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AAT level 2 Certificate in Accounting 4 Transaction processing Sekoyen Accounting Solutions Ltd

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Accounting for business transactions

What is accounting about? 1. Accounting is about recording the effects of business transactions, conditions and other events under the double entry system of bookkeeping. Notice that it is the

effects of the transactions, conditions and other events that are being recorded. A simple activity such as buying has an effect on the business: it results in goods being received by the entity and ownership being claimed. At the same time it results in the entity giving up cash or incurring a liability as would be the case if the seller offers credit to the customer.

Accounting as the language of business 2. Being the language of business accounting must represent the effects of business activities in terms that can be understood by users of accounting information. As a

language it requires a grammar, vocabulary and forms of communication to its audience. In this course you will learn about the grammar of accounting – rules about how to represent business transactions, conditions and other events in financial terms using the principles of accounting and the technique of bookkeeping by double entry.

3. In the course of gaining this knowledge and skills you will also learn the vocabulary of accounting. It is essential that you pay careful attention to this as effective communication in accounting, as in any language, requires accurate use of vocabulary. To underscore this point a glossary is given at the end of this chapter. You are strongly advised to learn it well. In later courses you will learn about the forms of communication at higher levels both internally and externally (e.g. through a full set of financials statements and notes to the accounts). In this course you will learn how the entity uses documents to communicate internally and externally, and how external parties communicate with the entity through basic forms such as bank statements and suppliers’ invoices and statements.

How to approach learning accounting and bookkeeping 4. Accounting students struggle at the later, more advanced stages of accountancy courses because the study of the earlier foundation stages are often approached

mechanically – learning by rote, what should be learnt by active application of principles in context; relying on mechanical recall instead of applying reasoning based on clear understanding of how the principles of accounting and bookkeeping apply to specific transactions in the business context. Below are examples of how to learn and how not to learn:

The mechanical approach is not focused on understanding

Why this rote learning approach hampers learning.

The active learning approach to understanding concepts and principles.



Remember that debit is on the left and credit is on the right

This approach is misguided because it relies on recall but does not help you to apply what you recall in situations that are unfamiliar to you. That is why students struggle when the situation in which they learn the concept is different from the situation in which they are required to apply it in an exam. Moreover, this approach assumes that T-accounts maintained under the manual

The way to understand a concept (an idea) or a principle (a guiding rule) is to first understand what it means in the context in which it applies. Never try to apply a concept or principle without first understanding what it means (literally) and what it implies (how it applies to all aspects of the context). If you fall into the temptation of seeking to apply first without understanding you will always be trying to hit and miss - you will never develop a coherent approach to learning anything. This weakness can hamper learning. You need to be patient to learn effectively. Shortcuts don’t lead to effective learning. Always reason it, don’t just memorise it.



system of bookkeeping are used in every system of accounting. This is not the case. In fact, in a computerised system debit and credit amounts can appear on the same column – there is no left or right column. Debits and credits are distinguished only by the sign – credits being negative amounts.

Understanding debits To understand debits you need to understand these things: i) debit is an accounting way of representing value; ii) the business exists to give value to the customer in exchange for value from the customer ultimately in the form of cash; iii) value in the context of exchange is the price agreed between the seller and the buyer; iv) to give value the business entity has to sacrifice value because resources are scarce – the value that is sacrificed is known as a cost; v) the difference between price and cost is known as profit. Now consider: When value is obtained e.g. the entity buys goods this fact is represented by a debit. DR PPE CR Cash When value is created the entries to represent this are DR Stock CR WIP (Work-in-progress) When value is consumed this fact is also represented by a debit. DR Depreciation expense CR Depreciation provision To record the amount allocated for the period So how can both value consumption and value creation be represented by the same “debit” term? How can this be meaningful? The answer is that “debit” can denote different outcomes (or value states) as a matter of accounting convenience: when an asset is created debit denotes an asset; when an asset is consumed debit denotes an “expense”. In the end all assets are consumed in the business unless their value is recovered through sale at which point their carrying value is an expense set against the proceeds of sale. So what is classified as assets can be regarded as future expenses to be charged against future income. So the convention of using “debit” to represent an asset and an expense is conceptually coherent; moreover, the use of one, rather than two, terms is



neat and tidy and actually quite smart. As the two outcomes (or value states) are different, they are reported differently. (Remember that ultimately accounting is about communicating useful information to users.) The asset is reported in the balance sheet (or statement of financial position); the expense is reported in the profit or loss (or statement of income). That is why it is important to see the big picture to understand the details and the way they work. There are six value states in accounting: Accrued (created, bought, revaluation gain) value (reported in the balance sheet) Acquired value (bought e.g. PPE, intangibles, goodwill, etc.: reported in the balance sheet) Deferred value (reported in the balance sheet e.g. R&D, prepayment) Created value (e.g. manufactured goods, constructed assets: reported in the balance sheet) Consumed value (reported in the profit or loss) Impaired value (reported in the profit or loss e.g. bad debts) When a business starts to trade its assets are equal to the amount of equity capital contributed by the owners. This is represented by the accounting equation: ASSETS = EQUITY A business is separate from its owners. The money (initial capital) contributed (invested) to get the business started belongs to the owners. The concept of equity reflects that. Hence the above equation holds in algebra as well as in economic substance. If the owners had borrowed any part of the money initially invested in the business then that borrowing is a long-term liability and would be reflected in the accounting equation thus:



ASSETS – LIABILITY = EQUITY The deduction of the liability means that the lenders have a priority claim on the entity’s assets. In other words the lenders claim must be satisfied before the owners claim can be met. The above equation can be represented as a journal DR Asset CR Liability CR Equity

Opening trial balance

DR CR

ASSET

LIABILITY

EQUITY

Below are examples of the statements (the big picture):

IAS1 Presentation of financial statements – get an overview of how accounting organises, presents and communicates huge amounts of information in a simple and clear way, using its own unique formats to reach many users.

Tesco plc What business is about and how business succeeds: listen, watch, interact and learn. Ask: how does accounting contribute to business success? Walk through the entire report to get an idea of its contents and purposes. What caught your eye?

Commercial awareness

Commercial awareness in the corporate sector get familiar with what commerce is all about: what happens in business, how it happens, who makes it happen, why does it happen, what are the financial effects on customers, owners and other stakeholders? That is what accounting aims to interpret and communicate.

https://www.youtube.com/watch?v=DlfQWi9T264

http://www.tescoplc.com/index.asp?pageid=548#ref_ar2015

http://www.sekoyen.com/CA%20in%20the%20corporate_sector.pdf



Understanding credits If debits represent value, credits represent claims on value. How does that work?

Credit element Explain the claim The practical effect of the claim

Equity Owners’ residual claim on value Shares can be bought back by the entity exchanging shares for cash. This is similar to settling a claim by the shareholder on the cash resources of the entity.

Liability Creditors claim This is the most obvious claim on the assets of the entity. It is settled routinely as in the case of current liabilities.

