Download - Basic Accounting II (BAII)
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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
___