BSBFIA301A - Maintain Financial Records by Precision Group (Australia)

Introduction (continued)

There are activities throughout this workbook. These require the Learners to think about their experience or reactions, or to try and complete some research through reading or accessing the Internet. The activities will also help Learners towards completing the Assessment Task by assisting them to think about issues involved in the Assessment Tasks. Learners will then be asked to complete an Assessment Pack for this unit of competency. The information contained in this workbook will assist them. These tasks can be completed as they work through the workbook, rather than leaving it all to be completed at the end of their study. Finally, at the end of this workbook you will find a list of useful resources that you may use for further information. You will need to have access to an Internet terminal. Throughout the text, there are references to websites for further information and for some activities. This unit contributes the attainment of National Certificates. Good financial records are maintained on a regular basis, so plan time in your work schedule to get it done. Although initially it may seem that this time would be better spent on running your business, by doing your bookkeeping, you’ll minimise costs, have more control, and get a better understanding of your financial information and operations.

BSBFIA301A Maintain Financial Records Trainer Manual © Precision Group (Australia) Pty Ltd

Element 1: Maintain Daily Financial Records

Maintain Daily Financial Records Maintain Daily Financial Records and in Accordance with Organisational Requirements for Accounting Purposes In this unit of competency we are going to learn some of the basic principles behind maintaining financial records. Maintaining good financial records starts with a good system and well-organised business records. The system can be a simple one and does not need to be complicated. • Acquire a filing cabinet, hanging folders, and some manila folders to help keep financial papers organised • Divide and sort financial records chronologically • All incoming documents (such as receipts and invoices) should be kept and filed under the proper headings. Never throw anything out; it might become important in the future. Each organisation is likely to have a different set of financial documents and requirements that they use in order to carry out their functions, but the most common include: • Occupational Health and Safety (OHS) policies, Procedures, and Programs OHS can include the cost of training programs or the cost of changes to infrastructure. But it could also include the way in a physical sense that the financial work is carried out. Stretching regularly and changing activities to reduce stress to the body are examples. • Procedures for Totalling Adjusted Journals While there are standard accounting practices, different industries have different methods for making adjustments to accounts. The methods used by your organisation will be to meet and perhaps even to minimise their taxation liability ,or to ensure that cash flow is positive. • Quality Assurance and/or Procedures Manuals Quality has a cost, and in the financial area, quality procedures are essential to ensure accuracy and ability to correct errors. There will be procedures here relating to the financial requirements of your organisation. • Resolution Procedures There will always be disagreements, either between individuals or groups, or even numbers when trying to reconcile figures. There is a need for resolution procedures that dictate how such issues will be managed to that a quick but satisfactory resolution can be reached without inflicting damage on the parties involved.

BSBFIA301A Maintain Financial Records Trainer Manual © Precision Group (Australia) Pty Ltd

Element 1: Maintain Daily Financial Records

• Security Procedures Security when dealing with finance is always a concern. It is essential that there be procedures developed to protect the assets and the individuals along with the organisation. You must never depart from a secure practice. • Designated Time Lines Some time lines will be set by the organisation and others by legislative requirements such as GST reporting, end of financial year reporting, and so on. Organisational requirements could include the final submission time for annual leave requests, for lodging time sheets, etc. • Guidelines for Reconciling Journals

When the organisation receives its bank statement, the organisation should verify that the amounts on the bank statement are consistent or compatible with the amounts in the organisation’s cash account in its general ledger and vice versa. This process of confirming the amounts is referred to as reconciling the bank statement, bank statement reconciliation, bank reconciliation, or doing a ‘bank rec.’ The benefit of reconciling the bank statement is knowing that the amount of cash reported by the organisation (organisation’s books) is consistent with the amount of cash shown in the bank’s records.

• Legal and Organisational Policies, Guidelines, and Requirements

Procedures of this type are for the protection of the organisation. Proper financial procedures help to take the entire burden off the shoulders of the finance manager and eliminate temptations for anyone involved in managing the assets of the organisation.

You should make yourself familiar with each of these before you commence the job of trying to maintain financial records. If you do not understand the requirements, how can you do the job effectively?

