recording receipts Segregation of duties Bank reconciliations • Receiving and the recording functions are kept separate – One person will receive, count and perhaps bank the money – Another person will record the money received.

• What for? – Avoiding theft – Collusion

• Exam focus • ?

Cash registers What is it?

Security and controls

• To check the amount of money in the cash register at the end of the day against the summary • To record receipts in the cash book

• • • •

Who can access Training Work observation The maximum possible amount of preset information • Periodic info analysis

Cash received sheets (remittance lists) Manually

Pre-printed

Posting from cash book • Suppose we wished to post Warren Miles's cash received for 1 September 20X7 to his general ledger. The relevant general ledger accounts are as follows


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150

Posting results

Chapter 9 Authorizing and making payments

Contents • • • • • • • •

Controls over payments Cheque requisition forms Expenses claim forms The timing and methods of payments Payments by cash Payments by cheque Bank Giro credits (credit transfers) Payments by banker's draft (payable order) • Payments by standing order and direct debit • Documentation to go out with payments

Controls over payments Suppose that a company buys goods costing $5,000. 1. Invoice from the supplier: reason for and amount of the payment 2. Authorization of the payment: by the purchasing director 3. Payment made to the supplier: For a payment of $5,000, perhaps only the finance director or managing director will be permitted

Authorization - Illustration

Cheque requisition forms •

•

A form requesting that a cheque should be drawn to make a payment E.g.: –

The advertising manager of ABC wants to put an advertisement into the local weekly newspaper. The

newspaper wants payment of $470 ($400 + sales tax at 17½%) in advance, and has sent a fax letter requesting this amount. A receipt will be sent later with confirmation that the advertisement has been inserted and paid for. –

The advertising manager will fill in a cheque requisition form.

Expenses claim forms • Employees make payments by their own pocket and then claim back • Proof should be given of the existence and the amount of the expense (attaching receipts, invoices) • Insufficient supporting evidence? – Company may refuse to reimburse the expense.

The timing of payments When and whom? • Things to consider? – Credit terms – Discounts

Who decides and how? • Senior person • List of unpaid invoices – Overdue – Outstanding – Soon due to be paid.

Methods of payment Commonly used

Other

• Cheques • Automated transfers (especially for salaries and wages) • Internet payments

• • • • •

Cash Banker's draft Standing order Direct debit Company credit card or charge card • Mail transfer and telegraphic transfer • Internet payments

Payments by cash • For small payments out of petty cash • Sometimes for wages • Pay large amounts? Not recommended – Rare – Secure – Dishonest dealers in backstreet or underworld businesses

Payments by cheque • Signatures on business cheques: – Only certain specified individuals – With names and signatures supplied to the bank on a bank mandate form – Cheques above a certain value must contain two authorized signatures – Might consist of the chairman, all the directors and the chief accountant or financial controller

Payments by cheque

Procedures for preparing cheques Step 1 Prepare list of payments Step 2 Payments authorised, sufficient funds available Step 3 Check invoices to be paid Step 4 Prepare the cheques Step 5 Attach invoice to cheque, sign Step 6 Mark invoice PAID Step 7 Send cheque off to payee with remittance advice

Examine the cheque


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Lost cheques


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• Step 1 Telephone your bank saying that you want the cheque to be stopped. • Step 2 Confirm this instruction in writing.

Bank giro credits • Filling in a bank giro credit transfer form and handing this together with the payment (cheque or cash) over the counter at a bank – Telephone companies – Electricity companies – Water companies

Payments by banker's draft • Unlike company cheques, a banker‘s draft cannot be stopped or cancelled after it has been issued • And so when a supplier receives the draft, payment is guaranteed

Standing orders • To make regular payments of a fixed amount • Arranged by a Standing Order Mandates

Direct debits Similar

Difference

• Like standing orders, are used for regular payments

• the person who receives the payments who initiates each payment • Payments can be for a variable amount each time, and at irregular intervals

Documentation to go out with payments • A remittance advice: – Created by the customer – Part of the statement sent by the supplier

• A copy of a pro-forma invoice where this has been provided by the supplier for payments with an order • A bank giro credit form for telephone, electricity and other similar bills • A covering letter explaining what the payment is for, when other forms of documentation do not exist

Chapter 10 Recording payments

Contents • Controls over recording payments • The cash book: recording payments • Posting cash payments to the general ledger • Returned cheques • Automated credit systems