Provision for liability e.g. taxation

Obligation to be settled This is the claim that the entity has to meet once it is confirmed. It involves transfer of economic resources from the entity to the claimant e.g. tax authorities.

Provision for loss of value e.g. bad debts and provision for depreciation of assets.

Asset value restricted; restriction transmitted to owners via restriction of profits or earnings available for distribution.

Restricts equity of owners. Thus is a business combination the fair value (or price) of the net assets would be restricted as a result of the provision.

Revaluation reserve The claim that owners make on the value accrued on assets

The reserve can be used to buy back shares from owners.

Income The claim that owners make on the value created.

The effect of this claim can be seen in the distribution of dividends at the end of the year based on profits, of which income is the most important component.

Profits Derivative of income Provides dividends; provides a basis for measuring company value - the income model under IFRS 13 Fair Value measurement. This price can be the claim of the owners on its business - the basis of exchanging value in the market.

Earnings Derivative of income Provides dividends; provides a measure of share price. The basis of exchanging value in the market place.



Another way of working out which side the debit or credit should go – except for Bank Account, which has its own rules - is to remember the following table:

Business transactions are too varied and complex to be understood, interpreted and recorded on the basis of simplistic mental models created from incomplete and fragmentary knowledge. As you can see this guide does not explain how you should recognize an expense, why purchases are debited, why income and sales are credited, nor does it explain the differences and similarities between them.



Debit Credit

Purchases Expenses

Sales Income

An easy way to remember these words are by remembering the first letters of these phrases: Dead Parrots Exploding (for the debit side) Cause Serious Injuries (for the credit side)

5. What you should practise right at the outset is clear understanding of the concepts and principles of accounting and to be able to reason about any situation to bring about an accounting solution – a resolution of the issues raised by the situation.

6. You should recognise that accounting is not a mechanised routine. It is a problem solving exercise. Learn the steps of reasoning and proceed methodically towards a solution. Test the soundness of the solution using simple criteria of logic, common sense and business sense.

7. To ensure that you keep learning on track you are encouraged to use the Progress checker to self-assess your progress. Patiently work through the levels to gauge what progress has been made and to identify what progress still has to be made. Then work through the notes and exercises until the right level is reached to assure a pass and satisfactory performance at work.

The value of accounting 8. Because records are maintained the entity can inform itself and its stakeholders about its profits or losses, what it owes and what it is owed, how much capital is used in

the business, how much cash it has and so on. 9. This information helps the business to run smoothly, or to identify business problems that it needs to solve. 10. There are two types of information: business information is data that is input into the accounting system; accounting information is data that the accounting system

allows the business to provide as a result of processing business information. Financial information is often used to mean either of the two; also, business information and accounting information are used interchangeably. As a student accountant you are encouraged to use these terms precisely, as defined, because in any discipline it is essential to clarify terms so that people know what you are talking about.



The components and scope of the accounting system 11. The components of the accounting system: the chart of accounts (the skeleton that organises the entries so that meaningful information can be obtained from it);

documents evidencing transactions and settlements (e.g. invoices, credit notes, debit notes, remittance advices, statements); ledgers (Sales Ledger, Purchase Ledger, Contract, Cost, General Ledger), cash book, Journal.

12. Computerised modes: single ledger and modular ledger systems 13. The stages in processing business transactions:

i) Accounting stage (decide the accounting requirements: when to recognise, materiality, classify subjectively – based on the nature of the item (e.g. is it revenue?), unit of account – (which code?) and how to present – determines the location in the chart of accounts which in an efficient system is designed to facilitate aggregation for presentation). Thus, to account for business transactions means to determine how to record the transaction based on the agreed conventions. These conventions (the agreed way of showing the effects of business activity - custom and practice) ensure consistency in recording and once recorded the data can be interpreted correctly by users familiar with the conventions.

ii) Bookkeeping stage: recording entries in the accounting records based on the principles of double entry.

14. Products of the systems: Trial Balance, Bank reconciliations, aged debtors, standard reports (in-built: Trial Balance, Profit or Loss, Balance Sheet, aged debtors, etc.) bespoke reports (user defined: Statement of Comprehensive Income, Statement of Financial Position, Statement of changes in Equity etc.)

15. The scope of accounting is all the entity’s business transactions, conditions and other events – the business entity concept. The business is a separate entity – separate from its owners.

i) A business transaction is an economic (it has resource implications) event (occurs on a certain date) involving an exchange (between buyer and seller, lessor and

lessee, lender and borrower; it requires give and take, provide and receive) of value (a price is agreed signifying the resource each party is willing to give for the exchange to take place) and because of that, it gives rise to accounting entries. The broadest categories of business transactions are: operating, investing and financing. The operating transactions are the ordinary activities of the business routinely carried out and for which the entity earns revenue and incurs operating costs. Investing activities are undertaken to increase the entity’s operating capacity e.g. acquire intangible assets, PPE and increase its investment assets e.g. acquire investment property. Financing activities procure, provide and allocate financial resources to the entity and its operating activities. These broadly break down into equity and debt. Equity is the finance provided by the owners; debt is the finance provided by the lenders. Financial resources can be short-term and long-term. Short-term finance is required to pay for baseline operations and to support expansion; long-term finance is required to pay for long-term expansion of the business.



ii) A condition is a state that indicates the quality of an asset e.g. impairment, obsolescence, degree of credit risk. Such conditions are relevant business information hence they give rise to accounting entries. Because if the impairment is not adjusted for, the asset would be incorrectly stated, resulting in the wrong view being presented.

iii) Other events affect a business entity but do not involve an exchange of value with it; hence they are not transactions but nevertheless, they give rise to accounting entries. Examples are: loss or damage of an asset through flood, crime or fire (force majeure). This may result in an insurance claim which when confirmed will be reflected as an expected receipt to compensate for the loss. Note that the loss should be recognised immediately after detection; it is necessary to wait until compensation under an insurance policy is confirmed before the loss is recognised. The loss is a separate event; that it triggers an insurance claim is not a reason to delay its recognition. Even though the two transactions are linked, netting-off insurance claims from the losses is not allowed: they must be shown separately under the convention of no netting-off except as permitted.

What are transaction cycles? 16. The transaction cycle: the stages of a transaction from its initial existence to its completion. For example, the purchases cycle consists of: raising a requisition, ordering,

receiving the goods, approving the invoice for entry into the accounting systems, presenting the invoice for settlement, settling the invoice and posting the payment to the ledger to clear the account.

17. Control objectives - authorisation, custody and recording. The accounting process entails operating controls over inputs, processes and outputs of the accounting system. For further details and explanations refer below to the procedures for processing ledger transactions and extracting a trial balance.

18. Accounting objectives – should be achieved at the accounting stage. All relevant questions must be asked and answered before proceeding to the next stage. 19. Quality objectives – should be achieved at the bookkeeping stage. The accounting record must provide sufficient information to enable users to understand the

transaction without having to look at the supporting documents.