Procedures for Financial Processing There are numerous policies and procedures that your organisation is likely to have with regards to financial processing. Some of the more common may include: • Procedures for Entering and Balancing Deposits The customers or clients are likely to make payments to your organisation using different methods. Some may pay using a credit card, others on a credit account, using cash, cheques, or even using online banking. It is important that your organisation has procedures that are followed in order to ensure that payments are entered and balanced before they are deposited into the bank account. Banking is generally done on a daily basis, to ensure that there is no money left on the organisation premises at the end of the business day.

BSBFIA301A Maintain Financial Records Trainer Manual © Precision Group (Australia) Pty Ltd

Element 1: Maintain Daily Financial Records

• Procedures for Checking Validity of Cheques and Card Vouchers Cheques and credit card vouchers require special attention, as if the documents are not recorded correctly they may not be honoured by the issuing banks, leaving the organisation out of money. We will deal with checking these documents in detail later in this manual. • Security Procedures Organisations will all have their own security procedures that are used to ensure that the organisation’s safety, along with the safety of its staff and clients, is protected. These procedures are important to financial processing because they will provide rules on who is allowed access to what. For example, who has access to the codes to open a safe, alarm codes, or enter a secure area. Security procedures will also include security cameras and alarms which can be used to ensure activity within the organisation does not cause any damage or financial loss. • Cash Handling Procedures

One of the most important procedures in any organisation is how cash is handled. Some of the more common procedures used when handling cash include: ○ ○ The handling of cash within a department should be centralised as much as possible. That is, you may have just two people who have the responsibility of dealing with cash. ○ ○ Any cash that is collected by the organisation needs to be held in a secure manner for the entire process. This means cash collected by the organisation from sales as well as any petty cash that the organisation deals with. You may use a till, cash box, or other secure method of holding the cash. Petty cash needs to be held in a locked drawer, preferably with the key’s location only known to one or two individuals. A safe should be used for holding cash for a longer period of time. ○ ○ Any income received by the organisation should be kept intact, do not make payments directly from this amount or take personal drawings from it without the income being processed first. ○ ○ Keys for the secure locations (tills, cash boxes, and safes) should be kept in a location known to only designated individuals. They should be responsible for holding the keys and knowing where they are at any time. It is good practice to ensure that keys are not left in a location overnight, or if they are – keep them in a secure location as well. ○ ○ Handling cash should be undertaken in a location out of sight of other staff and the general public. ○ ○ Cash collection should be undertaken by designated personnel, with a receipt for the amount collected given, and a copy retained, so that everything can be matched up as appropriate. ○ ○ Cash received needs to be reconciled on a regular basis, to ensure that cash held matches the amount that the organisation believes it has. Next, ensure

BSBFIA301A Maintain Financial Records Trainer Manual © Precision Group (Australia) Pty Ltd

Element 1: Maintain Daily Financial Records

that cash is banked on a regular basis. For most organisations, this should take place daily, however if the amounts are small, it may be done on a less regular basis. ○ ○ Reconciliations should always be countersigned. ○ ○ The reconciliation documents must always be copied and a record made of this information. There are also a number of standard forms that you will need to be familiar with to transact the business and maintain the financial records. These include: • Application Forms These are generally used by an individual or a business that is applying for a credit account with an organisation. Checking identity details against passports and/or drivers licences is a good idea to ensure that the identity being provided is true. Credit checks should also be made. • Claim Forms

Expense claim forms should be checked against any receipts provided as evidence of the claim occurring. The claim should also be checked against organisational policies for what expense claims are allowable.

• Petty Cash Vouchers Again, petty cash vouchers need to be accompanied by a receipt proving the petty cash claim. This receipt needs to be checked to ensure a true claim is being made. • Invoices An invoice is a request for payment by an organisation. Check who the invoice is from, and whether a transition with the organisation was actually made. There are cases where organisations have generated fake invoices that get paid, unchecked. Ensure that all invoices match a purchase order generated by the organisation. • Receipts Receipts for payment should be checked against invoices, to ensure that the receipt is for an invoice actually provided to the organisation. Receipts should also be compared to bank statements (ensuring that the account has actually been debited), this can be used as a check when reconciling the bank account. • Credit Notes Credit notes should be compared against statements from both the bank and the issuing organisation. If a refund has been offered, the refund should appear in the bank account. In other cases, you may find the amount you owe the organisation has been adjusted to take into account any credit provided.

