Business Transactions and Documentation

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Chapter

BUSINESS TRANSACTIONS AND DOCUMENTATION

CHAPTER CONTENTS

Introduction Types of Businesses Business Transactions Documentation Practice Questions Answer Bank

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INTRODUCTION BUSINESS is described as any activity undertaken with a view to make profit. There are different sizes and types of businesses. The common activity between them is the sale of goods or services. They can be classified in different categories and that is stated in the chart drawn below.

Types of business

Sole Trader Individual runs the business (alone or with several employees) Owner is entitled to all the profits Suffers all the losses

Partnership Two or more people work together Partners agree how the firm should be run Partners share profits and losses in accordance with agreement

Limited company Offer the benefit of limited liability (i.e. investment is limited to shareholding.

Public companies Can issue shares to the public

Private companies Issue of shares is restricted to friends and family

TRANSACTION Whenever property changes hands, a transaction takes place. Cash transaction: The buyer pays cash to the seller at the time the goods or services are transferred. Credit transaction: The sale or purchase occurs some time earlier than cash is received or paid.

Business Transactions

Sales

Purchases

Payment of wages

Expenses

Cash
Sale occurs when goods or services are given in exchange for immediate payment

Credit
Good are ordered and delivered before payment is received. The sale occurs when the business sends out an invoice for the goods or services supplied.

Cash
Goods are paid for in cash. The purchase occurs when the goods and cash exchange hands.

Credit
The purchase occurs when the goods are received. Cash is paid later.

Borrowing money

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DOCUMENTS FOR BUSINESS TRANSACTIONS Documents for business transactions are required for several purposes: As evidence of the transaction and its details As evidence of the stage that the transaction has reached. For checking and confirmation. For recording the transaction details To keep track of how much it owes to its suppliers and how much it is owed by its customers Record of sales and purchases are useful in the event of a query or dispute with a customer or supplier To carry out checks to ensure they have been processed honestly To monitor how well a business is performing To measure whether a business is making profit or loss

FLOW OF DOCUMENTATION The following sequence of documentation would be expected in the case of credit sales or purchases: Enquiry customer

Quotation

seller

Purchase order

customer

Acknowledgement

seller

Goods dispatched

seller

Delivery note

seller

Sales invoice (bill)

seller

Cheque & remittance Advice

customer

INTERNAL DOCUMENTATION Companies generate a lot of internal documentation to help them manage their business. Some documents commonly referred to are: PURCHASE REQUISITION: A request for goods to be purchased: sent by a departmental manager to the purchasing department.

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GOODS RECEIVED NOTE: A document issued by the goods received department of stores when a delivery is received it is matched against the suppliers delivery note and the purchase order. STOCK/INVENTORY LIST: A list of items held in stores for external sale or internal use: shows quantity held at the moment. PRICE LIST: A list of the target selling prices for each item. SUPPLIER LIST: To trace from the code numbers of the parts which supplier manufactures which item of stock? WAGES AND SALARIES DOCUMENTATION: The documentation required for wages and salaries is detailed, and is covered in the last seminar of this series. EXPENSE CLAIM FORM: Employees fill out standard forms to claim back expenses they have incurred on behalf of the business. INTERNAL CHEQUE REQUISITION FORM: This is a form requesting a cheque payment when no supporting documentation is available. For example, if the supplier requires payment with an order and has not supplied a proforma invoice. INVOICES: The company will receive an invoice from its supplier, which will be used to update the companys accounting records.

Activity No. 1 Explain the purpose of the following documents, and state the order in which they are produced: Sales invoice Delivery note Remittance advice Sales order

Also explain the purpose of the following purchase documents, and list them in the order in which they are produced: Goods received note Purchase order Purchase invoice

ACTIVITY NO 2 What is the difference between a sales order form and a purchase order form? INVOICE An invoice is a demand for payment. An invoice shows the following: Name and address of the seller Name and address of the purchaser Invoice number (so that the business can keep track of all the invoices it sends out) Date of the transaction Description of what is being sold Quantity and unit price of what has been sold Total amount of the invoice including any details of sales tax
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The date by which the payment is due

FOB (FREE ON BOARD) may be found on import or export invoices. This means that the supplier pays all costs of carries (e.g. shipping, insurance etc) up to the point of, e.g., shipping, but the customer will have to pay any subsequent carriage costs. EX WORKS means that the price excludes the cost of delivery. E & O E (ERRORS AND OMISSIONS EXCEPTED) means that the supplier reserves the right to make alterations to the details as shown on the invoice should any prove at a later date to be incorrect. COPIES OF INVOICE An invoice usually has the following copies: Sent to the purchaser. It is a request for payment of the goods. Kept as a file copy to keep records straight and to prove an invoice has been sent.