Controls over recording payments To avoid fraud and to ensure completeness

Fraud

Completeness

• All payments are authorised correctly • Proper checks against supporting docs • Segregation of duties • At day end, a list of the payments for that day is submitted to a senior member of staff to check for unusual payments • A minimum number of cheque books is in use at any time

• Regular bank reconciliations • Sequential numbering • A sequence check carried out on the cheques in cash book • Regular examinations of bank statements to ensure that all payments by direct debit and standing order have been recorded in the cash book (along with bank interest and charges)

The cash book: recording payments

Automated credit systems (ACS) • Useful methods of making and recording payments. They can save business time • When a business uses automated transfer, it sends information (which will be input into the books of the business) to the bank for processing • Used for processing any of the following: – – – – –

Standing orders Direct debits Salaries (monthly) Wages (weekly) Some one-off payment

Exam focus points = remember the 5 above

Procedures for using ACS • To pay the salaries of its staff using ACS 1. Produces a file with staff details to send AC processing computer centre 2. Bank updates its database 3. On the day specified by the company 1. The salary due credited to staff account 2. Company's account is debited with the total amount

4. Related data and info a recorded and saved 5. The business's records will be updated with the same information

Chapter 11 Maintaining petty cash records

Contents 1 The purpose of petty cash 2 Security and control of petty cash 3 The imprest system 4 Petty cash vouchers 5 The petty cash book 6 Recording and analysing petty cash transactions 7 Recording petty cash transactions: sales tax 8 Topping up the float, balancing off and posting petty cash

Chapter scenario

The purpose of petty cash • Payments for small items of expense

• Exam focus point: A possible MCQ might be 'Which one of the following items would/would not be paid out of petty cash?'

Security and control of petty cash • The petty cash box • Limiting the size of petty cash payments • Authorisation and authorisation limits • Receipts – Sales tax receipts – No available receipts

The imprest system

Petty cash vouchers • Prepared by cashier when payment is requested • Usually, vouchers are numbered in sequence for each year, starting at 1 with the first voucher each year • For what?

Checks on petty cash and vouchers

What might be the reason? (a) A mistake in the amount of cash paid out, eg the petty cashier might have paid out $10.00 for a voucher of only $9.80, leaving a 20c shortage of cash (b) Theft from the petty cash box

IOUs and petty cash 

When staff borrows cash, he or she must put an IOU into the petty cash box



IOUs are equivalent to cash

Receiving money into petty cash 





An employee of the organisation might use some of the office's postage stamps, to put on personal letters. He or she will pay for the stamps by giving the cash to the petty cashier Similarly, employees might be expected to pay for any private telephone calls that they make from an office telephone Very occasionally, perhaps when the petty cash float is running low, the money received from a cash sale might be used to boost petty cash.

Chapter 12 Bank reconciliation

Contents • Bank reconciliations • The bank statement • Procedures for performing a bank reconciliation • Reconciliations on a computerised system

Bank reconciliations • A bank reconciliation compares the balance of cash in the business's records to the balance held by the bank. • Differences will be errors or timing differences, and they must be identified and satisfactorily explained.

The bank statement • Sent by a bank to its short-term receivables and payables (customers with bank overdrafts and customers with money in their accounts) itemising – The balance on the account at the beginning of the period – Receipts into the account – Payments from the account during the period – And the balance at the end of the period. – These statements may be produced monthly, weekly or even daily depending on the volume of transactions going through the account.

Proforma bank reconciliation

Chapter 14 The receivables ledger

Contents • Personal accounts for credit customers • Recording transactions in the receivables ledger • The age analysis of receivables and other reports • Irrecoverable debts

The need for personal accounts • A customer might telephone, and ask how much he currently owes. Staff must be able to tell the customer the state of his account. • It is a common practice to send out statements to credit customers at the end of each month, showing how much they still owe, and itemising new invoices sent out and payments received during the month. • The managers of the business will want to keep a check on the credit position of an individual customer, and to ensure that no customer is exceeding his credit limit by purchasing more goods. • Perhaps most important is the need to match payments against debts owed.

Authorisation • Ensure it will receive payment for those goods. • Authorisation procedures – Require references from suppliers with whom he already has a credit account, and maybe also a reference from his bank. – The customer's credit limit must be authorised – Before goods are despatched to a customer, the order may need to be authorised by the credit control department. • If the customer has invoices overdue for payment, it may be decided that no further orders can be accepted until payment is received.

Benefits and costs of offering credit facilities Costs

Benefits

• Interest costs of an overdraft, if customers do not pay promptly • Costs of trying to obtain payment • Court costs

• Very few businesses expect to be paid immediately in cash • What benefits?