BSBFIA301A Maintain Financial Records Trainer Manual © Precision Group (Australia) Pty Ltd

Element 1: Maintain Daily Financial Records

Identify and Rectify or Refer Discrepancies or Errors in Documentation or Transactions to Designated Persons in Accordance with Organisational Requirements Discrepancies are conflicts or variations between facts or figures. A practice of routinely verifying financial information or searching for discrepancies is critical to identifying fraud, even at its earliest stages. It will also help to solve problems in the budget, that may not be related to fraud. When analysing discrepancies in the budget it is not uncommon to find inadvertent misrepresentations and mistakes, which can result in poor financial decisions. But be aware that a common form of fraud is falsified financial statements. The forensic accounting approach is a common sense review of financial, business, and industry data. This investigation focuses on potential problem areas, not on checklists and specific procedures. The forensic review is an intuitive process focusing on patterns and expectations. It identifies red flags and requires the investigator to dig through detailed data to uncover the nature of the transactions. Common discrepancies are often associated with: • Bank charges • Dishonoured cheques • Errors in transposing between source documents and journals • Interest. Discrepancies can also occur on documentation such as: • Purchase credit notes • Purchase invoices • Sales credit notes • Sales invoices. If any problem is noted when checking any financial document, it is important that you notify the correct person. This individual will vary depending on the document being checked and the requirements of your organisation. Designated persons may include: • Bank staff • Line management • Organisation’s authorisations department • Statutory body • Supervisor.

BSBFIA301A Maintain Financial Records Trainer Manual © Precision Group (Australia) Pty Ltd

Element 1: Maintain Daily Financial Records

Accurately Credit and Debit Transactions and Promptly Enter into Journals in Accordance with Organisational Requirements • Double Entry Bookkeeping Double entry bookkeeping is an accounting method to balance an organisation’s books. For every journal entry credit (recorded under the organisation’s equity side), there is an equal journal entry debit (recorded under the organisation’s assets side). • Owners Equity

Owners’ Equity is the combined investments of the owner(s) and the accumulation of profit or losses for the organisation since it began.

Owner’s Equity (Net Worth) is expressed in the following accounting formula: Net Worth = Assets - Liabilities • Assets are any property owned by a person or organisation. Tangible assets include money, land, buildings, investments, inventory, cars, trucks, boats, or other valuables. Intangibles such as goodwill are also considered to be assets. All credit and debit entries are categorised using a Chart of Accounts. • Liability is a debt or obligation that a organisation must pay.

The purpose and goal of double-entry bookkeeping is to enter financial transaction records so that when financial statements and reports are run, the organisation’s assets are equal to its liabilities plus owners’ equity (net worth). This formula is expressed in accounting terms as:

Assets = Liabilities + Owners’ Equity (Net Worth)

In the double entry accounting method every journal entry transaction is recorded in the journal once, but affects two different accounts (using a Chart of Accounts):

1. The first entry shows a change on the assets side – the debit entry

2. The second entry shows a change on the equities side – the credit entry.

The double entry method can be very confusing at first but when entries are properly recorded, the account books will balance because the total of all credit entries will be equal to the total of debit entries. The double entry accounting method is used by most organisations throughout the world. However, some organisations that have strictly cash transactions may use the single entry bookkeeping method instead. The single bookkeeping method records entries once and is an accounting method much like the way people record cheques and deposits in a chequing account register.

BSBFIA301A Maintain Financial Records Trainer Manual © Precision Group (Australia) Pty Ltd

Element 1: Maintain Daily Financial Records

Some Other Definitions • Ledgers A ledger contains summarised financial information that is classified by assignment to a specific account number using a Chart of Accounts. It can be a physical book or also refer to software or spreadsheets where the financial information is recorded.

A General Ledger contains a summary of all the information recorded in subsidiary ledgers, which are ledgers that break down and show more information according to classifications.