TRANSFORMATIONS DURING THE LIFECYCLE OF A TRANSACTION

Original state Transformed state How the effect is represented? Reasons for the way that the effect is represented.

Stock Sold DR Cash/Accounts Receivable

CR Sales

Transformation is complete.

Used in manufacture DR Wonk-in-Progress (WIP)

CR Stock

Carried forward until manufacture is complete; cost of stocks is part

of the value of the finished goods recognised.

Used in construction DR Construction WIP

CR Stock

Carried forward until the construction work is completed. Work

certified based on stage of completion allows revenue to be

recognised.

Consumed DR Stationery expense

CR Stock

Benefit exhausted; therefore charge against income for the period that

benefits from consumption.

Debt Paid DR Cash and Bank The debt is fully discharged.



CR Accounts Receivable

Factored (the debt is

transferred to a factor in

exchange for a discounted

lump sum which is lower

than the total amount

transferred to the entity)

DR Cash


The debt is exchanged for immediate cash at a discount to its face

value. The asset (accounts receivable) is de-recognised as the risks

and rewards of its ownerships have now been transferred to the debt

factor that now bears the risk of loss and rewards of collecting the

debts.

DR Profit or loss


Part of the debt is wasted as the expected cash may never be received

from the debtor - certainly not from the factor. This reflects the risk of

trading on credit terms. This can be seen as credit risk but normally

when we talk about credit risk we mean the entity’s own credit risk –

the risk of it defaulting on what it owes its creditors.

Doubtful DR Bad debt expense

CR Bad debt provision

To show that the asset is wasted to the extent that it is doubtful

whether the cash can be received. The asset is said to be impaired.

Bad DR Expense (Profit or Loss)


To show that the asset is wasted as no further benefits can be

expected from it.

PPE Depreciated DR Depreciation expense

CR Depreciation provision

To set a fair portion of the cost of the asset as a charge against income

generated in its use

Revalued DR PPE

CR Revaluation reserve

To account for accrued value

Disposed of DR Cash

CR PPE

To account for the cash proceeds

DR Profit or Loss

CR PPE

To account for the loss on disposal

DR PPE

CR Profit or loss

To account for the gain on disposal

Liability

Discharged by waiver

DR Liability

CR Profit or loss

No resources are transferred by the entity; the resources represented

by the liability are effectively an addition to the entity’s resources.

Thus the credit to the balance sheet initially set up when the liability

was incurred is replaced by a credit to profit or loss.

For example, if an asset was initially acquired on credit and the

creditor decides to waive the asset this is like giving the entity a grant.

The effect is to increase the resources of the entity by releasing the

claim on the asset. This condition is immediately recognised as an

increase in a resource by crediting profit or loss – akin to the entity

receiving a grant.

The release of the claim on the asset increases the owners’ equity by

the same amount via the credit to profit or loss. In other words, the



creditors claim is replaced by the owners claim on the asset

(assuming an asset was initially acquired when the obligation was

incurred). This effect is the same if an expense was recognised

initially instead of an asset. The reasoning in that case would be that

the credit to profit or loss triggered by the waiver of the liability

offsets the initial charge that reduced equity. Thus offsetting the

charge increases equity.

Settled DR Liability

CR Cash

Discharged

The business entity concept

20. Because the business is separated from its owners it is necessary to account separately for transactions between the business and its owners (e.g. drawings) and between owners of the business (e.g. equity transactions accounted for in the statement of changes in equity)

Understanding double-entry bookkeeping

21. Recording and communicating the effects of transactions, conditions and other events. For example, buying Property Plant and Equipment on credit has two effects on

the entity: i) record a noncurrent asset PPE; ii) incur an obligation which represents a commitment to transfer resources embodying economic benefits to settle the obligation at some future date. This obligation may require an increase in cash and cash equivalent (the amount of liquidity in the entity).

22. The transaction itself is an exchange that involves a buyer and a seller. The buyer gives up, or agrees to give up cash, in order to acquire the asset. This is known as an event that gives rise to accounting entries (transactions). Thus buying the asset involves giving up (cash) in order to receive (Property Plant and Equipment) - each economic event must have a provider and recipient agent. This is represented in accounting terms by the bookkeeping technique of double entry. The notation debit is used to represent the entity receiving (or adding to) an asset; the notation credit is used to represent the entity giving up an asset (cash) in order to receive an asset in return. Where the buyer and the seller agree that the cash may be delayed for a specified period the seller is said to have given the buyer credit. Thus the buyer will record an obligation (credit) to pay for the asset at some time in the future. DR is used as the symbol for debit; and CR is used as the symbol for credit.

23. Generalising from this: debit represents increase in asset; credit represents decrease in asset (in this case cash). Examples of debits representing increases in assets: acquired stocks, investments, goodwill, intangible assets. Other examples of credits resulting in decreases in assets: cash used to pay for expenses; depreciation of assets representing allocation of costs; impairment of assets such as goodwill; bad debts written off.



24. Credit can also represent increase in income as in the sale of goods. Other examples of credit representing increase in income are: recording grant, interest, dividends, royalties, etc. that are due to the entity. Debits can also represent decrease in income. Examples are: trade discounts, defective goods, correction of errors in recording income.

Examples of a business transaction involving a student - to illustrate the above principles 25. When you paid for this course you gave up cash and in exchange you obtained access to the online course for a price you agree is acceptable for the value you expect to

obtain from it. This is a business transaction which is accounted for by the course provider as follows: DR Cash (representing an increase in asset) CR Sales (representing revenue earned as consideration for providing the course to you) This is known as a cash sale

Cash Account

Debit £ Credit £ Date Description Reference Amount Date Description Reference Amount

01/07/2015 AAT Level 2 online course

100010 1,000

Table 1 recording cash receipt in Cash Book

Sales



100010 1,000

Table 2 recording cash sale in the Sales account



If you agreed with the college to pay for the course in instalments the entries would have been DR Account Receivable (Student account) CR Sale (representing revenue earned as consideration for providing the course to you)

Accounts Receivable – Student A



100010 1,000

Table 3 recording amount owed due to credit sale to student

The whole of the sale would have been recognised at that point. Subsequently, as you pay the instalments, the entity would account for the receipt as follows: DR Cash (instalment received) CR Account Receivable (Student account reduced by the amount of the instalment) If the college charges interest on the outstanding balance the accounting would have been DR Cash (interest received) CR Interest (interest on outstanding balance)

Integrating books of prime entry and describing coding system functions 26. To understand the nature and purpose of books of original entry it is necessary to understand the accounting system of recording as a whole. To understand the

accounting system it is necessary to understand the transaction cycle. Below is an illustration of a transaction cycle



Figure 1 The Purchases cycle

27. Books of original entry are part of the accounting records of the enterprise where, as the name suggests, transactions are initially recorded, batched and the totals entered

periodically (e.g. daily where volumes are large) into the subsidiary ledgers. The purpose of the books of original entry (also known as books of prime entry or day

books or journals) is to reduce the number of entries in the subsidiary ledgers.