Delivery note sent to the customer for signature and then retained by the seller. Advice note is sent to customer by the supplier giving details of the status of goods. PROFORMA INVOICE (DUMMY INVOICE): when a customer does not want credit and/or wishes to pay in advance for goods, he may request a proforma invoice from the supplier. It shows the details of the sale. CREDIT NOTE (NEGATIVE INVOICES): a document, which cancels all, or part of an invoice. It may be required for the following reasons: Some or all of the goods are returned by the customer; The customer negotiates a reduction in price with the seller, after having received the invoice; The seller was unable to satisfy the complete order, but sent an invoice for the whole lot.

Credit note basically indicates that the amount shown on the credit note is no longer due from the customer DEBIT NOTE: a customer issues a debit note to a supplier as a means of requesting a credit note. A supplier instead of an invoice may issue a credit note in order to adjust the amount of an invoice already issued. REMITTANCE ADVICE: This shows which invoices a payment covers. It includes the following items: Name and address of the customer Name and address of the supplier Invoice numbers Invoice date Invoice amount Date of payment and total payment

DELIVERY NOTE: This is sent to customer for signature as evidence that the goods have been delivered and then retained by the seller. STATEMENT OF ACCOUNT: This is send by the supplier to the customer at regular intervals normally monthly giving details of the transactions and the balance that is to be paid by the customer

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MULTIPLE CHOICE QUESTIONS

1. Ostrich is given a haircut by Lamb, who owns his own business. Ostrich pays with a $10 note. What kind of a transaction is this? A. B. C. D. A. B. C. D. A. B. C. D. 2. Sale of goods by Lamb Sale of a service by Ostrich Purchase of goods by Lamb Purchase of a service by Ostrich Cash sale Credit sale Cash purchase Credit purchase Partnership Private company Public company Sole trader

What kind of transaction is this from Lambs point of view?

What is Lambs business?

Which of the following terms would be used to classify a payment for electricity to heat the business premises of a firm of plumbers? A. B. C. D. Expense Purchase Receipt Sales Business is a place where money is received and paid. Business is a process where resources are mixed together for the purpose of benefits. Business is an activity, which results in profit alone. Business is only the process of selling and buying commodities.

3.

Which of the following statements is correct? A. B. C. D.

4.

In which form of business are profits and losses shared between the owners in accordance with the agreement between them? A. B. C. D. Partnership Private limited company Public limited company Sole trader/proprietor

5.

Why do business organizations keep accounting records?

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A. B. C. D. 6.

In order to know profit To have control of the organization To get loan To pay tax

Jack runs a stationery business and has sold computer supplies to Peter for payment in one month. Which of the following are true in respect of this transaction? (i) (ii) (iii) (iv) A. B. C. D. It is a cash transaction The expenditure must be authorized by Jack A record of the transaction must be kept in case of future query Jack will need to ensure payment is received in one month (i) Only (ii) And (iii) (iii) And (iv) All of the above Credit note Debit note Dispatch note Goods received note All those things which the owner has invested The fund that is invested by its owners The objects that the owner has bought for resale All those things which the owner has invested outside the business

7.

Which document is used to correct an overcharge on an original invoice? A. B. C. D.

8.

Which of the following is true for capital? A. B. C. D.

9.

The types of documentation that might accompany a complex transaction for a piece of equipment include three of the following. Which is the odd one out? A. B. C. D. Invoice for outstanding amount from manufacturer Initial enquiry letter to manufacturer Price quotation for machinery from manufacturer Deposit remittance from purchaser Delivery note Quotation Pay slip Receipt Advice note Credit note Debit note Invoice

10.

Which of the following does not contain any monetary value? A. B. C. D.

11.

The document used by a supplier to correct an earlier overcharge is known as: A. B. C. D.

12.

Following is the list of situations where an invoice has been sent, choose one that would not require a credit note to be raised:
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A. B. C. D. 13. A. B. C. D. 14.

A customer has returned some or all of the goods because they are damaged or faulty A customer has returned some or all of the goods because they are not the ones that were ordered A customer has never received the goods although an invoice was sent out Postage and packaging was omitted on the original invoice It is a formal request, sent by a business to a supplier requesting the delivery of the goods specified on the purchase order It is an internal check document that serves as a record of the quantity and condition of goods that have been delivered to the business It is a discount that is offered to a customer if the invoice is paid by a certain date It is a means of identifying a transaction as being of a particular type by allocating to it an appropriate reference number Credit sales Payroll Purchases of equipment Payment of suppliers Acknowledging a purchase on credit Giving a reference from an agency detailing the creditworthiness of a new customer Issued when a deposit is paid on goods

Which of the following is the best description of goods received note?

