FA Ch 4

• Flow of Accounting Information

  1. Recording business transactions

  2. Classifying transactions into relevant ledger accounts

  3. Preparing trial balance

  4. Preparing financial statements

  
• The eventual goal of accounting is to present fairly and accurately all financial transactions in the financial statements

  
• Characteristics of computerised accounting systems

  • Transactions recorded electronically
  • Source documents and ledgers created, distributed, and held electronically
  • Authorisation performed electronically
  • Extraction of trial balance, reconciliations, and other financial processes done electronically
  • Filing and archiving held electronically

  
• Business transactions


  The business's day-to-day activities that have a monetary value
• Examples of business transactions

  • Sales
  • Purchases
  • Payments
  • Receipts
• Financial or source documents


  Documents produced for each business transaction to record information about individual transactions

  
• Examples of financial documents

  • Sales invoice
  • Purchase invoice
  • Cheque stubs
  • Remittance advice
• Financial documents in a computerised system may be automatically generated as transactions are processed; controls will be implemented that make the source document's creation, distribution, and authorisation mandatory before any transaction is recorded

  
• General ledger


  Contains all the individual ledger accounts used by a business
• Information from the source documents is classified into their respective ledger accounts using double entries via computerised systems and the Journal
• The general ledger contains individual accounts for the business's assets, liabilities, capital, income and expenses

  
• Trial balance


  A list of each ledger account's closing balances
• The trial balance is investigated to ensure no errors have occurred in recording the transactions
• Statement of financial position


  Provides an overview of a business's assets, liabilities, and capital at the financial year-end
• Statement of profit or loss


  Summarises a business's income and expenses during the financial year
• The profit or loss is the net of the business's income and expenses
• Sales


  The exchange of goods or services for money, either for cash or credit
• Sale returns


  Faulty or incorrect goods returned from a customer due to faulty or damaged goods being supplied
• Purchases


  The exchange of money for goods or services, either for cash or credit
• Purchase returns


  Faulty or incorrect goods sent back to the supplier due to faulty or damaged goods being supplied
• Payments


  The settlement or transfer of money to a third party
• Receipts


  Money received by the business from a third party
• All financial transactions must have a valid financial document with details of the transaction
• Quotation


  A document sent by the seller with details of the price for each item
• Purchase order


  A document completed by the customer and sent to the supplier, highlighting the items they want to order
• Sales order


  An internal document generated to process a customer order after receiving it
• Delivery note or goods despatched note

  A document that accompanies the delivered goods
• Goods received note (GRN)

  An internal document completed by the customer to ensure everything ordered has been received
• Sales invoice


  A document sent to customers with details of the items purchased on credit
• Purchase invoice


  A document received from suppliers with details of the items purchased on credit
• Credit note


  A document issued by the supplier to reduce the value of the previously issued invoice due to faulty or damaged goods being supplied
• Debit note


  A document issued by the customer to the supplier to request a credit note
• Statement of account


  A document sent by a supplier to a customer with details of all transactions between the parties
• Remittance advice


  A document sent to the supplier to show that payment has been made
• Receipt


  A document issued by the business to the customer to confirm that a payment has been received that pays any outstanding invoices
• Source documents can be created and issued electronically through automated processes, with the necessary fields populated from the accounting system's databases
• The only process requiring human intervention would be the necessary authorisations to approve the transaction. The authorisation may be applied digitally
• General ledger


  Contains individual accounts for the business's assets, liabilities, capital, income and expenses

  
• Most users of financial statements do not require the detail of every transaction that large businesses will encounter daily
• The financial information of each transaction should be summarised before completing the final accounts