Table 4 Subsidiary ledger entries

Book of prime Entry Supporting documents and their uses

Subsidiary ledger (Individual transactions)

General ledger (Batch control totals)

Note that in a computerised system details posted to the individual accounts of the subsidiary ledger are summarised and posted to the general ledger so that the total amount posted to both ledgers is the same, and represents only one and the same side of

the double entry. As shown below, the other side of the double entry is posted to other accounts in the general ledger.

Sales day book Credit sales on order. The sales order is used by the sales department to request goods to be released from stores as ordered by the customer. Once the order is fulfilled the sales order is used to raise sales invoices.

DR Individual accounts receivable in Sales ledger

DR Debtors Control account in General ledger CR Sales

Goods Purchased

Goods Received/GRN

produced

Invoice entered in Purchases day

book

Accounts payable and general

ledger posted

Supplier paid

(End of the cycle)

Procurement

cycle (subsystem)

Purchase requisition starts the

procurement process



Credit notes issued by the seller to the buyer to correct errors e.g. over invoicing and reduce the amount owed to the seller.

CR Individual accounts receivable in Sales ledger

DR Sales CR Debtors Control account in General ledger

Purchases day book Credit purchases on Purchase order CR Individual accounts in Accounts payable (suppliers or Bought ledger)

DR Asset e.g. stocks, PPE or expenses CR Creditors control account in General Ledger

Goods received note (GRN): used to check that goods have been received in good condition as ordered (Purchase order) so that the related obligation can be accepted for settlement on agreed terms.

Debit notes issued by the buyer to the seller to correct for over invoicing. This is the opposite of the credit note that the seller issues to correct the same error and they should therefore match. Why are separate documents raised? Because the buyer and the seller are separate entities. They each need to maintain their individual audit trails.

DR Individual accounts in Accounts payable

DR Creditors control account in General Ledger CR Asset or Expenses

Sales returns day book

Return of goods sold on credit. The effect of this event is to reduce the debt owed by the customer by the amount of the goods returned.

CR Individual accounts receivable in Sales ledger DR Sales CR Debtors Control account in General ledger

Purchases returns day book

Return of goods sold on credit. The effect of this event is to reduce the debt owed to the seller by the amount of the goods returned.

DR Individual accounts in Accounts payable (suppliers or Bought ledger)

DR Creditors control CR Purchases of assets or Expenses

Cash book Cash receipts – remittance advices sent

CR Individual accounts receivable in Sales ledger DR Cash in the General ledger CR Debtors Control account in General ledger

Receipts for cash sales are entered direct to ledger CR Cash sales

Cash payments – remittance advices received

DR Individual accounts in Accounts payable (suppliers or Bought ledger)

DR Individual accounts in Accounts payable (suppliers or Bought ledger) CR Creditors control



Petty cash book Petty cash voucher CR expenses DR individual expenses

Petty cash imprest reimbursement DR Petty cash CR Petty cash account

Stock Stock inwards: Good received notes (GRN)

DR Individual stock accounts DR Stock account CR Suppliers (Same as above – Purchase day book)

Stock outwards: Stock requisition/sales order

CR Individual Stock accounts DR Cost of sales or DR Contract cost ledger (see below) or DR Expenses (e.g. stationery) CR Stocks

Contract Contract requisitions for materials stocks, labour and other resources.

DR Individual contract cost account in the ledger DR Contract cost control CR Materials Stock CR Labour CR Expenses

Journal Journal vouchers Used to correct errors not involving subsidiary ledgers and cash book. Used for monthend and yearend adjustments such as prepayments, accruals, bad debt provision, depreciation, etc. Used to record payroll transactions from the payroll to the general ledger

DR Individual accounts CR Individual accounts

28. The subsidiary ledgers consist of (and each has a day book associated with it)

i) Sales ledger (Customers ledger)

ii) Purchases ledger (Suppliers ledger)

iii) Contract, process or Job cost ledger

iv) Payroll.

v) Stock ledger



Figure 2 Integrated modular system showing the day books and ledgers

29. The purpose of the subsidiary ledgers is to maintain individual accounts and provide details of business transactions considered too much to be held in the General Ledger. Thus the subsidiary ledgers receive details from the day books (or books of original or prime entry). This is known as posting. At the same time summarised details of the day books are transferred to the general ledger after validating checks, and held in control accounts. The control accounts must of course agree or reconcile to the subsidiary ledgers. This process is part of the internal check that maintains accuracy and completeness in the accounting system. The chart of accounts

30. The coding system is the backbone of the accounting system. The principles of the coding system are illustrated below. The account code is the unit of account – the lowest level at which the organisation chooses to monitor the transaction. The analysis code allows the transaction to be further analysed so that management can obtain richer information for their purposes.

Account code Type Name Analysis codes (Allows analysis by region to provide further information for management)

1000 H INCOME A1 = UK A2 = Europe A2 = Africa A3 = Asia A4 = Latin America

1100 H Online sales

Dr Cr Debit sales on credit

Dr Cr

Dr Cr Credit customers accounts

Dr Cr Credit purchase invoices

Purchases are credited

Debit notes are debited

Debtors control

Sales

Cash & bank

Creditors control

General Ledger Books of original entry

Record of trading transactions All accounting records

Subsidiary ledgers

Record of customers and suppliers

Purchases Credit individual suppliers accounts

Sales

Debit individual customer accounts

Sales invoices/credit notes

Purchasesinvoices/debit notes

Cash bookIndividual receipts



1110 P Sale of text books

1120 P Sale of Revision & practice kits

1130 P Sale of Exam guidance

1140 P Sale of Terms and techniques

1180 P Sale discounts allowed

1190 P Sales Returns

1200 H Shop sales

1210 P Sale of text books

1220 P Sale of Revision & practice kits

1230 P Sale of Exam guidance

1240 P Sale of Terms and techniques

2000 H EXPENSES

2100 P Online cost of sales

2110 P Purchases of textbooks

2120 P Purchases of Revision and practice kits

2130 P Purchases of terms and conditions

2140 P Postage & packing

3000 H NONCURRENT ASSETS

3100 B Intangible assets

3200 B Property plant and Equipment

3300 B Investment

4000 H CURRENT ASSETS

4100 B Stocks

4200 B Debtors

4300 B Cash

5000 H CURRENT LIABILITIES

5100 B Trade creditors

5200 B Accruals and Provisions

5300 B Current taxation

6000 H LONG TERM LIABILITIES

9000 H CAPITAL AND RESERVES

9100 B Share capital

9200 B Share Premium

9300 B Capital Redemption reserve



9400 B Revaluation Reserve

9500 B Retained Earnings (cumulative profit or loss amounts)

H = Heading, B = Balance sheet, P = Profit or Loss

31. The structure, organisation and sequencing provide an orderly arrangement of records that facilitates extraction of financial information about the profit or loss for the period. In addition, the entity can also obtain information to enable it to fulfil its contractual, statutory and fiduciary responsibilities to shareholders.

