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Basic Accounting II (BAII)

Level 2 Certificate in Accounting

AAT

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Terminology

A summary of the equivalent international version to the UK terms which are used within this assessment.

UK InternationalFixed Assets Non-current AssetsStock InventoryDebtor ReceivableCreditor Payable

It is also important for you to be able to use the terms “main ledger” and “general ledger” interchangeably.

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Ledger accounts

Title of account

Date Details Folio Amount £

Date Details Folio Amount £

It is often referred to as a ‘T’ account

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Ledger accounts

DRs represent: CRs represent:

Increase in asset Increase in liability

Decrease in liability Decrease in asset

Increase in expense Increase in income

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Ledger accounts

Remember the mnemonic DEAD CLIC for

increases

Debtors Creditors

Expenses Liabilities

Assets Income

Drawings Capital

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Debits and credits

Bank account

£ £

Van 500

Van account

£ £

Bank 500

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Balancing a ledger account

Step 1 Total both debit and credit sides of the ledger account and make a note of each sub-total

Step 2 Insert the higher of the two totals as the final total on both sides of the ledger account

Step 3 On the side with the smaller sub-total insert the figure needed to make this column add up to the final total. This should be referred to as “balance carried down” (“bal c/d”)

Step 4 On the opposite side of the ledger account, below the final total insert this same figure. This should be referred to as “balance brought down” (“bal b/d”)

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Balancing a ledger account

Bank

£ £ Capital 1,000 Purchases 200 Sales 300 Drawings 100 Sales 400 Rent 400 Capital 500 Stationery 300 Sales 800

Purchases 400

Bal c/d 1,600 _____ 3,000 _____

_____ 3,000 _____

Bal b/d 1,600

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The trial balance

•List of all the ledger balances in the main (general) ledger

•Debit balances and credit balances listed in difference columns

•Total debit balance must equal total credit balance

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The trial balance

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The trial balance

Assets Liabilities

Expenses Income

Drawings Capital

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Journal adjustments

•A written instruction by a bookkeeper to write a double entry into the general ledger accounts

•Generally for adjustments therefore a narrative usually accompanies the double entry as explanation for the purpose

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Journal adjustments

•E.g. £170 has been debited to insurance instead of motor tax

Journal:

Dr Motor tax

Cr Insurance

Being motor tax posted to insurance in error

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Journal adjustments

Other adjustments:

•Bad debts

•Contra entries

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Journal adjustments

Bad debts

•Arise when a debtor fails to pay and the debt is written off

DR Bad debt expense

CR Sales Ledger Control Account

Being the write off of a bad debt

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Journal adjustments

Contra entries

•A business is both a debtor and creditor of another business if it buys and sells with it.•Both parties have to agree to “net” balances off i.e. Reduce both the creditor and debtor balances

DR Purchases Ledger Control Account

CR Sales Ledger Control Account

Being the adjustment for a contra entry with ABC Ltd

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Contra entry - example

James has a customer, X Brothers

X Brothers also sells goods to James

X brothers owes £250 to James and James owes £100to X brothers

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Contra entry - solution

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Suspense accounts

• Used as a temporary holding account when

– Destination of a posting is uncertain

– The Trial Balance does not balance and an error has to be investigated

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The trial balance

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Errors identified by trial balance

Single entry - the debit entry may have been madecorrectly but the associated credit entry has beenoverlooked

Casting error - an account or the trial balance mayhave been added up incorrectly

Transposition error - for example, an amount of£7,532 may have been incorrectly written as £7,352

Extraction error - An account may be correct in theledger but has been copied out incorrectly

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Errors not identified by trial balance

Errors of original (prime) entry - the original figure isincorrectly entered in both parts of the double entry -the trial balance will still balance

Compensating errors - one error is compensatedexactly by another in the opposite direction

Errors of omission - an entry is left out altogether Errors of commission - the double entry is

completed but between the wrong accounts, forexample

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Journals

• Used to record unusual items such as error corrections or to clear a suspense account

£XXX

£XXXAccount to be debited

CrDr

Account to be credited

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Journal entry

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Sales ledger control account

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Purchases ledger control account

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Control Account Balances

• Reasons for differences– Casting errors– Posting errors– Bad debts– Contra entries

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Imprest system

business decides an amount of petty cash (the imprest) this amount of petty cash is withdrawn from the bank claims are paid a voucher is completed for each claim paid the vouchers are kept in the petty cash box petty cash plus vouchers equals the imprest at the end of the period, a cheque is drawn for the total

of the vouchers

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Petty cash voucher

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Petty cash book

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VAT

VAT is charged on the taxable supply of goods and services in the United Kingdom by a taxable person in the course of a business carriedon by them.