Which of the following transactions occurs on a daily basis in a large business? A. B. C. D.

15.

A credit note is a document which: A. B. C.

16.

D. Cancels out all or part of a sales invoice Which one of the following is not an internal document for purchases? A. Supplier list B. Delivery note C. Goods received note D. Purchase order Remittance advice is: A. To indicate items now paid B. To identify goods received C. To advise remittances received D. For notification of goods dispatched Which of the following are the purposes of a purchase invoice? (i) (ii) (iii) (iv) To claim back the VAT To identify the goods bought To record how much is owed to the creditor To record how much is owed to the debtor

17.

18.

19.

A. i, ii and iii only B. All C. ii and ii only D. i and ii only In the purchasing procedure, the document following the goods received note is:

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A. B. C. D. 20.

Delivery note Invoice Statement Advice note

Kimmy receives a document from Cullens Stationery Suppliers for 8 reams of paper which they supplied three days ago. Kimmy would refer to this document as a: A. B. C. D. Goods received note Receipt Purchase invoice Credit note A credit note A debit note A remittance advice An internal cheque requisition

21.

Which of the following is authorized by a business to settle an outstanding invoice? A. B. C. D.

22.

Which of the following correctly describes the function of a credit sales invoice which a customer has received from a supplier? A. B. C. D. It is a receipt for money paid It is a demand for immediate payment by the supplier It is a record of goods purchased by the customer It is a demand for payment within an agreed time from the supplier Credit note Debit note Purchase invoice Receipt

23.

Which of the following is called as sales invoice by a supplier? A. B. C. D.

24.

Fleming & Co wishes to buy goods from Paddington & Co. Which of the following is the most likely flow of documents to complete the purchase? A. B. C. D. Purchase order, delivery note, goods received note, cheque requisition, invoice Purchase order, delivery note, goods received note, invoice, cheque requisition Goods received note, purchase order, delivery note, invoice, cheque requisition Purchase order, goods received note, delivery note, cheque requisition, invoice

25.

Which document lists the invoices; credit notes and amounts sent and paid from a supplier to customers monthly? A. B. C. D. Delivery note Purchase order Quotation Statement To pay a supplier

26.

What is the purpose of a remittance advice? A.

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B. C. D.

To remind a customer to pay To match a customers payment with the invoice To send goods back to a supplier

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27.

Which of the following documents would NOT come across in dealing with sales to customers? A. B. C. D. Purchase order Delivery note Goods received note Statement

28.

Beta Ltd, a credit customer of Alpha Ltd, returns faulty goods to Alpha Ltd. Which document will Alpha raise to reduce Betas debt in respect of these goods? A. B. C. D. Credit note Purchase order Debit note Remittance advice Enquiry Order Invoice Payment Order Enquiry Invoice Payment Enquiry Order Payment Invoice Enquiry Invoice Order Payment

29.

Which of the following is the correct chronological sequence for sales documents? A. B. C. D.

30.

Mary buys goods on credit from Lisa but finds that some of them are faulty. What document would Mary return to Lisa with the faulty goods? A. B. C. D. Statement Debit note Sales invoice Purchase invoice

31.

Which business document provides proof of payment for a business transaction? A. B. C. D. Invoice Receipt Claim Debit note A document produced by a purchaser detailing items purchased A document produced by a seller detailing items sold A document produced by a seller following the return of goods A document produced by a seller listing monthly transactions

32.

Which of the following best describes an invoice? A. B. C. D.

33.

Which of the following correctly describes a debit note? A. B. C. D. It is issued by a customer to a supplier to cancel an invoice received It is issued by a customer to a supplier to request a credit note It is issued by a customer when goods are delivered It is issued by a supplier to a customer to demand payment in full for goods supplied

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34.

The term FOB shipping point may appear on export or import items. What does this mean? A. B. C. D. No carriage costs will be payable by the customer The supplier pays carriage costs to the point of shipping, the customer pays any subsequent charges The invoice price includes carriage costs The supplier will pay for delivery to the customer

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ANSWERS TO MULTIPLE CHOICE QUESTIONS

Questions 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Answers D,A,D A B A A C A A B A B D B A D B A Questions 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 Answers A B C D D C B D C C A A B B B B B

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