Preparing and processing customer and supplier invoices and credit notes Customer invoices 32. The objective of preparing customer invoices is to ensure that all relevant details are correct so that the invoice is raised for the correct amount and sent to the correct

customer in accordance with the terms of the sale. Details include correct account code, quantity, price, VAT, date, name, totals, etc. Usually a box stamp is put on the face of the invoice requiring all checks to be evidenced by signature or initial and dated.

Supplier invoices 33. The above checks are also carried out on suppliers’ invoices. In addition checks are carried out to ensure that goods received are as ordered, and Goods Received Notes

raised to evidence receipt are correctly signed and dated by authorised responsible officers of the entity that ordered the goods. The correct budget line has been allocated the cost by the officer responsible for budget. These checks ensure that only valid invoices are processed for entry into the system; validity implies that the entity accepts the liability.

Totalling and balancing a 3-column analysed cash book 34. The three-column cash book allows discounts allowed to be recorded in a separate column: there is a column for cash and bank.

Date Detail Discount allowed

Cash Bank Date Detail Discount received

Cash Bank

€ € € € € €

1/03/2015 Bal b/d 150 4,500

15/03/2015 Online student 10 290 02/03/2015 Study book Ltd 5 105

7/03/2015 Rent 1,000

10/03/2015 Insurance 250



31/03/2015 5 45 3,540

31/03/2015 10 150 4,790 150 4,790

01/04/2015 Bal b/d 45 3,540

35. The discount allowed and discount received are separately accounted for

Discount allowed

DEBIT CREDIT

Date Detail Amount Date Detail Amount

€ €

15/03/2015 Online student 10 31/03/2015 Profit or loss 10

Discount received

DEBIT CREDIT


€ €

31/03/2015 Profit or loss 5 02/03/2015 Study book Ltd 5

Account Receivable - Online Student

DEBIT CREDIT


€ €

15/03/2015 Online course 300 15/03/2015 Bank 290

15/03/2015 Discount allowed 10

300 300



Account Payable – Study Book Ltd

DEBIT CREDIT


€ €

02/03/2015 Cash 105 02/03/2015 Study texts 110

Discount received 5

110 110

36. Totalling, balancing and reconciling petty cash records within an analysed petty cash book 37. A fixed amount known as a float is maintained and reimbursed for the expenses paid such that the total amount is always the same.

Petty Cash book – Maintained on the imprest system

Receipts £ Payments £ Analysis Date Description Reference Amount Date Description Reference Amount Newspapers Travel Entertaining

01/07/2015 Initial float 100010 100.00 02/7/2015 Oyster 001 10.50 10.50

Taxi 002 15.00 15.00

Fruit, Sandwiches, drinks

003 50.00 50.00

31/07/2015 Bal c/d 24.50

100.00 100.00 25.50 50.00

1/8/2015 Bal b/d 24.50

3/8/2015 Reimbursed 75.50



Processing ledger transactions and extracting a trial balance 38. Ledger transactions are the result of the posting of individual transactions in sales day books that are then posted to the general ledger via the subsidiary ledger.

Internal controls are operated in both manual and computerised systems to ensure that the ledger is accurate and complete. The following controls are typically operated to prevent, detect and correct errors:

Internal check Objective Proof that the checks have been carried out

Serial continuity check on all transaction documents including journal vouchers

All documents have been accounted for and by implication all related transactions have been recorded in the day books.

Independent supervisory checks evidenced on records e.g. box stamp with initials or signature of the checker. There can be a separate register to be signed to prove that the controls have been carried out. Any issues would be noted. This may be named the Monthly control register.

Arithmetical control checks To check that all column additions in day books are correct; that all batch totals are correctly determined. These are known as control totals because they can be used to detect errors of omission, transposition and duplication. The individual documents are independently added up, checked with the control totals and signed for, providing an internal check.

The monthly control register may require all the control totals to be entered for all day book, ledger and control accounts. At a glance the control totals can be seen to be the same or discrepant between sources. This can trigger enquiries to bring about a resolution.

Control totals Control totals are used in internal check to ensure that subsidiary ledgers are completely and accurately posted to the subsidiary and general ledgers.

Same as above.

Statements reconciliations with ledger balances prior to settlement of outstanding balances.

Reconciliations with individual supplier account balances provide further check on the accuracy of the ledger accounts. Discrepancies are raised as queries and resolved prior to

The reconciliations and the independent verification required by the control would be evidenced, especially where they are required to support payment requests.



settling outstanding balances.

Ledger reconciliations with control accounts. The subsidiary ledgers are reconciled with the control accounts in the general ledger. Discrepancies are typically caused by i) journal entries in the general ledger that are not part of the subsidiary ledger which only accepts transaction documents processed through the day books.; ii) cash sales mistakenly processed into the control account. As these are not part of the subsidiary ledger they are reconciling items, explaining the difference between the two ledgers.

The monthly control register (or memorandum) would provide evidence of this. Alternatively, the appropriate checks would be evidenced on the relevant documentation, signed and dated.

Aged debtors checked for recoverability and indicators of internal control problems.

An aged debtors list that classifies ledger transactions according to age e.g. current, more than 30 days, more than 60 days, etc. is used to help in controlling credit. This may highlight any errors as old and slow moving debts come under closer scrutiny by the management.

Evidenced on the aged debtors printout – signed and dated by a person independent of the sales ledger operations. Alternatively, evidence of control checks may be logged in the Monthly control register.

Bank reconciliation The bank reconciliation explains why the balance in the ledger is different from the balance in the bank as reported on the bank statement at the end of the reporting period e.g. 31 March 2015. It is good practice to carry out bank reconciliation prior to closing the books for a period to extract a trial balance. Typically the discrepancies between the entity’s ledger balance and the statement balance are due to: i) Credits e.g. interest on the bank statement not yet

recorded on the general ledger. ii) Debits e.g. charges on the bank statement not yet

recorded on the general ledger. iii) Items on the ledger not yet on the statement such as

cheques lodged but not credited. iv) All items on the bank statement but not yet recorded

on the ledger must be processed, validated and recorded to ensure the ledger is as up to date as possible.

v) Items on the ledger but not yet on the statement

Evidenced on the bank reconciliation printout – signed and dated by a person independent of the banking operations and cash book maintenance. Alternatively, evidence of control checks may be logged in the Monthly control register.



must be rigorously checked for validity particularly if they are old and have exceeded an acceptable period.

vi) Errors e.g. transposition errors must be corrected.

Depreciation Eligible capital expenditure must be allocated in accordance with the accounting policy to comply with the matching principle. Appropriate journal entries must be raised to record the allocation DR Depreciation charge CR Provision of depreciation

Evidenced on the depreciation calculations printout – signed and dated by a person independent of the fixed assets register. Alternatively, evidence of control checks may be logged in the Monthly control register.

Revaluation Where the asset has been revalued to reflect substantial market price changes the fact must be recorded DR Asset CR Revaluation surplus

Evidence of control checks may be logged in the Monthly control register.