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VAT Control Account

OUTPUT VAT > INPUT VAT = LIABILITY OWED TO HMRC

INPUT VAT > OUTPUT VAT = REFUND DUE BACK FROM HMRC

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Calculating VAT

Net 100%

VAT 17.5%

Gross 117.5%

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Calculating VAT

Example

Goods have a selling price of £2,350 inclusive of VAT.What is the VAT on the goods and the net price ofthese goods?

Solution

£

Net price (£2,350 x (100/117.5) = 2,000VAT (£2,350 x (17.5/117.5) = 350

_____Gross price 2,350

_____

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Gross pay and deductions

Gross pay basic hours worked overtime hours worked bonus/commission holiday pay sick pay

Deductions income tax in the form of PAYE national insurance contributions (NIC) save as you earn give as you earn pension contributions

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Employee payslip

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Entering payroll in the ledger - 1

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Entering payroll in the ledger - 2

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Entering payroll in the ledger - 3

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Bank accounts

Current accounts

The current account is a business’s normal workingaccount. Cash and cheques received are paid into thisaccount and the business will make payments by writingcheques

Deposit accounts

Deposit accounts, or savings accounts, are held by manybusiness and personal customers

Loan accounts

If larger funds are required for example for the purchaseof plant and machinery in a business, then a separateloan should be taken out

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Cheques

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Cheque crossings

The parties involved in a cheque are: the drawer - the person writing the cheque the payee - the person the cheque is to be paid to the drawee - the bank upon whom the cheque is

drawn, ie the bank who has issued the cheque book

Account payee crossing

The account payee crossing means that the chequecan only be paid into the bank account of the personnamed on the cheque as the payee

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Standing orders and direct debits

Standing order

This is an instruction to a customer’s bank to makeregular payments (usually fixed amounts)

Direct debit

This is an instruction to a customer’s bank to allow athird party to debit (ie collect money from) thecustomer’s account at regular intervals

Direct debits are better than standing orders when the amount is uncertain; or the date of payment is uncertain

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BACS and CHAPS

BACS

BACS (Bankers Automated Clearing System) is a method of clearing payments in which transactions are recorded on magnetic tape or disks (rather than on paper). Transactions are then processed at the BACS computer centre

CHAPS

CHAPS (Clearing House Automated Payments System) is an electronic clearing system for large sums. Payments are credited to the payee on the same day as instructions are received

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Credit and debit cards

Credit cards

Credit cards are issued by the credit card companies toallow customers to make purchases at shops, hotels,websites, etc

Debit cards

A plastic card which looks very similar to a credit card butunlike a credit card no credit is given to the cardholder.

A debit card is a method of making payment direct from abank account without having to write out a cheque

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Bank reconciliation - 1

Items in cash book – not on bank statement

cheques received and paid into the bank whichhave not appeared on the bank statement(outstanding lodgements)

cheques paid by the business which have notappeared on the bank statement (unpresentedcheques)

errors in the cash book (eg transposition ofnumbers, addition errors)

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Bank reconciliation - 2

Items on the bank statement not in the cash book direct debit or standing orders that are in the bank

statement but are not yet in the cash book BACS or other receipts paid directly into the bank

account by a customer bank charges or interest that are unknown until

the bank statement has been received errors in the cash book

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Bank reconciliation - method

compare the cash book and bank statement andidentify any differences

enter in the cash book items that appear on the bankstatement but do not appear in the cash book

bring down the new cash book balance prepare the bank reconciliation statement

£

Balance as per bank statement XLess unpresented cheques (X)Add outstanding lodgements X

___Balance as per cash book X

___