Business activities and transaction processing

1. Business activities and transaction processing Learning objectives To understand the various business activities and business decisions that are made. To decide on the information that is needed for various decisions. To review the steps in the accounting cycle. To understand the principles of internal control.

2. account account code adjustment note assets chart of accounts control account current assets current liabilities expenses field file financial statements gross loss gross profit internal control invoice journal ledger key terms

3. liabilities master file net loss net profit non-current assets non-current liabilities owner’s equity posting record reserves retained profit revenues source document transaction file transaction processing key terms (cont.)

4. Structure and characteristics of businesses • Most common forms of ownership are: • sole proprietorship • partnership • company • Capital: • an investment of cash or other assets required to establish a business

5. Structure and characteristics of businesses • Liability: • amount owed by a business to others • Equity: • amount owed by a business to owners • Retained profit: • amount of profit not distributed

6. Structure and characteristics of businesses • Liabilities of a business: • capital contributions by owners • retained profit • loans • accounts payable • bank overdraft

7. Structure and characteristics of businesses • Assets of a business: • land and buildings • plant and equipment • motor vehicles • furniture • cash at bank • accounts receivable • inventory

8. Organising capital Acquisition of premises and equipment Recruiting employees Acquiring inventory Manufacturing products Marketing and selling product/service Collecting amounts owing from customers Paying amounts owing to vendors Paying amounts owing to loans Paying amounts owing to employees Paying amounts owing to Australian Taxation Office Business activities

9. Transaction processing procedures • Consists of the following: • capturing transaction data on forms called source documents • recording transaction data in books called journals • posting data from journals to books of accounts called ledgers

10. Capturing transaction data • Business transactions are recorded on standardised forms that become the source documents • Source documents require only variable information to be completed • Source documents are prenumbered so it is easy to detect missing documents

11. Capturing transaction data - examples • When orders are received the details of the order are recorded on sales order documents • When the sale takes place the details are recorded on an invoice • When purchases are made the details and authorisations are recorded on purchases order documents • Source documents provide an audit trail so transactions can be traced to the journals and ledgers

12. Recording transactions • Recording is made in a journal • Journals can be either specialised or general • Specialised: • used for repetitive transactions and simplify the process of recording large numbers of transactions (e.g. sales journal, cash receipts journal, cash payments journal) • General: • records the transactions that cannot be categorised and recorded in specialised journals

13. Posting transactions • Information in journals is transferred or posted to ledgers where a number of accounts are maintained • Ledgers can be divided into general or subsidiary ledgers • General: • where many accounts are recorded at summary level for assets, liabilities, expenses and revenue • Subsidiary: • where individual details of these accounts are recorded

14. Chart of accounts • The list of all account names and codes in an organisation is called a chart of accounts • A well-designed chart of accounts should accomplish the following: • adequate description of each account • distinction between account titles • assistance in the preparation of required reports

15. Financial statements • There are three main financial statements: • Statement of financial performance • profit and loss statement • Statement of financial position (balance sheet) • statement of the assets, liabilities and owner’s equity of a business at any point in time • Statement of cash flows • shows the changes in an organisation’s cash situation between the beginning and end of an accounting period

16. Management reports • Specialised reports for management control purposes. For example: • inventory levels • profitability of each product • performance of each salesperson • daily cash balances and commitments • extent of back orders

17. Internal control issues • Adequate internal controls are required to: • facilitate the capture of reliable business data • safeguard assets and business data • enable the execution of management objectives • Internal control principals include: • documented procedures • quality of personnel • authority • recording of transactions • internal verification

18. Computer accounting systems • Now used by most organisations • Most computer accounting packages may have modules for: • general ledger • cash book • accounts receivable • accounts payable • inventory • payroll • asset register