FIA Paper FA1: Notes

Chapter 5 extract from our ExPress notes for use with the current video.
A full set of FA1 ExPress notes can be downloaded free of charge at www.theexpgroup.com
Notes
FIA Paper FA1
Recording Financial Transactions
For exams in 2011
theexpgroup.com
ExPress Notes
FIA FA1 Recording Financial Transactions
Contents
About ExPress Notes

1. 2. 3. 4. 5. 6. 7. 8. Business transactions and documentation Financial statements and their elements Double entry bookkeeping: the debits and credits Cash and bank
3
7 12 18 21 24 29 32 34
Sales and credit transactions

Purchases and credit transactions Payroll Control accounts and initial trial balance
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
ExPress Notes
START About ExPress Notes

We are very pleased that you have downloaded a copy of our ExPress notes for this paper. We expect that you are keen to get on with the job in hand, so we will keep the introduction brief. First, we would like to draw your attention to the terms and conditions of usage. Its a condition of printing these notes that you agree to the terms and conditions of usage. These are available to view at www.theexpgroup.com. Essentially, we want to help people get through their exams. If you are a student for the ACCA exams and you are using these notes for yourself only, you will have no problems complying with our fair use policy. You will however need to get our written permission in advance if you want to use these notes as part of a training programme that you are delivering. WARNING! These notes are not designed to cover everything in the syllabus! They are designed to help you assimilate and understand the most important areas for the exam as quickly as possible. If you study from these notes only, you will not have covered everything that is in the ACCA syllabus and study guide for this paper. Components of an effective study system On ExP classroom courses, we provide people with the following learning materials: The ExPress notes for that paper The ExP recommended course notes / essential text or the ExPedite classroom course notes where we have published our own course notes for that paper The ExP recommended exam kit for that paper. In addition, we will recommend a study text / complete text from one of the ACCA official publishers, but we do not necessarily give this as part of a classroom course, as we think that it can sometimes slow people down and reduce the time that they are able to spend practising past questions.
ExP classroom course students will also have access to various online support materials, including: The unique ExP & Me e-portal, which amongst other things allows view again of the classroom course that was actually attended. ExPand, our online learning tool and questions and answers database
Everybody in the World has free access to ACCAs own database of past exam questions, answers, syllabus, study guide and examiners commentaries on past sittings. This can be
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ExPress Notes
an invaluable resource. You can find links to the most useful pages of the ACCA database that are relevant to your study on ExPand at www.theexpgroup.com.
How to get the most from these ExPress notes

For people on a classroom course, this is how we recommend that you use the suite of learning materials that we provide. This depends where you are in terms of your exam preparation for each paper.
Your stage in study for each paper Prior to study, e.g. deciding which optional papers to take These ExPress notes ExP recommended course notes, or ExPedite notes Dont use yet ExP recommended exam kit Dont use yet ACCA online past exams
Skim through the ExPress notes to get a feel for whats in the syllabus, the size of the paper and how much it appeals to you. Work through each chapter of the ExPress notes in detail before you then work through your course notes. Dont try to feel that you have to understand everything just get an idea for what you are about to study. Dont make any annotations on the ExPress notes at this stage.
Have a quick look at the two most recent real ACCA exam papers to get a feel for examiners style. Dont use at this stage.
At the start of the learning phase
Work through in detail. Review each chapter after class at least once. Make sure that you understand each area reasonably well, but also make sure that you can recall key definitions, concepts, approaches to exam questions, mnemonics, etc.
Nobody passes an exam by what they have studied we pass exams by being efficient in being able to prove what we know. In other words, you need to have effectively input the knowledge and be effective in the output of what you know. Exam practice is key to this. Try to do at least one past exam question on the learning phase for each major chapter.
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ExPress Notes
Your stage in study for each paper Practice phase
These ExPress notes
ExP recommended course notes, or ExPedite notes Avoid reading through your notes again. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if theres something in an answer that you dont understand.
ExP recommended exam kit This is your most important tool at this stage. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. You pass real exams by passing mock exams. Dont be tempted to fall into passive revision at this stage (e.g. reading notes or listening to CDs). Passive revision tends to be a waste of time. Dont touch it!
ACCA online past exams
Work through the ExPress notes again, this time annotating to explain bits that you think are easy and be brave enough to cross out the bits that you are confident youll remember without reviewing them.
Download the two most recent real exam questions and answers. Read through the technical articles written by the examiner. Read through the two most recent examiners reports in detail. Read through some other older ones. Try to see if there are any recurring criticism he/ she makes. You must avoid these! Do a final review of the two most recent examiners reports for the paper you will be taking tomorrow.
The night before the real exam
Read through the ExPress notes in full. Highlight the bits that you think are important but you think you are most likely to forget.
Unless there are specific bits that you feel you must revise, avoid looking at your course notes. Give up on any areas that you still dont understand. Its too late now. Avoid looking at them in detail, especially if the notes are very big. It will scare you.
At the door of the exam room before you go in.
Read quickly through the full set of ExPress notes, focusing on areas youve highlighted, key workings, approaches to exam questions, etc.
Leave at home.
Leave at home.
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ExPress Notes
Our ExPress notes fit into our portfolio of materials as follows:
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Provide a base understanding of the most important areas of the syllabus only.
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Provide a comprehensive coverage of the syllabus and accompany our face to face professional exam courses
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Provide detailed coverage of particular technical areas and are used on our Professional Development and Executive Programmes.
To maximise your chances of success in the exam we recommend you visit www.theexpgroup.com where you will be able to access additional free resources to help you in your studies.
START About The ExP Group

