Process Accounts Payable and Receivable

BSBFIA303AProcess Accounts Payable and Receivable

SECTION ONE - INTRODUCTION

The Need for Accounting

What is Accounting?

Accounting is the process of recording, classifying, interpreting, summarising and communicating information. The records of the financial activities of a business are called financial records.

What is the difference between a bookkeeper and an accountant?

A bookkeeper prepares financial records by transferring information from source documents to journals, posting this information to ledgers and preparing reports. An accountant summarises and analyses these financial records.

Why is accounting needed?

Accounting is needed so as to provide interested parties with information on the profitability and financial position of a business. Businesses are also required to keep accurate records that comply with government laws and regulation.

The parties who are interested in the profitability and financial position of a business are: owners, management, creditors, investors, potential investors, government, employees, trade unions and the general public.

Types of Business Enterprise

In Australia you will find many different types of business that fit into the following broad categories:

Primary producers: agricultural and extraction of natural resources

Manufacturers: production of goods (raw to finished product) any assembling a product

Wholesalers: bulk purchases from manufacturers and resale of same goods to other businesses (retailers)

Retailers: buy in bulk from wholesalers and sell in smaller quantities to the general public

Service businesses: sale of professional time and knowledge eg doctor, accountant, solicitor

Non-profit organisation: sporting or charity organisation eg facilities for members/community

Forms of business ownership

All business are owned in one of the following ways:

Sole trader: owned by one person, usually managed by the owner, owner provides all capital necessary to operate and maintain the business, owner enjoys the benefits of all profits and suffers the consequences of all the losses, owner has unlimited liability ie the owner is liable to the full extent of his/her personal assets to meet the debts of the business.

Partnership: association of two or more persons, usually professional groups eg accountants, solicitors, dentists, unlimited liability in respect to the partnership debts, partnership can raise more capital and have a greater variety of skilled people involved in the running of the business.

Companies: a company is a business with a separate legal identity created by law and is much more complicated to set up. Separate legal identity means

• it can enter contracts as a legal person and can sue or be sued as a legal person
• it continues to exist after the death of a member because the shares are transferable

Cooperatives: formed by a number of people with a common interest eg Dairy Farmers Cooperative, St Vincent de Paul Thrift Shops.

Processing information through the accounting system

The main elements of the accounting system are the source documents, the journals and the ledger. These devices are used to collect and summarise financial data, which is then displayed in financial reports.

You have already completed the module involved in the preparation of source documents. This was the first step in the accounting process.

ACCOUNTING THEORY

You now have a knowledge of types of business enterprise and the differences in business ownership. Before beginning to work in an accounting system, you will need to understand some common business terms and basic theory.

Accounting terms used in a business

Account: is a means of recording all relevant data to a particular person or thing eg in the Cash at Bank account would only be recorded the movement of money coming into and out of the business.

Aging Accounts: the process of determining the age of a debt or how long the debt has been owing. Aging a statement tells the customer and your own accounting department how long various amounts have been owing. This is especially important to the business as it can monitor customers who are not paying their accounts promptly.

Assets: items of value, OWNED by the business, for USE within the business eg Cash at Bank, Office Furniture, Office Equipment.

Buying/Selling on Credit: the business will purchase/sell goods and services/assets without paying/receiving cash at the time of the transaction. Instead, the amount will be paid to the supplier/received from the customer within one month (30 days) of the date of the transaction.

Chart of Accounts: is a complete list of accounts in the general ledger. It is a list of account titles classified and indexed according to the nature (type) of the account eg Proprietorship, Asset, Liability, Expense or Revenue. (See page 8)

Credit: means to enter an amount in the credit column of the ledger card.

Cross Reference: when posting from the journal to the ledger card, it is necessary to record the journal page number beside the ledger card entry and to cross reference ledger account number beside the journal entry which has been posted.

Cycle Billing: staggering the preparation and sending of statements eg on a set date each month. Customers’ records are divided into groups (alphabetical or geographical) eg A-F sent on the 1st day of each month, G-L sent on the 8thday of each month, M-R sent on the 15th day of each month and S-Z sent on the 23rd day of each month.

Debit: means to enter an amount in the debit column of the ledger card.

Double-entry Accounting: is a system of recording transactions according to the accounting equation for which every debit entry must be accompanied by a corresponding credit entry of equal value.

Drawings: withdrawals of cash and goods from a business by its owner.

Expenses: the costs and/or losses incurred in the day-to-day running of the business eg Purchases, Wages, Advertising, Electricity, Bad Debts.

Folio Number: page number eg S1 means Sales Journal page 1.

General Ledger: contains details of all accounts relating to the business, except the trade debtors’ and trade creditors’ personal accounts. These accounts are represented in the general ledger by control accounts of the same name.

Goods and Services Tax: It is a consumption or value added tax which will be applied at a flat rate of 10% on the sale of most goods and services. It came into effect on 1 July 2000. GST is added to the selling price of goods and services as they pass through the business supply chain until they are finally consumed. To avoid the tax cascading and multiplying through the sales process, each registered business is given a rebate of the GST they paid to their supplier when they on sell the goods.