Accounts receivable

Sales returns (credit notes) inc sales tax X Discounts allowed Payments received X

Personal accounts as memorandum accounts • What means by memorandum? – Do not form part of the double entry system

• Businesses not needing a receivables ledger? – Small businesses – Large businesses

Recording transactions in the receivables ledger • Hawkins Co started trading at the beginning of April. During April, the sales day book and the sales returns day book of Hawkins Co showed the following transactions. • We need to show the entries as they would appear in the sales ledger accounts to reflect the above transactions


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• Balancing

Posting to general ledger

Posting to general ledger

Summary

Which is NOT part of double entry

How to check posting correctness?


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Discounts allowed • Pet supplies makes a sale for $1,000 worth of goods to Janice. A 10% discount will be allowed if Janice settles within 10 days. Assuming that Janice settles within 10 days record the journal entries in the suppliers' books.


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The age analysis of receivables

What for?

• Breaks down the customer balances on the receivables ledger into different periods of outstanding debt.

Other reports • • • • •

Statements of account Sales tax analysis Sales analysis List of customer accounts Customer mailing lists

Irrecoverable debts • Some debts may need to be written off as 'irrecoverable debts' because there is no real prospect of them being paid. • Reasons? • What should be done?

Irrecoverable debts written off DEBIT Irrecoverable debts account (expense) CREDIT Total receivables account

A write off of any irrecoverable debt will need the authorisation of a senior official in the organisation.

Irrecoverable debts and sales tax • A business may be able to claim relief from sales tax on the following irrecoverable debts. – At least six months old (from the time of supply) – Written off in the accounts of the business

Example • If both the debts written off in previous example were inclusive of sales tax, the accounts would look as follows.

How about total AR?

Chapter 15 Purchase and purchase returns day books

Contents • What is the purchase day book? • What is the purchase returns day book? • Entering purchase transactions in the day books • Coding data • Posting the day book totals

What is the purchase day book? • Used to keep a list of all of the invoices received from suppliers of goods and services to the business. • Like the sales day book, it is a 'book of prime entry' or a 'primary record' and not a ledger account.

What is the purchase returns day book? Lists credit notes received in respect of purchase returns in chronological order. Why returns? Supplier to accept? Faulty or damaged goods Goods purchased on a 'sale or return' basis will be returned if they cannot be sold If goods have been ordered by the business and are in good condition but are surplus to the requirements of the purchasing business, it is up to the supplier whether he accept them as returns

Discussion Which of the following cases would you classify as a purchase return by your business (a) Goods purchased from you by a customer and returned. (b) You have been billed twice, by accident, for a single amount of goods, and you return the superfluous purchase invoice. (c) You have been delivered some goods which are faulty and you send them back. You have posted the invoice received in respect of the goods. (d) A customer sends back some sub-standard goods to you. (e) A supplier sends back some goods to you which you have delivered there by mistake, thinking the supplier was in fact a customer. (f) An item of inventory is damaged in a fire at your warehouse and, because you cannot use it any more, you have to go back to the original supplier and order a replacement. (g) You question an invoice because you have been billed for items which you have not ordered, and which you have not received. (h) You have been delivered a quantity of goods in excess of your requirements. The supplier agrees that you can return them.

Analysis of purchases


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Posting the day book totals

Narrative: Posting purchases

Narrative: Posting purchases returns

Chapter 16 The payables ledger

Contents • Personal accounts for suppliers • Recording transactions in the payables ledger • Payments to suppliers • The age analysis of payables and other reports • Contra entries with the receivables ledger

The need for personal accounts A supplier might telephone, asking for payment of the full balance due to him It is common for businesses to receive statements of account from their suppliers monthly. The business needs to maintain its own records to check that the supplier's statement is correct. The business needs to maintain a complete record of the items making up the balance it owes so that it can make appropriate payments on an appropriate regular basis to suppliers. The business will not usually want to pay each of a supplier's invoices separately

The payables ledger • The personal accounts showing how much is owed to each credit supplier of the business are contained in the purchase ledger, or payables ledger.

