Study Notes aat QCF Level 3 ACCOUNTS PREPARATION I (API) STUDENT NOTES
Study Notes aat
QCF Level 3
ACCOUNTS PREPARATION I (API)
STUDENT NOTES
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CONTENTS
SESSION TITLE PAGE 1 Introduction to API 1 2 Key definitions 3 3 Double entry and the trial balance 5 4 Accounts preparation 37 5 SSAP 5 VAT 43 6 Fixed assets 49 7 Depreciation 53 8 Disposal of fixed assets 61 9 Irrecoverable and doubtful debts 75 10 Accruals and prepayments 81 11 Control accounts and reconciliations 91 12 Suspense accounts and errors 101 13 SSAP 9 Stock 107 14 The extended trial balance 111 15 Solutions to session 3 121
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SESSION 1: INTRODUCTION TO API This session covers the background for API
The new Accounts Preparation units are designed to develop the student’s double entry bookkeeping skills. The student will need to deal with fixed asset accounting, including acquisition, depreciation, disposal and completing relevant accounting entries. They also need to be familiar with recording transactions in a fixed asset register and understand the purpose of such records. The student will need to complete an extended trial balance. There will be a range of accounting adjustments such as writing off an irrecoverable debt, an allowance for doubtful debt adjustment, accruals, prepayments and reconciliations that the student should be able to deal with. For each section of the exam there will be a range of short answer questions testing the student’s knowledge of principles of accounts preparation. Assessment Section 1 is about accounting for fixed assets. There will be two independent tasks. These will require managing a range of transactions such as addition, disposal and 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 trial balance and then extending these balances correctly to the profit and loss or balance sheet columns. The assessment for the units will be two hours computer based and the computer will mark the assessment for the student. Learners will be expected to demonstrate competence in both sections of the assessment. Successful completion of this Accounts Preparation I will result in the award of two QCF units: Accounting for fixed assets (skills) Extending the trial balance using accounting adjustments (skills).
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SESSION 2: KEY DEFINITIONS Assets
Fixed – Asset for long term use in the business
Current – Assets that are currently cash or will soon be converted into cash in the trading activities of the business Liabilities
Current – Creditors that are due to be paid within 12 months Long-term – Creditors which are due to be paid over the longer term Capital – Monies or goods invested by the owner/owners of the business Drawings – Monies or goods taken out of the business by the owner/owners of the business
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Example 1
Place the following under the correct heading –
1 A customer owes the business £10,000 2 The business owes a supplier £2,000 3 The business owns a van worth £1,000 4 The business has a bank overdraft of £1,500 5 The owner of the business introduces £30,000 into the business 6 The business owes £50,000 on a mortgage 7 The business owns computer equipment worth £3,000 8 Year end stock is valued at £5,000 9 The business has cash in hand of £100 10 The owner of the business takes goods worth £500 FIXED ASSET CURRENT ASSET CURRENT LIABILITY LONG TERM LIABILITY CAPITAL DRAWINGS
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SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCE In order to complete API you must have sound knowledge of double entry before you can move onto the more difficult aspects of API.
Main Principles
Dual Effect – Every transaction that a business makes has two effects
E.g. Purchase a motor vehicle for cash
Every transaction must be of corresponding equal amounts. For every transaction you must have at least one DEBIT entry and one CREDIT entry
DEBITS will increase CREDITS will increase Expenses Liabilities • Purchases • Loans • Rent and rates • Mortgages • Light and heat • Creditors • Wages and salaries • Motor expenses • Stationery Assets Income • Motor vehicles • Sales • Equipment • Rents received • Computers • Interest received • Furniture • Land and buildings • Debtors • Stock • Cash/bank Drawings Capital To help you remember these use the mnemonic:
DEAD CLIC
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Ledger accounting
Dr Cr Date Detail £ Date Detail £ Example 1
John 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 reconciliations
1 John introduced £2,000 into the business bank account
2 Made purchases of £175 worth of goods for resale from H Mills on credit
3 Purchased £150 worth of fixtures and fittings, paying by cheque
4 Made cash sales of £275
5 Made purchases of £114 worth of goods from D Frazer on credit
6 Paid rent of £15 by cash
7 Paid stationery expenses of £27 by cash
8 Returned goods to H Mills to the value of £23
9 Made credit sales of £77
10 Purchased a motor vehicle for £300 and paid by cheque
11 Paid cash wages of £117
12 Withdrew £44 worth of cash
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JOURNAL 1 Dr Cr 2 Dr Cr 3 Dr Cr 4 Dr Cr 5 Dr Cr 6 Dr Cr 7 Dr Cr 8 Dr Cr 9 Dr Cr 10 Dr Cr 11 Dr Cr 12 Dr Cr
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Using the journal entries that you prepared above, write up the Ledger accounts to show the first months transactions.
Bank Date Detail £ Date Detail £
Capital
Date Detail £ Date Detail £
Purchases
Date Detail £ Date Detail £
Creditors (PLCA) Date Detail £ Date Detail £
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Fixtures and fittings Date Detail £ Date Detail £
Sales Date Detail £ Date Detail £
Cash Date Detail £ Date Detail £
Rent Date Detail £ Date Detail £
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Stationery Date Detail £ Date Detail £
Purchase returns Date Detail £ Date Detail £
Debtors (SLCA)
Date Detail £ Date Detail £
Motor vehicles Date Detail £ Date Detail £
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Wages Date Detail £ Date Detail £
Drawings Date Detail £ Date Detail £
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Example 2
Sasha Glew started trading as a sole trader on 1 December 2003
The following transactions took place in the first month of trade
You 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 purchased
on 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 originally
been sold on credit) (l) Paid a supplier £278 by cheque (these goods had originally been
purchased 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
Cash Date Detail £ Date Detail £
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Capital Date Detail £ Date Detail £
Purchases Date Detail £ Date Detail £
Creditors (PLCA) Date Detail £ Date Detail £
Rent
Date Detail £ Date Detail £
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Bank Date Detail £ Date Detail £
Sales Date Detail £ Date Detail £
Debtors (SLCA) Date Detail £ Date Detail £
Stationery Date Detail £ Date Detail £
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Purchase returns Date Detail £ Date Detail £
Repairs Date Detail £ Date Detail £
Sales returns Date Detail £ Date Detail £
Motor vehicles Date Detail £ Date Detail £
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Motor expenses Date Detail £ Date Detail £
Fixtures and fittings Date Detail £ Date Detail £
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Trial balance
Once the ledger accounts have been prepared and closed off you are then in a position to prepare the TRIAL BALANCE.
Definition
A list of balances taken from the nominal/general ledger. The trial balance is used to establish that the dual effect/double entry has been successful.