Accruals Where expenses have been accrued but not invoiced by the supplier the entity must reflect these prior to extracting a trial balance. DR Expense CR Accruals

Evidence of control checks may be logged in the Monthly control register. There must be supporting calculations and evidence independently checked.

Prepayment Where certain expenses are deemed to provide benefits in subsequent periods they must be deferred into that period and matched against the income generated while the benefit was consumed in that period. DR Prepayment CR Expenses


Bad and doubtful debt provision An assessment of the quality of debts must be carried out at the end of the reporting period to determine the recoverability of the carrying amount of debts at that point. Significant verifiable uncertainty over their recoverability must be quantified and recognised as a charge.




DR Bad and doubtful debts CR Provision for bad and doubtful debts

Provisions Where an obligation has been incurred by legal and non-legal) means (e.g. constructive obligations the fact must be quantified and recognised. DR Expenses CR Provisions


39. In a manual system a journal book would be used to post the entries in the day book to the subsidiary ledger and general ledger. The manual provides the audit trail to show how the entries were posted and maintains journal numbers and references. For example, for a particular batch of credit sales the journal will show the date, batch number, control totals and accounts into which the amounts are posted. The journal number and posting date are written in the relevant page on the sales day book. DR Individual accounts (Accounts Receivable) CR Debtors control

40. The journal is used to post all the monthend adjustments discussed above to bring the ledger fully up to date.

41. In a computerised accounting system there are two types (or configurations). The modular and the single ledger systems. Most systems such as Sage are modular - this means that the ledgers are separated into modules for Accounts Receivable, Accounts Payable, Inventory, Cash book, etc. each with its sales day book. Each of the modules is linked to the general ledger by means of a control account as previously described. In the single ledger system there is no separation into modules. Why does this matter?

42. The structure of the system matters because the controls used to operate them are differently designed and operated. In a modular system controls exist to ensure that entries in the sales day book are agreed before they are posted to the sales ledger; a further validation check is required before entries are made into the general ledger. Because the single ledger system is one open ledger unit there are no additional checks as required for the modular system. Items entered in the journal are posted straight through to the relevant ledger account.

43. The trial balance is then extracted: in a computerised system the computer will ensure that the trial balance balances because at the entry point a journal will not post unless it balances. In a manual system this in-built control does not exist and it is possible for an unbalanced journal to be posted resulting in an unbalanced trial balance unless compensating errors occur to offset the error.



44. If a trial balance does not balance a suspense account should be opened and the difference between the total debits and total credits should be posted to it pending

investigation to identify and correct the differences.

45. If a trial balance balances this in of itself is not proof that the accounting records are complete and accurate. It merely proves that the total debits have been matched by the total credits: it is possible that transactions may have been omitted entirely in which case the balancing of the debits with the credits does not provide any clue as to what may be missing. Rigorous internal check and effective operation of input, process and output controls is necessary to make sure all transactions, whether documented or not, are recorded.



GLOSSARY

Accounting policy A statement explaining how and why certain items such as depreciation are dealt with in the accounts. The accounting policy must fit the entity’s business circumstances and comply with generally accepted accounting practice. Accounts payable Amounts owed by the entity to suppliers from whom goods and services have been bought on credit. Accounts receivable Amounts owed to the entity by customers to whom goods and services have been sold on credit. Accrual An amount of uninvoiced income or cost of the period: an accrued expense is an expense that has been incurred but not invoiced. The expense may have been incurred by taking possession of goods or receiving services. Accrued income would have been earned by providing a service or goods to the customer. Adjustment A change in recorded amounts (e.g. depreciation adjustment) to reflect changes in circumstances or to correct errors, to defer recognition (e.g. prepayment) or to record a transaction such as an accrual. Asset An asset is a resource that provides benefit to the entity on an ongoing basis. Examples of assets: buildings, cash, stock, accounts receivable and investments. Balance sheet A statement of the assets, liabilities and equity of the entity. The balance sheet provides information about the entity’s financial position which enables users to understand how much money it has and whether it is able to pay its debts as they fall due. Moreover, the balance sheet allows users to understand the nature and composition of the entity’s assets, liabilities and equity. Business A business is an integrated set of assets and activities managed and applied to earn a return in the form of dividends, cost savings and other economic benefits for its shareholders, partners and other owners. Business circumstances Business circumstances refer to the context (e.g. competition pressure), strategies (e.g. expansion, cost cutting, innovation) and business model (e.g. franchising, online and shop channels) by which the entity’s management aim to provide value to customers and manage the assets of the business in the face of competition and threats to the business. Bad and doubtful debts



Bad debts are debts owed by customers that are unable or unwilling to pay. These debts are not recoverable and must be removed from accounts receivable once it is clear that they are irrecoverable. When bad debts are removed they are treated as an expense and charged to the profit or loss for the period in which they are determined as bad. A doubtful debt is uncertain as to whether it can be recovered. Therefore a provision is made to reflect the uncertainty over its recoverability. This provision is different in nature from the provision that represents an uncertain liability. It represents a reduction in the value of the asset; it is similar to the provision for depreciation which also represents a reduction the value of the asset. Both these provisions are represented in the balance sheet. The other side of the double entry is treated as an expense and set as a charge against income. Charge To charge is to set expenditure against income for a period to determine the profit or loss for that period. Expenditure set against income for a period is known as an expense for the period. Thus an expense is an expired cost or expenditure. A key charge against profits is the tax charge. Chart of accounts An arrangement of codes that provide a framework for organising the transactions in the accounting records to facilitate reporting understandable information to users. Commercial awareness The accountant must have commercial awareness: understanding of how a business gives value to the customers and what it achieves by so doing and what it requires to do so. Controls A control is a set of activities carried out separately and independently to ensure that the entity’s control objectives are achieved. Control objectives are the aims of the control systems and they are focused on recording, authorising and maintaining custody of the entity’s assets to prevent loss and to give an adequate account of their existence and use. Control accounts Control accounts are records in the general ledger that summarise the records of the corresponding subsidiary ledgers. As such they provide a means of checking the accuracy and completeness of the ledger it represents. Convention Conventions are the agreed way of showing the effects of business activity - custom and practice. For example, duality is a convention of bookkeeping that requires the effect of a business transaction to be shown as a debit and a credit that must equal in amount. Compensating errors These errors cancel each other out.



