1. Business transactions
There are two types: cash transactions and credit transactions. The distinction is the timing of payment, not the method used to pay.
In a cash transaction, payment is made or received at the point of sale of goods or services. Examples include cash sales, immediate purchases of goods or assets, and payments made by cheque when payment occurs at that point.
In a credit transaction, payment is delayed to an agreed future date. Examples include credit sales, credit purchases and using utilities before paying the utility bill.
Common mistake: “Cash transaction” does not mean notes and coins must physically change hands. A cheque can still form part of a cash transaction; timing is what matters.
2. Accounting cycle and AIS
Businesses use an Accounting Information System (AIS) to record and process accounting information and business transactions.
Information flow: Source document → Journal → Ledger → Trial Balance → Financial Statements
- Source document: identifies the transaction.
- Journal: records the transaction.
- Ledger: posts the transaction to the relevant accounts.
- Trial balance: summarises account balances.
- Financial statements: report the resulting financial information.
The financial statements include the statement of financial performance and statement of financial position.
3. Source documents
Source documents are records of transactions. They contain details such as the date, value, type of transaction and parties involved. They have two important purposes: providing reliable and verifiable evidence that a transaction exists, and providing the details needed to record it.
Invoice
Issued by a seller to a credit customer, showing details of goods or services sold on credit and the amount payable.
Credit note
Issued by a seller when a buyer returns goods or when an amount previously charged was too high. It reduces the amount owed by the customer.
Debit note
Issued by a seller as an additional bill when a buyer was undercharged.
Receipt
Issued to acknowledge that money has been collected from a customer for goods or services.
Remittance advice
Sent to a supplier to indicate that an invoice for a credit purchase has been paid.
Payment voucher
An internal document used to process and authorise payment to a supplier or another party to whom money is owed.
Bank statement
Issued by a bank and lists receipts, payments, bank charges and other transactions affecting the business bank account. It allows the business to check and reconcile its cash-at-bank balance.
Memory aid: Overcharged customer → credit note. Undercharged customer → debit note.