Generally
• List of balances from the ledgers’ brought forward balances • The starting point for preparing profit and loss account and balance sheet of
an organisation • Does not guarantee that double entry is correct (covered later)
Example of a trial balance
Detail Dr Cr Bank 11,700 Capital 12,500 Purchases 3,250 Creditors 1,500 Sales 1,800 Debtors 800 Purchase returns 250 Drawings 100 Sales returns 200 Total 16,050 16,050 –––––– –––––– Notice that the debit and credit columns should equal one another. This proves that for every debit entry a credit entry of the corresponding amount has gone through, although it does not prove that the transaction has gone to the correct account!
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Example 3 Complete the trial balance for Sasha Glew from Example 2. Trial balance as at 31 December 2003
DEBIT CREDIT
£ £
Cash
Capital
Purchases
Creditors
Rent
Bank
Sales
Sales ledger control account
Stationery
Purchase returns
Repairs
Sales returns
Motor vehicles
Motor expenses
Fixtures and fittings
Total
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Activity 1
James started a business on 1 January 20X1 selling furniture. In the first year of trading he entered into the following transactions.
(a) Paid £40,000 into a business bank account. (b) Made purchases from Bill for £2,000 cash. (c) Purchased goods costing £6,000 from Samantha, and agreed to pay within
one month. (d) Paid £400 for insurance in cash. (e) Bought storage units for £1400 on credit from Jo. (f) Paid £300 cash for advertising. (g) Sold furniture to Pete for £3,000 cash. (h) Paid the telephone bill of £240 in cash. (i) Paid Samantha £2,000 on account. (j) Sold further furniture to Chris for £8,000 on credit. (k) Bought stationery for £160 cash. (l) Paid Jo in full. (m) Received £2,000 from Chris. (n) Withdrew £1000 cash to pay for a holiday for himself. (Treat bank and cash as the same) You are required to prepare the double entry for the following transactions, enter them into the relevant ledger accounts and close them off.
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Cash
Date Detail £ Date Detail £
Capital Date Detail £ Date Detail £
Purchases Date Detail £ Date Detail £
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Creditors Date Detail £ Date Detail £
Insurance Date Detail £ Date Detail £
Advertising Date Detail £ Date Detail £
Telephone Date Detail £ Date Detail £
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Stationery Date Detail £ Date Detail £
Storage units Date Detail £ Date Detail £
Sales Date Detail £ Date Detail £
Debtors Date Detail £ Date Detail £
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Drawings Date Detail £ Date Detail £
Prepare the Trial Balance for James
Trial Balance as at 31 December 20X1
Detail Dr £
Cr £
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Activity 2
Show by means of T accounts how the following transactions during January 20X1 would be recorded in the books of Clive for January.
(a) Started business by putting £10,000 in a business bank account. (b) Made purchases for £200 cash. (c) Made further purchases from Margaret for £400 on credit. (d) Paid rent of £1000 cash. (e) Bought stationery for £60 cash. (f) Bought a second-hand van from Peter for £4,000 and promised to pay him
soon. (g) Made a sale to Greg for £1000 cash. (h) Paid Margaret £100 cash. (i) Made a sale on credit to Dean for £140. (j) Bought more stationery for £40 cash. (k) Paid cash of £150 for motor expenses. (l) Paid Peter £1000. (m) Took £300 from the business to pay for his own living expenses. (n) Received £100 from Dean.
(Treat bank and cash as the same)
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Bank Date Detail £ Date Detail £
Capital Date Detail £ Date Detail £
Purchases Date Detail £ Date Detail £
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Creditors Date Detail £ Date Detail £
Rent Date Detail £ Date Detail £
Stationery Date Detail £ Date Detail £
Van Date Detail £ Date Detail £
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Sales Date Detail £ Date Detail £
Debtors Date Detail £ Date Detail £
Motor expenses Date Detail £ Date Detail £
Drawings Date Detail £ Date Detail £
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Prepare the Trial Balance for Clive
Trial Balance as at 31st January 20X1
Detail Dr £
Cr £
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Trial Balance – other methods
You may come across the situation where you do not have to prepare all the ledger accounts for an organisation. It could be that these have already been prepared on your behalf and you are purely given a list of balances. The twist is that you will not be told whether the balances are debit or credit!
Recap
Debits Credits
Fixed assets Loans Debtors Mortgages Stock Creditors Cash Sales Purchases Interest received Discounts allowed Rent received Sales returns Discounts received Expenses Purchase returns
The following could be either: Bank A debit (DR) balance represents money in the bank A credit (CR) balance represents an overdraft VAT (Value added tax) A debit (DR) balance represents a refund due from HMRC A credit (CR) balance represents a liability owed to HMRC
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Example 4
(a) Close off the following ledger accounts
Sales Date Details Amount Date Details Amount 2000 £ 2000 £ 30-Nov Balance B/d 309,000 30-Nov Debtors 10,200 Sales returns Date Details Amount Date Details Amount 2000 £ 2000 £ 30-Nov Balance B/d 2,968 30-Nov Debtors 1,400 Debtors control Date Details Amount Date Details Amount 2000 £ 2000 £ 30-Nov Balance B/d 106,840 30-Nov Sales returns 1,645 30-Nov Sales 11,985 30-Nov Bank 2,700 30-Nov Discount allowed 50
Bank charges
Date Details Amount Date Details Amount 2000 £ 2000 £
30-Nov Balance B/d 367 30-Nov Bank 87
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Discounts allowed Date Details Amount Date Details Amount2000 £ 2000 £
30-Nov Balance B/d 170 30-Nov Debtors 50 Insurance
Date Details Amount Date Details Amount2000 £ 2000 £
30-Nov Balance B/d 600 30-Nov Bank 700
Rent paid Date Details Amount Date Details Amount2000 £ 2000 £
30-Nov Balance B/d 850 30-Nov Bank 300 VAT
Date Details Amount Date Details Amount2000 £ 2000 £
30-Nov Sale returns 245 30-Nov Balance b/d 16,512 Sales 1,785
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(b) Prepare the trial balance from the ledger accounts above and the following list of balances
Account name £
Motor vehicles 37,200
Office equipment 9,700
Other debtors 56,540
Cash 190
Creditors 47,910
Capital 19,381
Purchases 126,003
Purchase returns 459
Commission paid 890
Wages 42,078
Rates 1,200
Electricity 981
Telephone 1,585
Motor expenses 900
Miscellaneous expenses 1,500
Bank 4,313
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Trial balance as at 30 November 2000
DEBIT CREDIT
£ £
Sales
Sales returns
Debtors control
Bank charges
Discounts allowed
Insurance
Rent paid
VAT
Motor vehicles
Office equipment
Other debtors
Cash
Creditors control
Capital
Purchases
Purchase returns
Commission paid
Wages
Rates
Electricity
Telephone
Motor expenses
Miscellaneous expenses
Bank
Total
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Activity 3
Prepare the trial balance from the following list of balances
Capital 30,000Drawings 12,000Sales 45,625Purchases 32,652Rates 2,530Light and heat 3,560Interest received 356Motor vehicles 2,853Fixtures and fittings 1,520Cash 560Bank overdraft 237Creditors 3,500Debtors 6,526Discounts received 650Discounts allowed 560Purchase returns 123Sales returns 150Wages 10,000Rent 4,500Insurance 1,500Stationery 980Advertising 600
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Trial balance as at ……. £ £
Capital Drawings Sales Purchases Rates Light and heat Interest received Motor vehicles Fixtures and fittings Cash Bank overdraft Creditors (PLCA) Debtors (SLCA) Discounts received Discounts allowed Purchase returns Sales returns Wages Rent Insurance Stationery Advertising
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SESSIONS 4: ACCOUNTS PREPARATION Financial statements of an organisation are made up of:
• Balance sheet • Profit and loss account (Income statement Ltd Company) • Cash flow statement (not examined in this syllabus)
The following are examples of a Profit and loss account and a Balance sheet. You should ensure that you make yourself familiar with the formats.
