ACCA FA Business Transactions and Sales Tax: Concepts, Entries & Examples

Recording business transactions and sales tax correctly is an important part of ACCA Financial Accounting (FA). Businesses perform various transactions such as sales, purchases, and petty cash payments every day, and each transaction must be recorded accurately using the double entry bookkeeping system.

This topic provides an understanding of how sales and purchase transactions are recorded, how petty cash is managed through the imprest system, and how VAT/GST is calculated and accounted for. It also explains trade and settlement discounts and the process of preparing bank reconciliation statements to help maintain accurate financial records. 

What Is the Double Entry Bookkeeping System?

The double entry bookkeeping system is also called the duality concept. It records every financial transaction in two accounts, one as a debit and the other as a credit. This system helps maintain accurate records and keeps the accounting equation balanced.

The four main accounting categories and their debit and credit treatment are: 

How Are Sales Transactions Recorded?

Sales transactions are recorded under the accrual accounting concept, meaning income is recognised when the sale occurs, even if payment is received later. The journal entries for different types of sales transactions are:

How Are Purchase Transactions Recorded?

Purchases are recorded when a business buys goods, especially items purchased for resale. These transactions are recorded based on whether the payment is made immediately or at a later date.

The journal entries for different purchase transactions are:

Purchase returns reduce the total purchase expense and are recorded separately in the accounts.

What Is Petty Cash and How Does the Imprest System Work?

Petty cash is a small amount of cash kept by a business to pay for minor daily expenses, such as stationery, travel costs, or other small payments that do not require bank transactions. Under the imprest system, a fixed amount of cash called a float is maintained. Expenses are paid from this amount, and the remaining cash plus vouchers should always equal the original float.

Formula: 

Cash Remaining + Vouchers = Float

The petty cash balance is regularly replenished back to its original amount. The journal entry for replenishment is:

Debit: Petty Cash
Credit: Bank

To prevent misuse of petty cash, businesses should:

• Keep the cash box secure

• Number all vouchers

• Perform regular checks

• Assign an independent cashier

• Review petty cash records regularly

What Is Sales Tax (VAT/GST) in Accounting?

Sales tax, also known as VAT or GST, is an indirect tax collected by businesses from customers on behalf of the government. The business later pays this collected tax to the government.

Output Tax vs Input Tax

Understanding Sales Tax with an Example

For example, if a business makes a sale of $5,000 with 20% VAT, the customer pays $6,000. The additional $1,000 is recorded as output tax payable to the government.

Net Sales Tax Position

• If Output Tax exceeds Input Tax, the difference is Net Sales Tax Payable (liability).

• If Input Tax exceeds Output Tax, the difference is Net Sales Tax Refundable (asset).

Sales Tax Calculation Formula

• Net Amount to Gross Amount: Net Amount × (100 + Tax %) / 100

• Gross Amount to Net Amount: Gross Amount × 100 / (100 + Tax %)

Journal Entries with Sales Tax

Credit Sale Example
(Net Sale = $1,000, Tax = 20%, Total = $1,200)

• Debit Trade Receivables $1,200

• Credit Sales $1,000

• Credit Output Tax $200

Purchase Example
(Net Purchase = $1,000, Tax = 20%, Total = $1,200)

• Debit Purchases $1,000

• Debit Input Tax $200

• Credit Trade Payables $1,200

Trade Discount vs Settlement Discount – What’s the Difference?

Businesses may offer discounts to customers or receive discounts from suppliers. These discounts are mainly of two types: trade discount and settlement discount.

1. Trade Discount

A trade discount is a price reduction given on the original selling price, usually for bulk purchases or regular customers. It is not recorded separately in the accounting records. The transaction is recorded at the final amount after applying the discount.

Example:
Goods worth $10,000 with a 10% trade discount will be recorded at $9,000.

2. Settlement Discount

A settlement discount is offered when a customer makes payment before the due date. Under IFRS 15, the accounting treatment depends on whether the discount is expected to be used.

• If the discount is expected to be taken: Sales and receivables are recorded at the discounted amount from the beginning.

• If the discount is not expected to be taken: Sales and receivables are recorded at the full amount. If the customer later takes the discount, it is recorded separately as a discount allowed.

For supplier transactions, the purchase is initially recorded at the full amount. If the business receives a settlement discount on early payment, it is recorded separately as Discount Received.

Unlike trade discounts, settlement discounts are shown separately in the accounts as Discount Allowed or Discount Received.

What Is Bank Reconciliation and Why Is It Needed?

Bank reconciliation is the process of comparing a business’s cash book balance with the bank statement balance to identify differences and ensure the accuracy of financial records.

Differences between the two balances usually occur due to:

• Timing differences: These are adjusted in the Bank Reconciliation Statement.

• Errors or omissions: These require corrections in the cash book or accounting records.

Common Bank Reconciliation Items

• Unpresented Cheques: Cheques issued by the business but not yet cleared by the bank. These are deducted from the bank statement balance.

• Outstanding Lodgments: Amounts deposited by the business but not yet processed by the bank. These are added to the bank statement balance.

Key Points to Remember

Keep these important points in mind while preparing for the ACCA Financial Accounting (FA) exam:

• Understand return entries: Sales returns are debited because sales are normally credited. Purchase returns are credited because purchases are normally debited.

• Remember the accounting rules: Assets and expenses increase with a debit, whereas liabilities and income increase with a credit.

• Know discount treatment: Trade discounts are not recorded in accounts, while settlement discounts are shown separately.

• Identify bank reconciliation adjustments: Check whether the difference is due to a timing delay or an error. Record timing differences in the Bank Reconciliation Statement and correct errors in the cash book.