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2. Kaplan Financial Limited, 2011All rights reserved. No part of this publication may be reproduced, stored in a retrievalsystem, or transmitted, in any firm or by any means, electronic, mechanical,photocopying, recording or otherwise, without the prior written permission of KaplanPublishing.The text in this material and any others made available by any Kaplan Group companydoes not amount to advice on a particular matter and should not be taken as such. Noreliance should be placed on the content as the basis for any investment or otherdecision or in connection with any advice given to third parties. Please consult yourappropriate professional adviser as necessary. Kaplan Publishing Limited and all otherKaplan group companies expressly disclaim all liability to any person in respect of anylosses or other claims, whether direct, indirect, incidental, consequential or otherwisearising in relation to the use of such materials.iiKAPLAN PUBLISHING 3. CONTENTSSESSION TITLEPAGE1 Introduction to API12 Key definitions33 Double entry and the trial balance 54 Accounts preparation375 SSAP 5 VAT436 Fixed assets497 Depreciation538 Disposal of fixed assets619 Irrecoverable and doubtful debts7510Accruals and prepayments8111Control accounts and reconciliations9112Suspense accounts and errors 10113SSAP 9 Stock 10714The extended trial balance 11115Solutions to session 3 121KAPLAN PUBLISHING iii 4. iv KAPLAN PUBLISHING 5. SESSION 1: INTRODUCTION TO APIThis session covers the background for APIThe new Accounts Preparation units are designed to develop the studentsdouble entry bookkeeping skills.The student will need to deal with fixed asset accounting, including acquisition,depreciation, disposal and completing relevant accounting entries. They alsoneed to be familiar with recording transactions in a fixed asset register andunderstand the purpose of such records.The student will need to complete an extended trial balance. There will be arange of accounting adjustments such as writing off an irrecoverable debt, anallowance for doubtful debt adjustment, accruals, prepayments andreconciliations that the student should be able to deal with.For each section of the exam there will be a range of short answer questionstesting the students knowledge of principles of accounts preparation.AssessmentSection 1 is about accounting for fixed assets.There will be two independent tasks.These will require managing a range of transactions such as addition, disposaland depreciation, relating to fixed asset accounting.Section 2 is about accounting adjustments.There will be five independent tasks.Journal entries will be required to record the adjustments in the extended trialbalance and then extending these balances correctly to the profit and loss orbalance sheet columns.The assessment for the units will be two hours computer based and thecomputer will mark the assessment for the student.Learners will be expected to demonstrate competence in both sections of theassessment.Successful completion of this Accounts Preparation I will result in the award oftwo QCF units:Accounting for fixed assets (skills)Extending the trial balance using accounting adjustments (skills).KAPLAN PUBLISHING 1 6. AAT STUDY NOTES (STUDENT) : API2 KAPLAN PUBLISHING 7. SESSION 2: KEY DEFINITIONSAssetsFixed Asset for long term use in the businessCurrent Assets that are currently cash or will soon be converted into cash inthe trading activities of the businessLiabilitiesCurrent Creditors that are due to be paid within 12 monthsLong-term Creditors which are due to be paid over the longer termCapital Monies or goods invested by the owner/owners of the businessDrawings Monies or goods taken out of the business by the owner/owners ofthe businessKAPLAN PUBLISHING 3 8. AAT STUDY NOTES (STUDENT) : APIExample 1Place the following under the correct heading 1A customer owes the business 10,0002The business owes a supplier 2,0003The business owns a van worth 1,0004The business has a bank overdraft of 1,5005The owner of the business introduces 30,000 into the business6The business owes 50,000 on a mortgage7The business owns computer equipment worth 3,0008Year end stock is valued at 5,0009The business has cash in hand of 10010 The owner of the business takes goods worth 500FIXED ASSET CURRENT ASSET CURRENT LIABILITY LONG TERM LIABILITYCAPITAL DRAWINGS4KAPLAN PUBLISHING 9. SESSION 3: DOUBLE ENTRY ANDTHE TRIAL BALANCEIn order to complete API you must have sound knowledge of double entry beforeyou can move onto the more difficult aspects of API.Main PrinciplesDual Effect Every transaction that a business makes has two effectsE.g. Purchase a motor vehicle for cashEvery transaction must be of corresponding equal amounts. For everytransaction you must have at least one DEBIT entry and one CREDIT entry DEBITS will increaseCREDITS will increaseExpenses Liabilities PurchasesLoans Rent and rates Mortgages Light