Born with a desire to be the leading supplier of business training services, the ExP Group delivers courses through either one of its permanent centres or onsite at a variety of locations around the world. Our clients range from multinational household corporate names, through local companies to individuals furthering themselves through studying for one of the various professional exams or professional development courses.
As well as courses for ACCA and other professional qualifications, our portfolio of
expertise covers all areas of financial training ranging from introductory financial awareness courses for non financial staff to high level corporate finance and banking courses for senior executives. Our expert team has worked with many different audiences around the world ranging from graduate recruits through to senior board level positions. Full details about us can be found at www.theexpgroup.com and for any specific enquiries please contact us at info@theexpgroup.com.
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ExPress Notes
Chapter 5
Sales and credit transactions
START The Big Picture

Sales form the basis of every companys existence and business owners spend time creating products and services customers want and are willing to pay for it. Each time the company makes a sale the following entry is made:
Dr Cash Cr Sales or Dr Receivables Cr Sales
$1,000 $1,000 for cash transactions
$2,000 $2,000 for credit transactions
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ExPress Notes
Credit sales are often made to encourage sales. The problem with extending credit is that not all receivables will pay. This means that some will become irrecoverable. Before being written off as irrecoverable, some will also look like they may not pay (perhaps by being a month overdue for payment). These are doubtful debts. Remember that an asset is a resource that is expected to give an inflow of benefits. Logically therefore if a receivable is not expected to pay, it cannot be shown as an asset.
KEY KNOWLEDGE Irrecoverable debts

If a debt is not going to pay, for example if a person has died bankrupt, then it must be written out of the accounting records as the receivable is no longer an asset. Removing an asset reduces net assets and so generates an expense, which is normally called irrecoverable debts expense, hence:
Dr Irrecoverable debts expense Cr Receivables
$800 $800
KEY KNOWLEDGE Recovery of debts written off

If a debt is unexpectedly paid having previously been written off, it is likely that the cash received will initially be recorded in the cash received book as a receipt from a debtor. This means that the journal to record the cash will be automatically generated thus:
Dr Bank Cr Receivables
$800 $800
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ExPress Notes
However, the balance is no longer in receivables, as it was written off. In order for the journal to work, it is then necessary to reinstate the balance that was previously written off. This is a change in accounting estimates, since the estimate last period was there was no realistic chance of the debt being recovered:
Dr Receivables Cr Irrecoverable debt expense
$800 $800.
There is no attempt to change the previous years figures, which include an expense for the write off of the debt, since this was a fair estimate at the time. There will be an expense recorded for the write off in the year when it was written off and a credit to profit or loss when the cash was received. Depending on how the initial cash receipt has been recorded, it may be possible to simplify the above two journals, because there is a debit and credit of the same amount to receivables, thus:
Dr Bank Cr Irrecoverable debt expense
$800 $800.
KEY KNOWLEDGE Doubtful debts