Liabilities: items of value OWED by the business, eg Bank Overdraft, Mortgage.

Proprietorship: value of the owner’s investment in the business. It is also known as Capital, Owner’s Equity or Net Worth of the business.

Purchases: trade goods bought for cash or on credit, with the intention of resale

Revenues: the earnings or gains made during day-to-day running of the business eg Sales, Rent Receivable, Interest Receivable.

Sales: trade goods sold for cash or on credit.

Schedule of Creditors’ (Accounts Payable) Balances: the listing and totalling of outstanding balances from the Creditors’ Ledger. This total should agree with the balance in the Creditors’ (Accounts Payable) Control account in the General Ledger.

Schedule of Debtors’ (Accounts Receivable) Balances: the listing and totalling of outstanding balances from the Debtors’ Ledger. This total should agree with the balance in the Debtors’ (Accounts Receivable) Control account in the General Ledger.

Settlement Discount: a monetary reduction or deduction applicable when the account is paid and which is conditional upon the buyer paying for the goods within an agreed time. If payment is late the discount will not be allowed.

• Discount Allowed: allowance given by the business to trade debtors
• Discount Received: allowance received by the business from trade creditors

Sundry Creditor: the supplier to whom the business owes money for the purchase of an asset/services (non-trade goods/services) on credit.

Sundry Debtor: the customer to whom the business has sold an asset (non-trade goods) on credit.

Trade Creditor: the supplier to whom the business owes money for trade goods bought on credit (Supplier or Accounts Payable).

Creditors’ Ledger (Accounts Payable Ledger): contains all details of suppliers from whom the business has purchased goods, services on credit.

Trade Debtor: the customer to whom the business has sold trade goods on credit (Customer or Accounts Receivable).

Debtors’ Ledger (Accounts Receivable Ledger): contains all details of customers to whom the business has sold goods, services on credit.

Trade Discount: a monetary reduction or deduction in the catalogue or listed price of goods given by the seller to customer who will be using a product within their line of work eg Marathon Tyres could give a Shell Garage a trade discount on tyres to be used in its line of work.

Accounting Conventions

A convention is a traditionally accepted way of doing things.

Historical Record Convention: transactions are recorded at their original cost at the time of transaction.

Accounting Monetary Convention: transactions are recorded at a money value (not a quantity measure).

Continuity of Activity Convention: all decisions are based on the premise that the business is an ongoing concern.

Accounting Period Convention: the life of a business is divided into time periods. A business is required to report to interested parties at the end of each financial year. Therefore, the accounting period of most businesses is twelve months. However, management will request financial reports more regularly than this.

Accounting Entity Convention: for recording purposes, the owner of the business and the business are separate entities. Only the transactions of the business are recorded. The personal financial dealings of the proprietor (owner) are completely separate.

The Accounting Entity Convention gives us a starting point. We can link it with the accounting equation.

The Accounting Equation Convention: is a formula used in double-entry accounting systems which shows the relationship between proprietorship, assets and liabilities. Proprietorship (capital) is the difference between the total value of assets and the total value of external liabilities.

There are three different forms of the Accounting Equation:

Assets=Proprietorship+Liabilities

Liabilities=Assets-Proprietorship

Proprietorship=Assets-Liabilities

The whole of the accounting process is based on the accounting equation.

CHART OF ACCOUNTS

1 /

ASSET ACCOUNTS

/ 4 /

REVENUE ACCOUNTS

Current Assets / 4.1 / Sales
1.1 / Cash at Bank / 4.2 / (Sales Returns)
1.2 /

Payroll Cheque Account

/ 4.3 / Discount Received
1.3 /

Accounts Receivable Control

/ 4.4 / Interest Revenue
1.4 / Inventory / 4.5 / Rent Revenue
1.5 / Petty Cash Imprest / 4.6 / Commission Revenue
4.7 / Freight and Insurance Collected
Non-current Assets / 4.8 / Dividends/Interest on Investments
1.10 / Land / 4.9
1.11 / Buildings
1.12 / Plant and Equipment
1.13 / Shop Fittings (Fixtures & Fittings)
1.14 / Motor Vehicles / 6 /

EXPENSE ACCOUNTS

1.14A / Accumulated Depreciation on Motor Vehicles / 6.1 / Purchases
1.15 / Office Equipment / 6.2 / (Purchases Returns)
1.15A / Accumulated Depreciation on Office Equipment / 6.3 / Discount Allowed
1.16 / Office Furniture / 6.4 / Advertising
1.16A / Accumulated Depreciation on Office Furniture / 6.5 / Bad Debts
6.6 / Bank Charges
2 / LIABILITY ACCOUNTS / 6.7 / Electricity
Current Liabilities / 6.8 / General Expenses
2.1 / Accounts Payable Control / 6.9 / Insurance
2.2 / Bank Overdraft / 6.10 / Interest Expense
2.3 / Group Taxation / 6.11 / Postage
2.4 / Medical Insurance / 6.12 / Rent Expense
2.5 / Superannuation / 6.13 / Repairs and Maintenance
2.6 / Sundry Creditor / 6.14 / Stationery/Office Supplies
6.15 / Telephone
6.16 / Travel Expenses
GST Liability / 6.17 / Wages
2.10 / GST Collected / 6.18 / Freight and Insurance Paid
2.11 /