Profit and loss account for the year ended 31 December 2005 For ....................................................
£ £ Sales X Less: Cost of sales
Opening stock
X
Purchases
X
Closing stock
(X)
X
–––––– –––––– Gross profit X –––––– Sundry income X Expenses Rent X Rates X Electricity X Depreciation X Irrecoverable debt X Stationery X Telephone X –––––– Total expenses X –––––– Net profit X ––––––
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Balance Sheet as at 31 December 2005
For ................................................... £ £ £
Fixed assets Cost Depreciation Fixed assets X X X –––––– –––––– Current assets Stock X Debtors X Less allowance of doubtful debt
(X)
–––––– X Bank X Prepayment X –––––– X –––––– Current liabilities Creditors X Accrual X –––––– (X) –––––– Net current assets X –––––– Total assets less current liabilities X Long term liabilities (X) –––––– Net assets X –––––– Financed by Capital X Profit X Drawings X –––––– X ––––––
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Example 1
At the end of the financial year the following trial balance was drafted for Harry who owns an event organisation business.
Prepare the profit and loss account and balance sheet from this information.
Trial balance for the year ended 31 December 2009 for Harry trading as Aster Florists.
Description Dr Cr Sales 689,250Purchases 414,875Opening stock 69,376Closing stock BS 65,456Closing stock P&L 65,456Salaries and wages 115,654General expenses 82,440Shop fittings 48,140Computer equipment 12,900Debtors 58,200Creditors 45,320Bank – current account 4,658Cash 550VAT 13,500Discounts allowed 8,740Discounts received 3,658Drawings 22,000Bank – deposit account 20,000Capital 105,805 Total 922,989 922,989 ––––––– –––––––
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Profit and Loss account for the year ended 31 December 2009 for Harry
trading as Aster Florists. £ £ Sales
Less: Cost of sales
Opening stock Purchases Closing stock Gross profit Sundry income Discounts received Expenses Wages General expenses Discounts allowed Total expenses Net profit
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Balance sheet as at 31 December 2009 for Harry trading as Aster Florists
£ £ £ Fixed assets Cost Depreciation
Shop fittings Computer equipment ––––––– ––––––– ––––––– Current assets Stock Debtors Bank Cash ––––––– Current liabilities Creditors VAT ––––––– Net current assets ––––––– Total assets less current liabilities Long term liabilities ––––––– Net assets ––––––– Proprietors funds Capital Profit Drawings ––––––– –––––––
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The accounting equation Assets – liabilities = Capital + profit – drawings
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SESSION 5: SSAP 5 VAT VAT is a consumer tax, in that all of us have to pay it. The HM Revenue and Customs (HMR&C) collect it.
The main issue is that if each of us where to pay VAT individually to HMR&C, it would be an administrative nightmare!!!!
To prevent this, VAT is collected on behalf of HMR&C through registered businesses.
Registered businesses
A VAT registered business must charge VAT on sales. But it can reclaim VAT on purchases.
VAT on sales – OUTPUT VAT VAT on purchases/expenses – INPUT VAT
The difference between these two amounts must be paid to/received from Customs.
If output VAT is greater than input VAT, then the business must pay that amount over to HMR&C and vice versa.
Rates of VAT and calculating VAT
VAT is currently charged at two main rates:
Standard rated items – VAT is charged at 17.5% Zero-rated items – VAT is charged at 0%
There is a reduced rate VAT that is 5% – this is applicable to domestic fuel only.
Calculating standard rated VAT
Invoices are usually broken down under three headings:
GROSS (VAT inclusive) VAT (VAT element) NET (VAT exclusive)
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The VAT structure
Gross 117.50%
VAT 17.50%
Net 100.00%
You need to understand how to calculate VAT from either a gross or a net amount. The calculation in each case is different.
GROSS x 17.5 / 117.5 or (7/47) = VAT element NET x 17.5% = VAT element Double entry and accounting for VAT
Sales invoice Dr Debtors X Gross invoice Cr VAT control X VAT element Cr Sales X Net invoice Purchase invoice Dr Purchase X Net invoice Dr VAT control X VAT element Cr Creditors X Gross invoice The VAT would appear in the VAT control account as follows:
VAT control Date Detail £ Date Detail £ Input VAT X Output VAT X Payable to HMR&C X X X
Example 1
1 Graham purchases 4 units for resale at £500 plus VAT each on credit 2 Graham then sells 3 of the units for £1,000 plus VAT each on credit 3 Graham then sells the remaining unit for £900 plus VAT for cash
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Required
Prepare the journal entries for the above transactions.
Prepare the VAT account/control account to show the above transactions.
Explain whether the balance on the VAT control account is a debtor or a creditor
1 Dr Dr Cr
2 Dr Cr Cr
3 Dr Cr Cr
VAT control
Example 2
1 Abdul purchases 3 units for resale at £600 plus VAT each on credit 2 Abdul then sells 2 of the units for £1,500 plus VAT each on credit 3 Abdul then sells the remaining unit for £800 plus VAT for cash
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Required
Prepare the journal adjustments for the above transactions.
Prepare the VAT account/control account to show the above transactions.
Explain whether the balance on the VAT control account is a debtor or a creditor
1 Dr Dr Cr
2 Dr Cr Cr
3 Dr Cr Cr
VAT Control
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Activity 1
A business that is registered for VAT has the following records relating to sales, purchases and expenses.
Sales for the quarter ending 31 March 20X4 of £236,175 (including VAT)
Purchases and expenses of £143,600 (excluding VAT).
At 1 January 20X4 there was an amount of £8,455 owing to HM Revenue and Customs and this was paid on 28 January 20X4.
Required Write up the VAT control account for the quarter ending 31 March 20X4.
VAT control account £ £ Explain what the balance on the account represents.
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SESSION 6: FIXED ASSETS Definition The fixed assets of a business are the assets that are purchased with the intention of being for long term use within the business, it is important to differentiate between capital and revenue expenditure.
Capital expenditure – expenditure on fixed assets and is recorded on the balance sheet as a fixed asset.