Complete reversal of entries Where the correct accounts are used but each item is shown on the wrong side of the account. Cost Resources applied to obtain value in exchange. For example, the cost of an online AAT level 2 Certificate in Accounting course is the amount of cash sacrificed to gain access to the benefits the course is expected to provide (value). Accounting for the cost depends on its materiality and the accounting policy dealing with educational costs. Accounting options include treating the cost as an expense on account of its materiality and capitalising the course on account of its long-term benefits to the company. Credit sales A sale in which the buyer is allowed to take possession of the goods and pay later. Current assets The assets such as accounts receivable and stocks that the entity expects to convert into cash within the next twelve months. Day book A day book is an initial record of business transactions. Day books are not part of the double entry system of bookkeeping. Thus adequate checks must be carried out to ensure that all day book entries have been posted to the ledgers. Depreciation The cost of an asset allocated to a particular period is known as depreciation. The allocation is based on the assumption that the period would benefit from the use of the asset and hence must bear a fair portion of the cost of the asset. The depreciation policy determines how much should be allocated. Deferral Deferral is the practice of excluding from current period profit or loss incurred expenditure for the period until it is due for matching against subsequent period income. Discount allowed The amount by which a customer’s debt is reduced to encourage them to pay promptly Discount received The amount by which the supplier reduces the liability for prompt settlement of the obligation Entity Entity refers to the business entity Equity



Equity is the difference between the assets and liabilities of the entity; it represents the net assets that belong to the entity’s owners over which no other party has a claim. The owners initially contributed equity capital to start and maintain the business. Therefore, whatever remains of the entity’s assets after all claims against those assets (liabilities) have been paid belongs to the owners. Error of commission Occurs where the correct amount is entered in the wrong account e.g. the credit sale to A Student of AAT course of £1,000 is incorrectly entered in the account of B Student who is then unfairly chased for the debt. Error of omission Occurs where a transaction is completely omitted from the records Errors of original entry Where the original amount is incorrectly entered in the correct accounting records Errors of principle Occurs where the transaction is wrongly classified as e.g. revenue instead of capital Expenditure Expenditure is the resources applied to obtaining a value in exchange – it is the same as cost. Like cost expenditure may be capitalised or expensed depending on its materiality. Like cost when expenditure is set against the income of the period it is an expense of the period whose benefit is deemed to have been fully exhausted in that period. Deferral into future periods cannot therefore be justified. Internal check Internal checks are the controls built into the accounting system whereby separate activities carried out by individuals within the system provide a check on each other. For example, checking control totals between the sales day book, the subsidiary ledger and the general ledger control account provides a check on the accuracy and completeness of the recording process. Ledger A ledger is a collection of similar records providing evidence of transactions, conditions and other events of the business. An example is the Sales ledger which contains a record of all the Accounts Receivable of the business. There are two types of ledger: subsidiary and general. The general ledger contains all the records but not all the details. The subsidiary ledger contains records of all the details of the business customers and its suppliers. Each of the subsidiary ledgers is represented in the general ledger by a control account so the general ledger is complete, and a trial balance extracted from the general ledger has all the balances of the business activities that have a financial effect. Liability A liability is an obligation incurred by the entity and it will only be settled when the entity pays cash or some other asset that satisfies the creditor. An example of a liability is when the entity obtains goods on credit.



Materiality Materiality is the idea that above a certain threshold (or lower limit) information affects the way users make decisions – the information is said to be relevant. At the lowest level this idea determines whether separate accounts are maintained for different transactions. For example, should there be separate accounts for income as illustrated in the chart of accounts, or should there be only one account for income. Where the threshold is set is a matter of judgement, taking into account such factors as the relative size of the amounts, its sensitivity to control (e.g. petty cash is maintained on a separate account even though it is usually only a small amount) and sensitivity to stakeholders (e.g. the total amount spent on green issues can be relatively small but due to the interest of stakeholders management may choose to isolate and disclose it). Modular ledger system of accounting A system of accounting that consists of separate, but integrated modules. An example is a sales ledger, suppliers’ ledger, cash book and general ledger operated as a unit. Noncurrent assets Assets held for their long-term benefits and they include investments (e.g. corporate or sovereign bonds, share holdings, investment property) and PPE (operating assets held for making goods and providing services e.g. hotels) Petty cash A relatively small amount of cash is held securely in the office to meet small expenses such as travel cards and office consumables. This is paid until it runs out. Then the float is replenished by reimbursing the expenses incurred. This is known as the imprest system. Post To post is to record accounting details in ledgers from the journal and day books (books of original entry). Note that recording transaction entries in the books of original entry is not posting. Posting involves double entry. Recording entries in the books of original entry does not involve double entry. In both computerised and manual systems recording the day books and posting the ledgers are two distinct activities. PPE: Property, Plant and Equipment Noncurrent assets such as factory, office building and plants Profit or loss Profit or loss refers to a separate account in which all the income and expenses of the period are matched against each other to determine the profit or loss for that period. This method is required by the matching principle of accounting. Under this principle income is recorded when earned and expenses when incurred, regardless of when the related cash movement takes place. The profit or loss account is part of the balance sheet and represents the net increase or decrease in the net assets of the balance sheet. Provision A provision is a liability of uncertain timing and amount. A liability incurred when goods are obtained on credit terms is a liability that is certain as to the amount, because there is an invoice that confirms the price of the goods; when the liability should be paid is also certain because the terms of credit are agreed between the buyer and the



seller. However, there are other instances when the liability’s due date and amount are uncertain. For example, a warranty claim for defective goods is uncertain as to when the claim will be made and for how much. Thus a warranty claim is a provision that is classified separately from trade creditors even though they are both current liabilities. Prepayment Deferred period expenditure to be charged in subsequent periods when it is deemed the benefit from the expenditure would be obtained or consumed by business activities such as sales, distribution, production or administration. Reconciliation A statement that explains the difference on the same date between amounts extracted from different sources (e.g. from the bank and from the entity’s general ledger) representing the same value e.g. bank balance. Other examples of reconciliation include reconciliation of the supplier’s statement to the suppliers account, sales ledger to the debtors’ control, fixed assets register to fixed assets control and payroll to the payroll control account. Reserve A reserve is an amount set aside for a specific purpose. An example of a reserve is a revaluation reserve which can be used only for restricted purposes such as to offset any future losses on the property. Revaluation Restate the price of an asset based on current prices. An asset is normally recorded at the price it is bought. This is known as the historical cost convention. For certain assets such as property it may become necessary to update the cost of the asset to reflect trends in property prices. In this circumstance the journal is used to record the new price of the asset in the general ledger, and to reflect the difference from historical cost as a revaluation reserve. Suspense account An account that contains temporary entries to balance the trial balance; the existence of a suspense account signifies an error. The suspense account is cleared prior to preparing the financial statements. Trade discount The discount obtained for bulk buying from a wholesaler. This amount does not enter the entity’s accounting system. Transposition errors The numbers misplaced e.g. £142 instead of £124. Trial balance A list of balances of the general ledger: producing a trial balance can be part of a system of internal control that provides a check on the accuracy and completeness of the recording system. However, the trial balance is not evidence of satisfactory operation of all the accounting controls because transactions can be missed and the trial balance cannot provide a means of detecting this eventuality. Nor can it reveal errors of principle or commission; compensating errors can go undetected. Effective operation of adequate controls over input, processing and outputs is essential for the trial balance to have integrity.



PROGRESS CHECKER OBJECTIVE The objective of the progress checker is to assess whether student’s learning has happened as it is expected to have happened. The benefit of this tool is that it encourages the student to evaluate his learning through critical reflection. In addition, it encourages the student to evaluate his exam practice: its scope, quality and comprehensivity to assess exam readiness. This tool is especially invaluable to distance learners who don’t have access to teachers who can provide feedback and overall exam readiness assessment.