and heat Creditors Wages and salaries Motor expenses StationeryAssets Income Motor vehicles Sales Equipment Rents received Computers Interest received Furniture Land and buildings Debtors Stock Cash/bankDrawings CapitalTo help you remember these use the mnemonic:DEAD CLICKAPLAN PUBLISHING 5 10. AAT STUDY NOTES (STUDENT) : APILedger accountingDr CrDateDetail DateDetail Example 1John Dunn started trading as a sole trader on the 1 March 2003.The following transactions took place in the first month of trade.You are required to prepare the double entry for all the transactions.NB Only set up one debtors control account and one creditors control account;subsidiary ledgers come in later when dealing with reconciliations1John introduced 2,000 into the business bank account2Made purchases of 175 worth of goods for resale from H Mills on credit3Purchased 150 worth of fixtures and fittings, paying by cheque4Made cash sales of 2755Made purchases of 114 worth of goods from D Frazer on credit6Paid rent of 15 by cash7Paid stationery expenses of 27 by cash8Returned goods to H Mills to the value of 239Made credit sales of 7710 Purchased a motor vehicle for 300 and paid by cheque11 Paid cash wages of 11712 Withdrew 44 worth of cash6KAPLAN PUBLISHING 11. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCEJOURNAL1 DrCr2 DrCr3 DrCr4 DrCr5 DrCr6 DrCr7 DrCr8 DrCr9 DrCr10 Dr Cr11 Dr Cr12 Dr CrKAPLAN PUBLISHING7 12. AAT STUDY NOTES (STUDENT) : APIUsing the journal entries that you prepared above, write up the Ledgeraccounts to show the first months transactions.BankDate Detail Date Detail CapitalDate Detail Date Detail PurchasesDate Detail Date Detail Creditors (PLCA)Date DetailDate Detail 8 KAPLAN PUBLISHING 13. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCE Fixtures and fittingsDateDetailDateDetailSalesDateDetail Date DetailCashDateDetail Date Detail RentDateDetail DateDetailKAPLAN PUBLISHING9 14. AAT STUDY NOTES (STUDENT) : API StationeryDate DetailDate Detail Purchase returnsDate Detail DateDetail Debtors (SLCA)Date Detail DateDetail Motor vehiclesDate DetailDate Detail 10KAPLAN PUBLISHING 15. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCE WagesDateDetail Date Detail DrawingsDateDetail Date Detail KAPLAN PUBLISHING 11 16. AAT STUDY NOTES (STUDENT) : APIExample 2Sasha Glew started trading as a sole trader on 1 December 2003The following transactions took place in the first month of tradeYou are required to prepare the double entry for the following transactions,enter them into the relevant ledger accounts and close them off.(a) Sasha introduced 1,500 cash(b) Made credit purchases of 296(c) Paid rent of 28 in cash(d) Transferred 100 worth of cash to a business bank account(e) Made credit sales of 54(f) Purchased stationery 15 and paid by cheque(g) Made cash sales 49(h) Returned goods to a supplier 18 (these goods where originally purchasedon credit)(i) Made credit sale 29(j) Paid for 18 worth of repairs in cash(k) Sasha had 14 worth goods returned to her (these goods had originallybeen sold on credit)(l) Paid a supplier 278 by cheque (these goods had originally beenpurchased on credit)(m) Made cash purchases 125(n) Purchased a motor vehicle 395 paying by cheque(o) Paid 15 worth of motor expenses in cash(p) Purchased fixtures and fittings on credit 120 CashDate Detail DateDetail 12KAPLAN PUBLISHING 17. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCECapitalDateDetail DateDetail PurchasesDateDetail DateDetail Creditors (PLCA)DateDetailDateDetail RentDateDetail DateDetail KAPLAN PUBLISHING13 18. AAT STUDY NOTES (STUDENT) : APIBankDate Detail Date Detail SalesDate Detail Date Detail Debtors (SLCA)Date Detail DateDetail StationeryDate Detail DateDetail 14KAPLAN PUBLISHING 19. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCE Purchase returnsDateDetail Date Detail RepairsDateDetailDateDetail Sales returnsDateDetail Date Detail Motor vehiclesDateDetailDateDetail KAPLAN PUBLISHING15 20. AAT STUDY NOTES (STUDENT) : APIMotor expensesDate Detail Date Detail Fixtures and fittingsDate DetailDateDetail 16 KAPLAN PUBLISHING 21. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCETrial balanceOnce the ledger accounts have been prepared and closed off you are then in aposition to prepare the TRIAL BALANCE.DefinitionA list of balances taken from the nominal/general ledger. The trial balance isused to establish that the dual effect/double entry has been successful.GenerallyList of balances from the ledgers brought forward balancesThe starting point for preparing profit and loss account and balance sheet of an organisationDoes not guarantee that double entry is correct (covered later)Example of a trial balanceDetailDrCrBank11,700Capital12,500Purchases3,250Creditors 1,500Sales 1,800Debtors800Purchase returns250Drawings 100Sales returns200Total16,05016,050 Notice that the debit and credit columns should equal one another. This provesthat for every debit entry a credit entry of the cor