Revenue expenditure – expenditure for the expenses of the business such as telephone. Revenue expenditure is recorded in the profit and loss account.
The following document is an invoice relating to a purchase of an asset.
SALE INVOICE
West Yorks Machine Supplies Ltd
49 St Pauls Street Leeds LS1 2TE Telephone: 01302 721326 Fax: 01302 721325 VAT registration: 235721718 Date/Tax point: 27 December 2009 Invoice no: 7422 Your order no: FE763 Pickering Engineering Hawsker Lane Whitby North Yorkshire £ To: Supply and fit: One 2000 Cutting Machine 25,000 VAT @ 17½% 4,375 Balance to pay £29,375 TERMS NET 30 DAYS Approved by: B Curran / J Curran
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Fixed asset purchases would be recorded in the ledgers as follows:
Dr Cr Fixed asset account 25,000 Net invoice (Dr) VAT 4,375 VAT element (Dr) Bank/Creditors 29,375 Gross invoice (Cr)
*Note that each classification of fixed asset has its own ledger account, i.e. one for motor vehicles, another for fixtures and fittings etc
This is nearly always the double entry for a VAT registered business but there is one exception. VAT CANNOT BE RECLAIMED ON THE PURCHASE OF MOTOR CARS, so the debit to the fixed asset account is for the gross amount of the invoice.
It may be the case that when you purchase a fixed asset, the invoice amount includes items other than the fixed asset itself. Prime examples would be motor vehicles when insurance or road tax is included.
Financing fixed asset acquisitions
There are a number of different options available for financing the purchase of fixed assets. The following are a few examples: Borrowing – Loans
Hire purchase
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Finance and operating leases
Accounting for finance leasing and hire purchase
Accounting for operating leasing
Fixed asset register
Obviously the fixed assets of a business will tend to be expensive items that the organisation will wish to have good control over. In particular the organisation will wish to keep control over which assets are kept where and check on a regular basis that they are still there.
Therefore most organisations that own a significant number of fixed assets will maintain a fixed asset register as well as the ledger accounts that record the purchases of the fixed assets.
Layout of a fixed asset register
The purpose of a fixed asset register is to record all relevant details of all of the fixed assets. The format of the register will depend on the organisation, but the information to be recorded for each fixed asset will probably be similar.
An example of a fixed assets register is given overleaf.
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SESSION 7: DEPRECIATION Principles behind depreciation
Fixed assets as we have previously established are capitalised in the balance sheet at the point when they are purchased. However this is not the end of the story.
The accruals concept states ‘costs incurred in a period should be matched with the income produced in the same period’. This concept applies to fixed assets in that an asset is purchased with the view that it will help generate income for the business.
Therefore in accordance with the accruals concept some of the cost of the fixed asset should be charged to the profit and loss account each year that the asset is used.
What is depreciation?
It is the measurement of the cost of the fixed asset consumed in a period. It reflects the wear and tear of a fixed asset in a period.
Calculating depreciation
There are three key factors to consider:
Cost of the asset Useful economic life Residual value
There are two main ways of calculating depreciation
Straight line/on cost
With this method the amount of depreciation charged each year to the profit and loss account remains exactly the same. This means that the book value of the fixed asset is reduced by the same amount each accounting period.
There are two different ways that you may be asked to calculate straight-line depreciation.
Formula
Cost – residual value OR Cost – residual value x % Useful economic life
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Example 1 using the formula
Cost – residual value Useful economic life
A new oven has been purchased by Ian for his cafe, calculate the depreciation charge per year for the oven
Cost £100,000 Residual value £25,000 Useful economic life 5 years
Activity 1
A pub lease has been acquired by Kat, calculate the depreciation charge per year for the lease
Cost £700,000 Residual value £50,000 Useful economic life 10 years
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Percentage terms using the formula
Cost – residual value x %
Example 2
Roxanne’s business policy for her hairdressing business is to depreciate fixed assets at 25% on cost each year
What is the depreciation charge each year if one of the assets costs £15,000?
Activity 2
Phil has a business policy to depreciate fixed assets at 15% on cost each year.
What is the depreciation charge each year if his motor van cost £26,000?
Example 3
Eric owns a bed and breakfast, his business's policy is to depreciate fixed assets at 33% on cost each year.
What is the depreciation charge each year if his computer cost £1,800 and has a residual value of £600?
Activity 3
Andy’s business policy is to depreciate fixed assets at 15% on cost each year.
What is the depreciation charge each year if his tractor for his farm costs £4,200 and has a residual value of £200?
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Reducing balance/depreciation on the net book value
With this method of depreciation a different charge for depreciation is made in the profit and loss account each period. It assumes that an asset is used up more quickly in the first few years of ownership.
It is calculated by multiplying the asset's net book value (the cost of the asset that has not been charged to the profit and loss account) and multiplying it by a set percentage.
Example 4
Fixtures and fittings in Dev’s corner shop cost £40,000 His business policy is to depreciate these assets at 10% per annum on a reducing balance basis
Calculate the depreciation for the first three years of ownership.
Activity 4
Vivian’s fixtures and fittings in her corner shop cost £20,000 Her business policy is to depreciate these assets at 25% per annum on a reducing balance basis
Calculate the depreciation for the first 3 years of ownership.
Accounting for depreciation
As with any adjustment to the financial statements, double entry is always applied and at least two accounts will be affected.
Double entry
Dr Depreciation expense account X Cr Accumulated depreciation* X
*Note that each classification of fixed asset has its own accumulated depreciation ledger account i.e. one for motor vehicles, another for fixtures and fittings etc
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Monthly depreciation
An organisation's policy may be to calculate depreciation on a monthly basis rather than on an annual basis.
If this is the case, the calculation is the same except for the fact that you need to time apportion the annual depreciation charge.
Carla’s business has a financial year ending 31 December 2006. Depreciation is calculated on the basis of complete months of ownership. Calculate the depreciation charge for each of the following assets.
Example 5
Cost of fixtures and fittings £100,000 Residual value £25,000 Useful economic life 5 years Date of acquisition 1 April 2006
Activity 5
Cost of building £700,000 Residual value £50,000 Useful economic life 10 years Date of acquisition 1 June 2006
Activity 6
Cost of motor car £40,000 Depreciation 10% per annum on a reducing balance basis Date of acquisition 31 July 2006
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Recording assets in the fixed asset register
Activity 7
The following is an extract of a purchase invoice for Staplers office supplies.