Financial information for ledgers is taken from the organisation’s journal. • Chart of Accounts A Chart of Accounts is a list of numbered accounts containing ledger account names and numbers showing classifications and sub-classifications, which are affected by the financial transactions of an organisation. By assigning all transaction to a specific account, an organisation is able to use the double entry bookkeeping method to record debits and credits (assigning them to specific accounts) in a way that the books are always balanced. • Journals A journal details all the financial transactions of an organisation and which accounts these transactions affect. A journal entry is the record of a financial transaction recorded (entered) in a journal. A journal details all the financial transactions of an organisation and which accounts these transactions affect. All organisational transactions are initially recorded in a journal using the double entry or single entry method of bookkeeping. Typically, journal entries are entered in chronological order and debits are entered before credits. Journals may include: • Cash payments • Cash receipts • Purchases and purchase returns • Sales and sales returns. All organisational transactions are initially recorded in a journal using the double entry method or single entry method of bookkeeping.

Element 1: Maintain Daily Financial Records

• T-Accounts

A T-account is a visual aid used to show an account in a general ledger. When you first learn about debits and credits, you learn by recording them in T-accounts. T-accounts are used by accounting instructors to teach us how to do accounting transactions. T-accounts show which side of the ledger debits and credits go for a particular organisation transaction. In actuality, accounting transactions are recorded by making accounting journal entries. Just like everything else in accounting, there is a particular way that you make an accounting journal entry when it comes to recording debits and credits.

Debits are recorded on the first line, flush with the margin. Credits are recorded on the second line and are indented a couple of spaces. • Credit Credit is the opposite of debit. In this case, credit refers to a bookkeeping entry that is an increase in liabilities or net worth, or a decrease in assets on the organisation’s balance sheet. In double entry bookkeeping, a credit to one account is a debit to another. On a T-account ledger, credits are abbreviated Cr and are listed on the left-hand side of the ledger. • Debit

A debit is an accounting entry which causes a decrease in assets, OR an increase in liabilities or net worth on an organisation’s balance sheet. In double entry bookkeeping, a debit to one account is a credit to another. On a T-account ledger, debits (abbreviated Dr) are listed on the right-hand side. Debit is the opposite of credit in bookkeeping and accounting.

One of the most difficult things to get a handle on when setting up the books is when to use a debit and when to use a credit. Here are some simple rules. If you will follow these rules, it will make the accounting life a lot easier. ○ ○ You will always use both a debit and a credit for every journal entry. That is what the system of double entry bookkeeping is based on. You have two columns in the journal entry. Each will have an equal entry – one for a debit, one for a credit. ○ ○ Remember the format of the Accounting Equation where Assets = Liabilities + Owners Equity. The Asset side is the left side of the equation and the Liabilities + Owner’s Equity is the right side of the equation. When you need to make a journal entry, refer to the Chart of Accounts to see if the account you need to use falls on the left or right side of the accounting equation. If the account is on the Asset or left side, that is the Debit side. A debit will increase those accounts and a credit will decrease them. If the account is on the Liabilities and Owner’s Equity, or right side, that is the Credit side. A credit will increase those accounts and a debit will decrease them.

Element 1: Maintain Daily Financial Records

• Financial Statements These are the reports that show how income and expenses have affected the organisation as a whole. They provide a snapshot of the current financial standing of the organisation. There are many types of financial reports, but the three basic, essential financial statements are:

1. Balance Sheet Summarises the assets, liabilities, and net worth (owners / equity) of an organisation on a particular date.

2. Income Statement (Also called Profit and Loss Statement.) An accounting statement that shows the profit or loss for an organisation, by subtracting costs from its earnings, over a specific period of time, typically for a quarter or year.

3. Cash Flow Statement An accounting statement that forecasts cash receipts and disbursements for a specified period.

4. Statement of Retained Earnings The Statement of Retained Earnings is the second financial statement that should be prepared in the accounting cycle after the income statement. Retained earnings are the portion of net income not paid out to investors in the organisation as dividends. Retained earnings are reinvested in the organisation.

Journal Entries when Accounts have Normal Balances One easy way to remember when to debit and when to credit an account is to remember the normal balances of the five types of accounts on the Chart of Accounts. The normal balance is what the account would have if increases are more than decreases. Here is a list of those accounts and their normal balances. If you remember this list, it will save you a lot of time. • Asset accounts – debit • Liability accounts – credit • Owner’s equity – credit • Revenue accounts – credit • Expense accounts – debit As an example, if you are recording an entry to the asset account, you would debit the asset account and credit some other account.