Purchase returns Discounts received

Trade accounts payable • Trade accounts payable consist of those liabilities which are related to the trade of the business. • Other payables will not normally be recorded in the payables ledger and the balances owed should instead be recorded in: – Liabilities to pay wages and salaries – Taxes

Discussion (a) What is the status of a trade account payable in the accounts of a business? (i) An asset (ii) A liability (iii) An expense (iv) An item of revenue

Discussion (b) Which are not normally found in a payables ledger of trade accounts payable? (i) Depreciation provision (ii) Personal accounts for suppliers of subcomponents (iii) Taxation authorities (iv) Sales tax authorities (v) Suppliers of raw materials

Answer: 2 5 9 only

(vi) Bank overdraft (vii) Long-term bank loan (viii) Share premium (ix) Telephone expenses (x) Drawings (xi) Proprietor's capital

Recording transactions

Discounts received • Remember: ‘Memorandum' discounts received column in the cash book • Recording?

Supplier statement reconciliations

The reasons for reconciling items

Checks over payments

The age analysis of payables • The age analysis of payables will consist of a listing of payables' balances analysed between different 'ages' of debt represented by different items in the balance, measured in months

Contra entries with the receivables ledger • Contra entries 'net off' amounts due to and from the same parties in the payables ledger and receivables ledger respectively.

Chapter 17 Control accounts

Contents • Internal check • Control accounts • Control account reconciliations

Internal check What is it?

 Also known as internal controls, ensure that transactions to be recorded and processed have been authorised, that they are all included and that they are correctly recorded and accurately processed.

Types of internal check

• A trial balance • Bank reconciliations • Control account reconciliations • Segregation of duties • Authorisation

Control accounts • A control account is an account in the nominal ledger in which a record is kept of the total value of a number of similar but individual items. • Control accounts are used chiefly for receivables and payables

Reasons for having control accounts • Check accuracy of entries made in the personal accounts • Assist in the location of errors • Internal check where there is separation of bookkeeping duties • A balance can be extracted quickly for producing a trial balance or statement of financial position

Control account reconciliations The balance on the receivables control is $15,091. List of receivables ledger balances totals $15,320. The following errors are discovered. (a) A receivable paid $10 in cash. This has been correctly recorded in the receivables ledger, but no entries in the control account. (b) One of the receivables had a credit balance of $60. However this has been included as a debit balance (c) Returns inwards of $35 have been recorded in the receivables ledger, but not in the receivables control account. (d) One page of the sales day book has been undercast by $100. (e) When a sales invoice for $95 was entered in the receivables ledger, the figures were transposed and shown as $59. (f) An error has been made in totalling the list of receivables ledger balances, which has been overcast by $90.

Solution

Chapter 18 Recording payroll transactions

Contents • The nature of payroll • Gross pay and basic pay • Overtime, bonus payments and commissions • Payroll administration and documentation • Payroll deductions • Payment methods • Updating records

Payroll • A payroll is a list of employees and what they are to be paid. • Being on the payroll of an organisation means that you are selling your labour to it for an agreed price.

Employer's legal responsibilities to collect income tax Employer's duties (a) Operate the income tax system for all covered by it. (b) Maintain the necessary records. (c) Pay the income tax and benefit contribution collected from employees to the tax authorities every month (in most cases). (d) Let the tax office inspect the records. (e) Submit end of year returns. (f) Give employees payslips (g) Maintain for three years, at the minimum, after the end of a tax year, the records relating to that year.

Question All an employee's income is assessed to tax through the system operated by employers? False. The employer only deals with income arising from the employment. If the employee, say, received interest on a deposit account, this would not be taxed directly, through his or her employer's payroll system, although it might be reflected in the tax code. However, lower rate tax on such income may be deducted at source.

Question It is the employee's duty to ensure that the correct deductions are made from his or her income and that the correct records are kept?

False. Although the employee owes the tax, it is the employer's legal duty to ensure the correct working of the tax deduction system. Any underpaid tax under a payroll scheme is collected from the employer, who may then try to recover it from the employee

The main requirements of a payroll processing system • Accuracy – People get paid what they are owed – The government receives what it is legally entitled to – The employer's cost information is appropriate

• Timeliness – The employees do not being short of cash – Employee morale does not suffer – The government's requirements

• Security

Gross pay and basic pay • Gross pay is what an employee earns., not what the employee actually receives in cash • Basic pay is the rate for the job, and is what you expect to receive for a normal period's work, irrespective of overtime and so forth.


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Basic pay: Fixed rate per period Your contract of employment states that you are to receive an annual salary of $9,000. You join on 1 January 20X2. You are told that the first three months of your employment are a probationary period, and that from 1 April 20X2 your annual salary will increase by 10%. You are informed on 20 May 20X2 that everyone in the company is to receive a pay rise: yours works out at $600 per year in addition to the 10% rise you have already received, effective from 1 July 20X2.