SALE INVOICE
Computer Supplies Limited High Street Nottingham NE34 1AN Telephone: 0116 259 4562 Fax: 0116 649 3255 VAT registration: 289721918 Date/Tax point: 31 October 2009 Invoice no: 7245 Your order no: FE2087 To
Staplers Office Supplies
Pencils Business Centre Pencil Lane Leicester LE3 3EX £ Laser Printer 1,550.00 Delivery 15.00 Printing paper 75.00 1,640.00 VAT @ 17½% 287.00 Total £1,927.00 TERMS NET 30 DAYS Approved by: B Dell
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Further information
• Staplers has a policy of capitalising expenditure over £1000 • Computer equipment is depreciated at 30% on a straight line basis • Fixed assets are depreciated in the year of acquisition but none in the year
of disposal
Record the acquisition in the fixed asset register:
(a) The acquisition during the year ended X09
(b) Depreciation for the year ended X09
Fixed Assets Register
Description Acquisition Date
Cost Depreciation NBV Funding Source
Disposal Proceeds
Disposal Date
Computer Equipment
Computer Network
30/6/X7 5,000.00 Cash
Y/E 31/12/X7
1,500.00 3,500.00
Y/E 31/12/X8
1,500.00 2,000.00
Y/E 31/12/X9
Laser Printer
30/10/X9
Y/E 31/12/X9
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SESSION 8: DISPOSAL OF FIXED ASSETS When a fixed asset is disposed of, it is unlikely that the proceeds from sale will be equal to the value of the fixed asset in the balance sheet (the net book value).
The difference between the net book value and the sale proceeds will be either a profit or a loss on the disposal of a fixed asset.
Profit – this will occur where the net book value is lower than the sale proceeds.
Loss – this will occur where the net book value is higher than the sale proceeds.
Steps to disposing of a fixed asset
Firstly open disposals T Account, then:
Step 1 – Remove the original cost of the disposed asset from the asset account
Step 2 – Remove the accumulated depreciation of the disposed asset from the accumulated depreciation account
Step 3 – Enter the sale proceeds received/receivable for the disposed asset
Example 1
Veronica has a motor vehicle with a net book value of £2,800. The motor vehicle had originally cost £7,000.
Veronica sells the asset for £3,000 cash.
Required
Show the journal entries to dispose of the fixed asset above and calculate the profit or loss on the disposal of the fixed asset.
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Disposal –––––– –––––– –––––– ––––––
Motor vehicles
–––––– –––––– –––––– ––––––
Accumulated depreciation
–––––– –––––– –––––– ––––––
Activity 1
During the year Sarah sold a machine that had originally cost £20,000 for £3,000. At the date of sale the asset's accumulated depreciation was £15,000.
Required
Show the journal entries to dispose of the asset and prepare the disposal account to calculate the profit or loss on disposal.
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Disposal account –––––– –––––– –––––– ––––––
Machine account
–––––– –––––– –––––– ––––––
Accumulated depreciation account
–––––– –––––– –––––– ––––––
Example 2
Bob sold a car that had been purchased for £25,500. Depreciation on motor vehicles is calculated at 25% on a straight-line basis. The car was owned for 3 years before it was sold. Sale proceeds were £1,500
Required
Show the journal entries to dispose of the asset and prepare the disposal account to calculate the profit or loss on disposal.
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Disposal –––––– –––––– –––––– ––––––
Motor vehicle account
–––––– –––––– –––––– ––––––
Accumulated depreciation account
–––––– –––––– –––––– ––––––
Activity 2
A building that had depreciation for ten years at 2% on cost was sold during the year for £50,000. Its original purchase price was £43,000.
Required
Show the journal entries to dispose of the asset and prepare the disposal account to calculate the profit or loss on disposal.
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Disposal –––––– –––––– –––––– ––––––
Building account
–––––– –––––– –––––– ––––––
Accumulated depreciation account
–––––– –––––– –––––– ––––––
Part exchange
You may come across a situation where instead of selling a fixed asset for cash, an old asset is taken by the supplier in part exchange for a new asset. A cheque/cash is paid for the net cost of the new asset, after offsetting the part exchange value of the old asset.
It is important that the new asset is recorded at its full cost, not the net amount for which a cheque/cash is paid. So in this situation you have got to deal with both the sale of one asset and the purchase of another.
Journals for part exchange
£ £ 1 Dr Disposal account X Cr Fixed asset cost account X
2 Dr Accumulated depreciation X Cr Disposal account X
3 Dr Fixed asset cost account X (with part exchange value) Cr Disposal account X
4 Dr Fixed asset cost account X (with net cost) Cr Bank/creditors X
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Example 3
During the year Sarah part exchanged a machine that had originally cost £20,000 and had accumulated depreciation of £17,000.
The new machine cost £15,000 and a cheque for £14,000 was written for the remaining balance.
Required
Prepare the journal entries to account for the disposal and purchase of the assets and write up the disposal account to calculate the profit or loss on disposal.
Disposal account –––––– –––––– –––––– ––––––
Machine account
–––––– –––––– –––––– ––––––
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Accumulated depreciation –––––– –––––– –––––– ––––––
Activity 3
Bob part exchanged a car at a trade in value of £2,500. The car originally cost £24,000 and had been depreciated for 4 years at 10% on cost. The new vehicle's full cost was £27,000.
Required
Prepare the journal entries to account for the disposal and purchase of the assets and write up the disposal account to calculate the profit or loss on disposal.
Disposal –––––– –––––– –––––– ––––––
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Motor vehicle account –––––– –––––– –––––– ––––––
Accumulated depreciation
–––––– –––––– –––––– ––––––
Part-exchange with VAT
You may be asked to deal with a situation where a business registered for VAT disposes of a fixed asset to a supplier in part exchange for a new asset. As previously, a cheque/cash is paid for the net cost of the new asset, after offsetting the part exchange value of the old asset.
It is important that the new asset is recorded at its full cost, not the net amount for which a cheque/cash is paid, and also excluding VAT. Similarly, the gross part-exchange value of the fixed asset disposed of should be split between net sale proceeds and output VAT. Note that, in the year of disposal, the cost of the fixed asset disposed of will be exclusive of VAT in the accounting records. The split of the gross cost between fixed asset cost and input VAT would have been done in a previous year when it was first purchased.
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Journals for part-exchange of fixed assets with VAT
Example 4
During the year Fernando disposed of a van in part exchange for a new van. This van had originally cost £15,000 plus VAT at 17.5% several years ago and had accumulated depreciation of £12,750.
The new van cost £20,000 plus VAT at 17.5%. The gross part-exchange allowance including VAT was £4,935. A cash settlement was paid for the net amount outstanding.
Required
Prepare the journal entries to account for the disposal and purchase of the assets and write up the disposal account to calculate the profit or loss on disposal.
