Introduction to types of Business Transactions
This chapter gives a brief introduction to organisations, accounting documentation, and computer-based accounting systems.
Types of business transaction
An organisation can be defined as:
A social arrangement which pursues collective goals, which controls its own performance and which has a boundary separating it from its environment.
Organisations can include businesses such as companies and partnerships, clubs, charities, government departments, hospitals and schools.
Even if not strictly a ‘business’ all organisations will have business transactions. Typically these will include:
- Purchasing goods and materials. Purchases can be for cash or credit. Cash purchases are paid for immediately and are fairly rare in most businesses. Credit purchases are paid for after some time, typically a month or so
- Purchasing services, for example, repair s to equipment, advertising, printing costs.
- Sales. Cash sales, for example in shops, are paid for immediately. Credit sales are paid for after some time.
- Paying wages and salaries.
- Purchase of non-current assets.
- Raising finance and paying rewards to the suppliers of finance. For example, owners putting in capital or loans being raised from banks. Owners of the business expect rewards based on a share of the profit; banks usually expect interest to be paid.
- Accounting for and paying tax.
- Movements of cash and money in the bank account. These movements usually arise from the transactions above.
All to these transactions are summarised at the end of accounting periods into two statements:
Statement of financial position Assets (amounts owned) and Liabilities (amounts owed).
Income statement Income (such as sales) less expenses (such as rent, wages, electricity, raw materials). If income is greater than expenses, a profit will result.
In the statement of financial position, assets are divided into:
Non-current assets such as equipment, premises, motor vehicles. These are kept long-term in the business.
Current assets such as inventory (stock) receivables or cash. These either are cash or will become cash within 12 months.
Liabilities are divided into:
Current liabilities such as amounts that have to be paid to suppliers (trade payables). These liabilities have to be settled within 12 months.
Long-term liabilities These don’t have to be settled until at least 12 months time
Types of business documentation
Each type of business transaction has its own set of documentation. The documentation is needed to:
- Control the progress of the transaction
- Record the transaction
- Provide a history of how the transaction proceeded. This is sometimes known as an ‘audit trail’
Sometimes the documentation is purely internal; sometimes it arises externally or is sent outside the business. Nowadays, the term ‘documentation’ is not confined to paper documents as many business transactions are mostly handled using computerised records.
Typical documentation is as follows:
Purchase of goods and materials: this will usually be initiated by someone in the warehouse or factory who can see that more materials will soon be needed. Often this person raises a purchase requisition which goes the buyers’ department. Buyers will then raise a purchase order to order goods from the most suitable supplier. Goods, accompanied by the supplier’s delivery note, will be received in the warehouse, where a goods received note will be raised. These must be checked back to the order to ensure that the correct goods are being received. Invoices from suppliers will be received and recorded by the accounting department first in a purchases day book (just a list of invoices received) and then in the payables ledger. Usually suppliers will send statements of account setting out the amounts still owed. Statements act as reminders and also they can be used to check that buyers agree with suppliers’ versions of events. Later the invoices will be paid and a remittance advice sent by the customer to indicate which invoices have been settled.
If goods are returned to suppliers (for example their quality was poor) then buyers will ask for a credit note. This acts like a negative invoice.
Purchasing services: often, these will be recurring items such as rent, electricity, telephone and insurance, and an invoice will be received Sometimes they will be once-off like paying for an advertisement in a newspaper or for the repair of a piece of equipment. These services should have a purchase order. The invoices will be processed by the accounting department who will make sure that the expenses look reasonable compared to previous amounts or who will ensure that the services have been properly ordered and received.
Sales: in a retail organisation sales will be initiated by customers either in a shop or through the internet. Payment will usually take place immediately and the customer given a till (cash register) receipt; a copy of the sales is also recorded by the cash register system. In businesses selling to other businesses, the sales representatives (sales men and sales women) will be responsible for encouraging customers to place sales orders. Once received, orders should result in goods despatch notes being raised and these act as authorisation to despatch the goods from the warehouse and for also sales invoices being created and sent to the customers by the accounting department. The accounting department will also record each invoice in a sales day book (just a list of invoices) and will then record what each customer owes in the receivables ledger.
Most businesses will send customers statements of account which set out the amounts still owed by customers. Statements act as reminders to customers about what needs to be paid and they also allow customers to check that they agree with the seller’s version of events. Payments by credit customers should be accompanied by remittance advices which detail what is being paid.
If goods are returned by customers (for example their quality was poor) then customers will ask for a credit note. This acts like a negative invoice.
Paying employees: large organisations will have a wages and salaries department which is responsible for calculating amounts owing, and dealing with employees who leave and with new joiners. Sometimes the payments are the same every week or month; sometimes they depend on time records (such as clock cards). In both cases employees will receive a wage or salary slip showing their pay and any deductions for tax etc. The amounts to be paid will usually be passed to the accounting department which will look after the cash transfers to employees.
Purchase of non-current assets: The purchase of these assets will often begin with en employee raising a purchase requisition, for example for a new printer, which is then authorised by a manager or by the company accountant. When the invoice is received, someone needs to ensure that the asset has been received and that it is working properly. These payments are handled in a similar way to purchases of goods and raw materials.
Finance. In companies, shares can be issued in exchange for new share capital. Loans will usually be accompanied by a loan agreement setting out the terms of the loan.
Tax will be paid in response to an assessment by the tax authorities.
Movements in cash and bank account amounts require careful documentation. Cash payments are usually small and usually made through the petty cash system where payments will be supported by petty cash vouchers. Payments from bank accounts will be by cheque or credit transfer. Credit transfers can be:
- Specially initiated by the company
- Automatic constant amounts (standing orders)
- Initiated by the person receiving the money (direct debits).
In all cases there should be documentation to back up the payments.