Basic pay: Hourly rate • Some workers get paid a rate per hour. If you work 40 hours at $5 per hour then your basic pay will be $200.

Piecework • Wages = Units produced × Ra • It is common for pieceworkers to be offered a guaranteed minimum wage, so that they do not suffer loss of earnings when production is low through no fault of their ownte of pay per unit

Differential piecework • Offer an incentive to employees to increase their output by paying higher rates for increased levels of production. – Up to 80 units per week, rate of pay per unit = $1.00 – 80 to 90 units per week, rate of pay per unit = $1.20 – Above 90 units per week, rate of pay per unit = $1.30

Overtime • Overtime comprises hours worked over a standard working week • If an hour at basic rate is $4, how much is an hour of overtime at time and a half? – $6 per hour.

Bonuses • An extra payment made to an employee as a reward for results achieved. • To motivate employees to work harder and to reach or exceed some target

Commission Payment made to an employee (or agent) based on the value of something (usually sales) the employee (or agent) has generated Straight percentage of all sales 10%: $1,000 of sales get $100, for $100,000 get $10,000

Sliding scale, more valuable contracts earn greater commission Contracts up to $5,000 a 5% commission, over $5,000 7.5%

Increase with the total volume of sales. Sales up to $100,000 a 5% commission is earned If the target is exceeded, then a 7.5% commission is paid on the excess (ie all sales over $100,000).

Payroll administration and documentation Documents associated with payroll preparation. Timesheets record the hours spent by each employee on each job, or doing the work of each client. Attendance records are used by the personnel department to determine the reasons for absence from work, and to administer the granting of annual leave. Other personnel record documentation includes cards to record a person's career progress.

Personnel department 

Responsible for recruiting, engaging and holding certain basic data of employees

Personnel record card

Record of attendance card

Payroll function • Calculation of gross pay • Calculation of tax, national insurance and other deductions • Preparing payslips • Making appropriate returns to external agencies

• Making up wages, or preparing tapes for bank transfer • Distributing payslips • Preparing payroll statistics.

Documentation Hourly paid Salaried employees employees  Personnel records held in the personnel department document how much each salaried employee is to be paid, and for what periods  Payroll department will receive instructions from the personnel department relating to salary increases, or other alterations to an employee's pay.

• Attendance cards are the basis for payroll preparation • Time recording clock

The records required  Daily time sheets

 Job cards

 Filled in by employee indicate time spent on each job  The total time on time sheet should correspond with attendance record’s 

Weekly time sheets  Similar to daily time sheets but are passed to the cost office at the end of the week  Entries should be made daily to avoid error.

 Cards are prepared for each job



Route cards 

Similar to job cards, except that they follow the product through the works and carry details of all operations to be carried out.

Payroll deductions

Income tax – tax deducted at source • Tax deducted at source covers all the employees of an organisation • Does not cover self-employed people

Benefit contributions Compulsory contributions

Remittances to authorities

• Borne in part by the employee and in part by the employer:

• Contributions payable by the employee

– Unemployment benefit – Income support – The state pension scheme – The National Health Service in some countries

– Form part of the deductions from gross pay.

• Contributions payable by the employer – An additional cost to the employer.

The total cost of wages and salaries in the income statement is: Gross wages + employer's benefit contribution

Payroll giving • Payroll giving is entirely voluntary • In a payroll giving scheme, an employee is allowed to set aside a portion of his or her gross salary for charitable donations. – This portion of gross salary is not taxed – Both employer's and employee‘s contributions are still payable on this amount.


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Other deductions Sharesave payments • Deductions from net pay linked to share options. They do not affect payroll calculations. • Run by employer cooperates with building society or bank. • The employer deducts an agreed sum from net pay of the employee and deposits it in a building society or bank.

Trade Union contributions •

Deducted from earnings, if the employee is a member of a union

Pension scheme 

Payroll department deducts from employees' pay, maintain records and report them to the pension fund administrators.  The employer only (a so-called noncontributory pension scheme)  The employer and the employee (called a contributory pension scheme)


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Payment methods Cash payment

 Have reduced due to the following reasons.  Security problems  Extra time and effort compared to other payment methods

 Part time employees, temporary staff and casual staff.

Automated payment system  The payroll department prepares the payroll on magnetic disk or tape, then sends it to the automated service run by the clearing banks.  The system then automatically transfer the funds from the employer‘s banks accounts to the employees'


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FA1 Notes

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