£ £ 1 Dr Disposal account X (as normally) Cr Fixed asset cost account X 2 Dr Accumulated depreciation X (as normally) Cr Disposal account X 3 Dr Fixed asset
Dr VAT (input VAT) Cr Creditors
X X
X
Account for the gross cost of the new fixed asset purchased split between asset cost and input VAT
4 Dr Creditors
Cr VAT (output vat) Cr Fixed asset disposals
X X X
Account for the gross part-exchange value received on the fixed asset disposed – split between disposal value and output VAT
5 Dr Creditors
Cr Cash X
X Make net payment to conclude the transaction
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Solution
£ £ 1 Dr Disposal account (as normally) Cr Fixed asset cost account 2 Dr Accumulated depreciation (as normally) Cr Disposal account 3 Dr Fixed asset
Dr VAT (input VAT) Cr Creditors
Account for the gross cost of the new fixed asset purchased – split between asset cost and input VAT
4 Dr Creditors
Cr VAT (output vat) Cr Fixed asset disposals
Account for the gross part-exchange value received on the fixed asset disposed – split between disposal value and output VAT
5 Dr Creditors
Cr Cash Make net payment to conclude the transaction
Disposal of fixed asset –––––– –––––– –––––– ––––––
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Activity 4
During the year Jamie disposed of a fixed asset in part exchange for a new fixed asset. This asset had originally cost £30,000 plus VAT at 17.5% several years ago and had accumulated depreciation of £18,800.
The new fixed asset cost £35,000 plus VAT at 17.5%. The gross part-exchange allowance including VAT was £9,400. A cash settlement was paid for the net amount outstanding.
Required
Prepare the journal entries to account for the disposal and purchase of the assets and write up the disposal account to calculate the profit or loss on disposal.
Solution
£ £ 1 Dr Disposal account (as normally) Cr Fixed asset cost account 2 Dr Accumulated depreciation (as normally) Cr Disposal account 3 Dr Fixed asset
Dr VAT (input VAT) Cr Creditors
Account for the gross cost of the new fixed asset purchased – split between asset cost and input VAT
4 Dr Creditors
Cr VAT (output vat) Cr Fixed asset disposals
Account for the gross part-exchange value received on the fixed asset disposed – split between disposal value and output VAT
5 Dr Creditors
Cr Cash Make net payment to conclude the transaction
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Disposal of fixed asset –––––– –––––– –––––– –––––– Recording acquisition and disposals in the fixed asset register
Activity 5
The following is an extract from a purchase invoice by Staplers office supplies
SALE INVOICE
Computer Supplies Limited High Street Nottingham NE34 1AN Telephone: 0116 259 4562 Fax: 0116 649 3255 VAT registration: 289721918 Date/Tax point: 30 November 2009 Invoice no: 7245 Your order no: FE2088 To
Staplers Office Supplies
Pencils Business Centre Pencil Lane Leicester LE3 3EX £ Computer Netbook 1,375.00 Delivery 25.00 Carry case 50.00 1,450.00 VAT @ 17½% 253.75 Total £1,703.75 TERMS NET 30 DAYS Approved by: B Dell
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The following relates to the sale of a vehicle (part exchange)
Reg No: ST 08 PLS
Date of sale 31/10/09
Selling price ex VAT £2,000
Further information
• Staplers has a policy of capitalising expenditure over £1,000 • Computer equipment is depreciated at 30% on a straight line basis • Vehicles are depreciated at 20% on a reducing balance basis • Fixed assets are depreciated in the year of acquisition but none in the year
of disposal
Record the acquisition in the fixed asset register:
(a) The acquisition during the year ended X09
(b) Depreciation for the year ended X09
(c) Any disposals in the year ended X09
Fixed Assets Register
Description Acquisition Date
Cost Depreciation NBV Funding Source
Disposal Proceeds
Disposal Date
Computer Equipment
Computer Network
30/6/X7 5,000.00 Cash
Y/E 31/12/X7 1,500.00 3,500.00 Y/E 31/12/X8 1,500.00 2,000.00 Y/E 31/12/X9
1,500.00 500.00
Laser Printer 30/10/X9 1,565.00 Credit Y/E 31/12/X9 469.50 1,095.50 Computer Netbook
31/11/X9
Y/E 31/12/X9
Motor Vehicles ST 07 PLS 1/6/X7 7,500.00 Y/E 31/12/X7 1,500.00 6,000.00 Y/E 31/12/X8 1,200.00 4,800.00 Y/E 30/09/X9 ST 09 SLP 1/2/X9 10,000.00 31/12/X9
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SESSION 9: IRRECOVERABLE AND DOUBTFUL DEBTS Debtors should only be included as assets in a balance sheet if they are expected to settle the amounts due from them. The prudence concept requires an organisation to recognise future losses as soon as it becomes aware of their existence. This means that as soon as an organisation is aware that a debt may not be settled, then the asset value should be reduced by an adjustment being put through the accounts.
Irrecoverable debts (Bad debts)
This is a debt that will NOT be recovered. It should be completely removed from the ledger accounts and therefore from the balance sheet.
Double entry to account for an irrecoverable debt:
Dr Irrecoverable debt X (P and L) Cr SLCA X (Balance sheet)
Doubtful debts
This is a debt about which there is some question as to whether or not the amount will be settled. We must recognise this doubt in the accounts but we should not write off the debt completely, because the cash may be received. In any event we need to keeping pressing for it to be settled. Therefore we still need to show the debt as outstanding.
Example 1
Shauna has debtors at her year-end of £25,000.
There is concern about whether £5,000 of this will be settled.
Dr Doubtful debt adjustments 5,000(P and L) Cr Allowance for doubtful debts 5,000 (Balance sheet)
The allowance for doubtful debts is offset against the debtors balance in the balance sheet.
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Balance sheet extract
Debtors 25,000 Less allowance for doubtful debts (5,000) –––––– 20,000
This treatment clearly shows that there is doubt as to whether the debt will be received but does not write it off and we can continue chasing it.
Changes in allowance
As you are aware, any item that appears in the balance sheet is carried forward into the next accounting period. This means that there may be a balance on the allowance for doubtful debts account brought forward.
It is unlikely that the allowance will stay the same from one year to the next, so you may need to change the amount carried in the balance sheet.
The key thing to remember is that you only need to take account of either the increase or the decrease in the allowance, in the profit and loss account.
Increase
Dr Doubtful debt adjustments X Cr Allowance for doubtful debts X
In each case you would only enter the increase in the allowance
Decrease
Dr Allowance for doubtful debts X Cr Doubtful debt adjustments X
In each case you would only enter the decrease in the allowance
Example 2
Mina has debtors at the year-end of £50,000. There is a allowance for doubtful debts brought forward of £8,000. She feels that in this accounting period that this allowance should be increased to £10,000.
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Required
Prepare the journal entries to account for the increase in the allowance
Activity 1
Susan has debtors at the year-end of £35,000. There is a brought forward allowance for doubtful debts of £4,300. Susan believes the allowance should be 10% of the year-end debtors figure.
Required
Prepare the journal entries to account for the new allowance
Types of provision for doubtful debts
There are two main types:
• Specific allowance – calculated by reference to a particular invoice or debtor balance.
• General allowance – this is an allowance against debtors as a whole, normally expressed as a percentage of the debtors balance.
Example 3
A business has debtors of £356,000 of which £16,000 are to be written off as an irrecoverable debts. Of the remainder, a specific allowance is to be made against a debt of £2,000 and a general allowance of 4% is required against the remaining debtors. The opening balance on the allowance for doubtful debts account is £12,000.