(GST Outlaid [Paid])

/ 6.19 / Donations
6.20 / Depreciation
Long-term Liabilities / 6.21 / Printing
2.15 / Mortgage of an Asset / 6.22 / Cleaning
2.16 / Bank Loans / 6.23 / Rates
6.24 / Interest on Overdraft
6.25 / Gas
6.26
3 / PROPRIETORSHIP (OWNER’S EQUITY) / 6.27
3.1 / Capital / 6.28
3.2 / (Drawings) / 6.29
6.30

THE PRINCIPLE OF DOUBLE ENTRY

For every DEBIT entry recorded there must be a CREDIT entry recorded to exactly the same value.

THE PROCEDURE FOR DOUBLE ENTRY

/ to increaseDR
ASSETS- / DR Balance
to decreaseCR
/ to increaseCR
LIABILITIES- / CR Balance
to decreaseDR
/ to increaseCR
PROPRIETORSHIP- / CR Balance
to decreaseDR
EXPENSES- / DR amounts
REVENUES- / CR amounts

The above procedures are based on the ACCOUNTING EQUATION:

ASSETS = LIABILITIES + PROPRIETORSHIP (Owner’s Equity)

THE NATURE OF TRANSACTIONS

In any business, a transaction—the exchange of money for money’s worth of goods or services—has two sides. That is, there is always someone who gives value and someone who receives value. At all times the transaction must be seen from the viewpoint of the business—is the business buying or selling goods/services.

The whole of the accounting process is based on the link between the accounting equation and the accounting entity convention (traditional way of doing things).

The accounting entity convention (one of five used in accounting—see above) states that, for the purposes of accounting, the functions and records of the business are absolutely and entirely distinct from any personal (domestic) financial dealings of the owner of the business.

The accounting equation is the relationship of proprietorship (capital) to assets and liabilities based on the concept of TOTAL DEBITS = TOTAL CREDITS. Proprietorship (capital, owner’s equity, net worth) is the difference between the total value of the assets and the total value of external liabilities (the debts incurred by the business, distinct from the owner’s investment which is considered to be an internal liability).

There are three different simple mathematical forms of the accounting equation:

Proprietorship= Assets – Liabilities(P = A – L) or (C = A – L)

orAssets = Proprietorship + Liabilities(A = P + L) or (A = C + L)

orLiabilities= Assets – Proprietorship(L = A – P) or (L = A – C)

CALCULATING THE GST

The GST was introduced on 1 July 2000 and is levied at the rate of 10% on taxable supplies (see page 3).

If you sell a taxable itemand quote a price that is GST exclusive (original cost),it must be multiplied by 10% to calculate the GST to be added to determine the final selling price.

If you sell a taxable item and quote a price that is GST inclusive, then the final selling price must be divided by 11 to determine the GST component. Subtract the GST to find the original cost of the item.

Please ask your facilitator to provide you with an exercise sheet if you would like to practise calculating the GST component of GST inclusive and GST exclusive transactions.

THE JOURNAL FRAMEWORK

All transactions are evidenced by some sort of written document. We call these documents source documents.

The source document provides us with the necessary information to write up the journals (books of original entry).

Only pertinent information is taken from the source documents for entry into the journals. Journals have three main functions:

aclassifyingsorting documents of a like nature together,

bsummarisingconsolidating relevant information, and

cmeans of transferposting the information into a ledger. In the ledger we keep accounts. An account is a means of recording all relevant data relating to a particular person or thing. (See Chart of accounts for accounts listing.)

The journals in a typical retail business are summarised below.

Event / Source document / Record in Journal / Post to ledger cards
Sale of trade goods and assets on credit / Tax Invoice issued (duplicate) / Sales / ACCOUNTS RECEIVBLE
LEDGER
(DEBTORS OR CUSTOMERS) / G
E
N
E
R
A
L
L
E
D
G
E
R
Return inwards of trade goods and allowances on credit / Adjustment Note issued (duplicate) / Sales Returns and Allowances
Receipt of money (cash, cheques, credit card, eftpos) / (Tax) Receipt (duplicate) cash register listing, bank statement / Cash Receipts
ALL OTHER TRANSACTIONS:
Opening Entry
Interest Receivable
Interest Payable
Bad Debts
Correction of errors
Reversal entries
Omission of entries
Purchase of Asset
Sale of Asset / VARIOUS:
Tax Invoices
Statements
Memos / GENERAL / ACCOUNTS PAYABLE LEDGER
(CREDITORS OR SUPPLIERS)
Purchase of trade goods or assets on credit / Tax Invoice received (original) / Purchases
Return outwards of trade goods and allowances on credit / Adjustment Note received (original) / Purchases Returns and Allowances
All cash payments (cheque) made from the business / Chequebutt / Cash Payments

Faculty of Business and Computing Section 1 Page 1 of 9

Business Administration20 September 2018