It is likely that some receivables will not pay, even if they have not yet been written off. The business will continue to chase the receivables for full payment and may eventually even sue for the full balance. The amount cannot be written out of debtors, as credit control will need the records of the debt in full to know how much to chase for payment. However, if its estimated that there is a 20% chance that a debt will not pay, an allowance will be made, which reduces the value of net receivables, without corrupting the records of the actual debtor balance that will be needed to try to obtain payment. Creating, or increasing, an allowance will reduce net assets. This therefore creates an expense.
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ExPress Notes
Dr Bad debt expense Cr Allowance for receivables
$500 $500.
KEY KNOWLEDGE Discounts

There are two types of discount that you may encounter: trade discounts and settlement discounts. Trade discounts are those given to customers at the point of sale, perhaps because the customer buys in large volumes or is a member of staff. These discounts are not subject to any uncertainty at the time of sale it is known for sure that the customer will never pay the list price of the goods or services. The accounting is therefore very simple: they are simply ignored. The sale is recorded at the amount net of the trade discount. A settlement discount is an incentive for customers to pay you earlier than they otherwise naturally would. For example, a discount of 5% may be offered on the invoice sent to customers if payment is received within seven days of the invoice being sent. If payment is not received within that period, the offer of the discount lapses. Settlement discounts are uncertain at the point of sale. The actual amount of the debt is gross of the settlement discount, ie before its deduction, since this is the amount that the customer will eventually be chased for if they dont pay early. If the settlement discount is allowed to the customer, this is similar to the treatment of irrecoverable debts. It is simply a debt that we are voluntarily choosing to write off as partially irrecoverable because of the cash flow advantage of receiving the cash quickly. Settlement discounts are sometimes also called cash discounts for this reason and are recorded as follows: Dr: Discounts allowed (expense) Cr: Receivables $200 $200
Discounts allowed are settlement discounts that we allow to customers. They are therefore partial write off of debts receivable by us. They are therefore an expense in our books.
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ExPress Notes
KEY KNOWLEDGE Sales tax

In many countries certain organisations are required to charge a sales tax or Value Added Tax (VAT). The sales tax rate varies between countries and also varies between the nature of goods and services supplied. The sales tax collected does not belong to the organisation that collects it and therefore must be remitted to the tax authorities on a regular basis. Sales tax received can be referred to as output sales tax. The double entry bookkeeping records need to show the goods sold and the sales tax value separately. If the above cash transaction is subject to 20% sales tax the following entries will be made: Dr: Cash Cr: Sales Cr: Sales tax $1,200 $1,000 $ 200
If the above credit transaction is subject to 10% trade discount, sales tax should be charged on the reduced amount as follows: Trade discount: 10%*2,000 =200 Dr: Receivables Cr: Sales Cr: Sales tax $2,160 $1,800 $ 360
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Chapter 5 extract from our ExPress notes for use with the current video.

About ExPress Notes

Sales and credit transactions

START About ExPress Notes

How to get the most from these ExPress notes

At the start of the learning phase

Your stage in study for each paper Practice phase

These ExPress notes

ACCA online past exams

The night before the real exam

At the door of the exam room before you go in.

Our ExPress notes fit into our portfolio of materials as follows:

START About The ExP Group

Sales and credit transactions

START The Big Picture

Dr Cash Cr Sales or Dr Receivables Cr Sales

$1,000 $1,000 for cash transactions

$2,000 $2,000 for credit transactions

KEY KNOWLEDGE Irrecoverable debts

Dr Irrecoverable debts expense Cr Receivables

KEY KNOWLEDGE Recovery of debts written off

Dr Receivables Cr Irrecoverable debt expense

Dr Bank Cr Irrecoverable debt expense

KEY KNOWLEDGE Doubtful debts

Dr Bad debt expense Cr Allowance for receivables

KEY KNOWLEDGE Discounts

KEY KNOWLEDGE Sales tax

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