Show the entries in the allowance for doubtful debts account, the sales ledger control account and the irrecoverable debt expense account.
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Workings
Allowance for doubtful debts £ £ Balance b/d 12,000
Sales ledger control account
£ £ Balance b/d 356,000
Irrecoverable debt expense account
£ £
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Activity 2
A business has debtors of £712,000 of which £32,000 are to be written off as irrecoverable debts. Of the remainder a specific allowance is to be made against a debt of £4,000 and a general allowance of 4% is required against the remaining debtors. The opening balance on the allowance for doubtful debts account is £24,000.
Show the entries in the allowance for doubtful debts account, the sales ledger control account and the irrecoverable debts expense account.
Workings
Allowance for doubtful debts £ £ Balance b/d 24,000
Sales ledger control account
£ £ Balance b/d 712,000
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Irrecoverable debt expense account £ £
It is very important that you deal with these allowances in a set order:
1 Deal with any irrecoverable debt write off first – remove it from the accounts completely
2 Calculate the specific allowance 3 Calculate the general allowance 4 Calculate the total allowance and enter into the accounts (not forgetting to
deal with the increase or decrease in the total allowance only)
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SESSION 10: ACCRUALS AND PREPAYMENTS An organisation's profit and loss account and balance sheet is prepared on the basis of the accruals concept. Income is included on the basis of when it is earned, irrespective of whether it has been received in cash, and expenditure is included on the basis of when it is incurred, irrespective of whether it has actually been paid. This principle applies not only to sales and purchases but also to other income and expenses.
Accrual
Definition
An expense incurred in a period but not yet paid for – accounting for the accrual records this expense in the ledger accounts as below:
Accounting for an accrual – Journal entry
Dr Expense account * X Cr Accruals X (current liability in BS)
*Will depend on the expense that the accruals relates to i.e. will be rent and rates
Example 1
A business has a year-end of 31 December 2006. The last phone bill received and paid during the year covered the period to 31 October 2006.
Post year-end an invoice that covered November, December 2006 and January 2007 was received. The phone charge for that period was £600.
Required
Calculate the year-end accrual for the phone expense.
Example 2
A business has a year-end of 31 December 2005. The last gas bill received and paid covered the period from 1 January 2005 to 31 July 2005. The bill was for £1,400.Gas is expected to accrue evenly over the year.
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Required
Based on the information provided, estimate the gas accrual for the year to 31 December 2005.
Accounting for an accrual – Ledger entries
Expense account
Date Detail £ Date Detail £ Bank X Accrual account X Expense for the
year X
X X –– ––
Accrual account
Date Detail £ Date Detail £ Accrual c/d X Expense account X X X –– –– Accrual b/d X
Example 3
Harry started his business on 1 June 2003.
The bank summary shows payments of electricity expenses of £970 during the year ended 31 May 2004. At the year end there is an amount of £200 owing for electricity (this is for the two months April and May)
Write up the electricity account for the year ended 31 May 2004 and close it off by showing the transfer to the profit and loss account.
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Electricity account Date Detail £ Date Detail £ Note – the accrual account is included so that you can gain a full understanding of the accounting entries required. Normally, only the expense account is required in the examination
Accrual account Date Detail £ Date Detail £
Example 4
Ollie started his business on 1 June 2003.
The bank summary shows payments for selling expenses of £985 during the year ended 31 May 2004. Included in this amount is the last payment made of £300, which was for the quarter ended 31 March 2004.
Write up the selling expenses account for the year ended 31 May 2004 and close it off by showing the transfer to the profit and loss account and the appropriate accrual.
Selling expenses Date Detail £ Date Detail £
Accrual Date Detail £ Date Detail £
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Prepayments
Definition
A payment made in advance –the expense relates to a period following the current accounting period.
Example 5
Andrews’s year-end is 31 December 2006.
The bank summary for premises insurance shows that Andrew paid £1,500.
This was to cover the period 1 January 2006 to 31 March 2007.
Required
Calculate the prepayment as at 31 December 2006.
Example 6
Jason’s year end is 31 December 2008
Jason paid road tax of £120. This was for the period 1 July 2008 to 30 June 2009.
Required
Calculate the prepayment as at 31 December 2008.
Accounting for a prepayment – Journal entry
Dr Prepayments X (current asset in BS) Cr Expense* X
*Will depend on the expense that the prepayment relates to i.e. will be insurance and road tax in the examples above.
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Accounting for a prepayment – Ledger entries
Expense account* Date Detail £ Date Detail £ Bank X Prepayment c/d X Expense for the
year X
X X –– ––
Prepayment account*
Date Detail £ Date Detail £ Expense account X Balance c/d X X –– –– Balance b/d
Example 7
Jerry started her business on 1 April 2006. During the year ended 31 March 20X7 she made the following payments for rent of £3,000. At the year end she had paid £600 in advance.
Write up the rent expense account for the year ended 31 March 20X7 and close it off by showing the transfer to the profit and loss account.
Rent Date Detail £ Date Detail £
Prepayment Date Detail £ Date Detail £
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Example 8
Sophie started her business on 1 January 2006. During the year ended 31 December 2006 she paid £4,000 for administration expenses.
Included in this payment is an amount paid in November of £1,500 relating to the months of November, December and January.
Write up the administration expense account including the appropriate prepayment.
Administration expenses
Date Detail £ Date Detail £ Note – the prepayment account is included so that you can gain a full understanding of the accounting entries required. Normally, only the expense account is required in the examination.
Prepayment Date Detail £ Date Detail £
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Opening accruals and prepayments
In some questions there will be an opening accrual or prepayment brought forward from the previous accounting period. This needs to be reversed from the accrual or prepayment account and recorded in the relevant expense account at the beginning of the financial year.
Example 9
The electricity account for the year ended 30 June 20X3 was as follows:
Opening balance for electricity accrued at 1 July 20X2 £300
The bank payments made during the year were £3,060 and included in this amount was a payment of £840 relating to the three months ended 30 April 20X3.
Write up the electricity expense account clearly showing the accrual balance brought forward and the balance carried forward for the year ended 30 June 20X3.
Electricity account Date Detail £ Date Detail £ Note – the accrual account is included so that you can gain a full understanding of the accounting entries required, the opening accrual needs to be reversed at the beginning of the year and recorded in the relevant expense account. Normally, only the expense account is required in the examination.
Accrual account Date Detail £ Date Detail £
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Example 10
The insurance account for the year ended 31 December 20X3 was as follows:
Opening balance for insurance prepaid at 1 January 20X2 £10,000
On the 1 August it paid, in full, the annual insurance invoice of £36,000, to cover the following year. (1 August 20X3 to 31 July 20X4)
Write up the insurance expense account clearly showing the prepayment balance brought forward and the balance carried forward for the year ended 31December 20X3.
Insurance account Date Detail £ Date Detail £ Note – the prepayment account is included so that you can gain a full understanding of the accounting entries required, the opening prepayment needs to be reversed at the beginning of the year and recorded in the relevant expense account. Normally, only the expense account is required in the examination.