Processing business transactions under the double entry system of bookkeeping

Learning outcome Levels of understanding

Students should respond to the affirmative statements guided by the level descriptors in each column, by considering to what extent they apply to their own current level of understanding. Then they should use this tool interactively to work to the required level – moving through the levels until they are satisfied they are at the right level of understanding for a pass to be assured. The “Complete” level is the level that will equip a student to pass and operate effectively at work.

Incomplete There are significant identifiable gaps in my knowledge (e.g. I can’t tell the difference between a discount allowed and discount received) and my application is short of the expected learning outcome (as I still can’t work out the difference between a debit and a credit in recording certain transactions).

Intermediate There are some identifiable gaps in my knowledge and my application is still short of the expected learning outcome e.g. I don’t know how to operate accounting controls and correct a suspense account prior to extracting a trial balance.

Complete I can now apply concepts and principles confidently to deal with all the different kinds of transactions. I can apply adequate accounting controls and correct errors. I can extract trial balance. There are no obvious gaps in my knowledge. I am ready for the next stage.

What is accounting about?

Demonstrate understanding of what accounting is about

1. I have a clear understanding of what accounting is about.

2. My understanding of what accounting is about leads me to study accounting as a practical subject to be understood in its business context.

3. My emphasis in learning accounting is to understand how a concept such as “duality” works in a business context.

4. Because accounting is a universal language of business I am committed to learning and applying its grammar and vocabulary accurately.



5.

How to approach learning accounting and bookkeeping

6. I approach the study of accounting as learning to solve problems logically and methodically. Therefore, I reason it - not just memorise it.

7. The priority in learning is to understand the meaning of the concept or principle in its context. This helps me to reason correctly about situations that I need to deal with.

8. I practise reasoning extensively and strenuously avoid rote learning.

9. I don’t rely on recall because recalling a principle or concept does not help me to apply it in a situation I am not familiar with.

10. My approach to learning ensures that I don’t hit and miss accounting solutions.

11. Accounting for business activities is varied and complex; a fixed and simplistic way induced by rote memorisation cannot work. I learn so I can adapt my knowledge to the requirements of the task.

The value of accounting

12. I understand the value of accounting information in business.

13. I understand the importance of accounting as the language of business.

14. I have learnt the terms of accounting so as to be able to use the language effectively.

The components and scope of the accounting system

15. I understand the components of an



accounting system.

16. I understand the accounting and bookkeeping stages in processing a transaction, condition or other event. I can apply the distinct requirements of each stage.

17. I understand the scope of business transactions, conditions and other events and I can distinguish between them.

18. I understand the process and the products of an accounting system.

19. I understand and can apply the conventions of accounting.

20. I understand the importance of the chart of accounts as an organising feature of the accounting system.

What are transaction cycles?

21. Transaction cycles are the distinct stages of a transaction. I understand all the different stages of a business transaction and the transformation it undergoes.

22. Each stage has accounting implications with which I am completely familiar.

23. I can prepare and process customer and supplier invoices and credit notes.

Understanding double-entry bookkeeping

24. I understand the conventions (the agreed way of showing the effects of business activity - custom and practice) of bookkeeping and accounting.

25. I understand the accounting equation and its application to the trial balance and balance sheet.



26. I understand debits and I can explain and illustrate how and why debits represent value.

27. I understand the different states of value in the business and how debits apply to them.

28. I understand credits and I can explain how and why all types of credit represent a claim on value.

29. I can apply the conventions of bookkeeping and accounting to deal with basic business transactions such as sales, purchases, receipts and payments. I can apply the concepts in accounting for transactions, conditions and other events.

30. I understand the concepts of accounting such as business entity, materiality, and duality.

31. I understand the principles of accounting such as matching, going concern, recognition, measurement and presentation. I can apply the principles of accounting in dealing with transactions.

32. I understand the importance of accounting policy.

33. I can apply accounting policy such as depreciation, bad and doubtful debts and revenue recognition in dealing with real business situations.

34. I understand the importance of business context when applying accounting policy.

Integrating books of prime entry and describing coding system functions

35. I understand the concept of an integrated modular ledger system.

36. I understand the internal checks necessary to operate an integrated modular system.

37. I understand the purposes of the books of



original entry, the subsidiary and general ledgers and the relationship between them.

38. I understand how the double entry system of bookkeeping works in an integrated system. I can raise all the double entries to record the posting of transactions from books of original entry to the subsidiary ledgers and the general ledger.

39. I am familiar with all the components of the modular system such as sage line 50.

40. I understand and can apply the concept of a unit of account (account code).

41. I understand the subjective basis of classification of transactions for entry into the general ledger.

42. I understand and can apply the concept of a chart of accounts. I can apply the principles of the chart of accounts to accounting for transactions, conditions and other events.

43. I understand how the chart of accounts facilitates data processing and information production.

44. I can use the chart of accounts to process invoices, receipts, remittances and corrections.

45. I understand the role of control accounts.

46. I understand why the balance on a control account may not agree with the total of the balances on a subsidiary ledger, and a reconciliation of the difference may be required.

47. I understand all the different types of errors that can occur.

48. I can correct all the different types of errors using the journal.

49. I understand the special role of the journal.

Totalling and balancing a 3-column analysed



cash book

50. I understand the format and purpose of the 3-column cash book.

51. I can maintain the 3-column cash book and determine balances to be carried down.

52. I understand the nature of discount allowed and discount received.

53. I understand the nature of trade discount and I can distinguish it from discount received.

54. I can account for discount allowed, discount received and trade discount.

Totalling, balancing and reconciling petty cash records within an analysed petty cash book

55. I understand the format and purpose of the columnar petty cash book.

56. I can maintain the columnar petty cash book and determine balances to be carried down.

57. I understand the imprest system of petty cash and I can apply account coding to analyse and account for the expenditure by petty cash.

58. I can account correctly for reimbursement of petty cash.

Processing ledger transactions and extracting a trial balance

59. I am completely familiar with the mechanics of posting to the general ledger in a modular system such as Sage line 50.

60. I understand the importance of reliable records and the role that accounting controls play in achieving that objective.

61. I can operate the relevant controls



effectively, including performing reconciliations.

62. I can raise the relevant journal entries for monthend adjustments such as accruals and prepayment.

63. I understand the differences between manual and computerised systems of accounting and the implications of these differences for the way that certain procedures are carried out.

64. I understand the role of the suspense account.

65. I can correct all the different types of errors and eliminate the balance on the suspense account.

66. I understand when and how to extract a trial balance.

67. I know the limitations of the trial balance: what it tells us and what it does not tell us.

Accounting as the language of business

68. I am able to demonstrate understanding of business activities and how a business creates value.

69. I can effectively represent business activities and conditions in accounting terms

70. I am familiar with the vocabulary of accounting and I can express accounting problems using accurate vocabulary.

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