Prepayment account Date Detail £ Date Detail £
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Income accounts
Some businesses may have sundry types of income, e.g. rental income or interest received. Adjustments for accruals/prepayments may be required, similar to those for expenses dealt with above.
Accrued income – income earned not yet received
Dr Accrued income X (current asset B/S) Cr Sundry income* X
*E.g. rent received/interest received
Prepaid income – income received in advance
Dr Sundry income* X Cr Prepaid income X (current liability B/S)
*E.g. rent received/interest received
Example 11
A business has two properties, A and B, which are rented out to other parties. The rental on property A for the year is £12,000 but only £10,000 has been received. The rental on property B is £17,000 and the client has paid £18,000 so far this year.
Required
Prepare the journals to account for the accrued and prepaid income on properties A and B.
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SESSION 11: CONTROL ACCOUNTS AND RECONCILIATIONS So far in API when we have been looking at sales and purchases, we have only considered the sales ledger control account (SLCA) and purchase ledger control account (PLCA).
Both of these control accounts only deal with the total amount of what is owed by debtors and to creditors.
Therefore individual debtors and creditors balances are required for accounting and monitoring purposes. This is done via the subsidiary ledgers / memorandum accounts, were individual transactions are recorded in separate accounts for each debtor / creditor.
Subsidiary ledgers / memorandum accounts
These are normally referred to as sales ledger / purchase ledger accounts.
These do not form part of the double entry.
What is posted into the control accounts needs to be posted into the appropriate individual subsidiary ledger accounts.
Example 1
Credit sales
At the beginning of the month the following customers buy goods on credit:
£
Lisa 200 Jane 100 Kate 40 Martyn 60
Total 400
The journal entries into the nominal ledger are:
Dr Cr
SLCA Sales
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You must also record the transactions in the subsidiary ledger:
Lisa Jane Kate Martyn
At the end of the month you receive some cash from your debtors:
Martyn £ 60 Jane £ 60
The journal entries into the nominal ledger are:
Dr Cr
You are also required to update the subsidiary ledgers.
To ensure that the postings have been recorded correctly in both the nominal and subsidiary ledger, you need to reconcile them on a regular basis.
Control account reconciliations
SLCA 280 ––– Individual ledgers Lisa 200 The two balances are the Jane 40 same Kate 40 Martyn 0 280 –––
SESSION 11: CONTROL ACCOUNTS AND RECONCILIATIONS
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We should reconcile our subsidiary ledger accounts to the control accounts on a regular basis.
Procedure:
You need to remember all other transactions also need to be included: Complications
Contras
There may be situations where a customer is also a supplier. Instead of both owing money to each other, it may be agreed that the balances are offset.
Example 2
Andy is one of our customers and a supplier to us
He owes us £100 and we owe him £200
We agree these can be offset
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Subsidiary SL Andy Subsidiary PL Andy B/d 100 B/d 200 This must also be reflected in the control accounts
Dr Cr
Errors
On reconciling the control accounts to the subsidiary accounts, you may find that their totals do not agree. This could be a result of several types of errors.
Once an error has been detected, you should: Example 3 Slaven, maintains a purchase ledger control account (PLCA) as part of its double entry records. The balance on the purchase ledger control account is £15,654 and the total list of individual supplier balances (LIST) amounted to £14,416. The following errors were discovered: (i) A purchases invoice amounting to £586 was not recorded in the purchases
day book. (ii) Debit balances totalling £460 were omitted from the list of balances. (iii) A contra entry of £1,698 was not recorded in the purchase ledger control
but was recorded in the individual supplier balances. Reconcile the list of balances with the purchase ledger control account.
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Purchase ledger control account
Date Detail £ Date Detail £ List of supplier balances £
Example 4
Victor has discovered that his sales ledger control account (SLCA) does not agree with the total of his list of sales ledger balances (LIST). The balance on the sales ledger control account is £13,500 and the total list of individual customer balances (LIST) amounted to £11,800. The following errors have subsequently been discovered: (i) A sales invoice of £98 was not recorded in the sales day book. (ii) The sales day book was overcast by £560. (iii) A sales invoice of £67 was correctly recorded in the sales day book
however; it was posted to the individual customers account as £76. (iv) A contra entry £390 was omitted from the sales ledger control account. It
was correctly recorded elsewhere. (v) Debit balances of £759 were omitted from the sales ledger balances Reconcile the list of balances with the sales ledger control account.
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Sales ledger control account
Date Detail £ Date Detail £ List of customer balances £
SESSION 11: CONTROL ACCOUNTS AND RECONCILIATIONS
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The Bank Reconciliation
At regular intervals the cashier must check that the cash book is correct by comparing the cash book with the bank statement. Why might they not agree? Process 1 Tick off outstanding items from previous reconciliation/ agree opening
balance 2 Tick off items in cash received to bank statements 3 Tick off items in cash payments to bank statements 4 Any item not ticked on bank statement should be included in cash account 5 Any item not ticked on cash account should be included in reconciliation.
Bank Reconciliation Proforma £ £ Balance per bank statement x Add: outstanding lodgements Detail x Less: unpresented cheques Detail x Detail x (x) Balance per cash book x
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Example 5 On 2 July, Night Night Beds Ltd received the following bank statement as at 30 June 2005.
HIGH STREET BANK Plc High Street, Little Heath, Leeds LS28 1AD
To: Night Night Beds Ltd Account No 48917508 30 June 2005 Date
Details Debit Credit Balance
2005 £ £ £1 June Bal b/f 8,196C5 June Cheque no 816078 800 7,396C5 June Credit 2,000 9,396C8 June Bank Giro credit 3,500 12,896C10 June Cheque no 816079 1,864 11,032C16 June Direct debit 700 10,332C24 June Bank charges 52 10,280C25 June Direct debit 400 9,880C30 June Cheque no 816081 1,290 8,590C D = Debit C= Credit Night Night Beds Ltd's cash account for June 2005 was as follows
Date 2005
Details
Bank £
Date 2005
Cheque No
Details
Bank £
1 June Balance b/f 7,396 1 June 816079 SpringRite 1,8645 June Barbara’s
Beds 2,000 5 June 816080 Fabric House 2,120
29 June Renovates 5,120 22 June 816081 Heads Up 1,290 29 June 816082 John Joiner 7,400
29 June 816083 Foamies 200
SESSION 11: CONTROL ACCOUNTS AND RECONCILIATIONS
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Activity 1
The following differences have been identified when comparing the cash book with the bank statements.
(i) Bank interest received £40, had not been entered in the cashbook
(ii) A BACS receipt of £6,200 and £460 from two customers has not been entered in the cashbook
(iii) A receipt for £650 has been recorded in the cashbook as £750
(iv) Cheques drawn for £3,940 entered in the cashbook are not showing on the bank statement.
Using the table below show those items that would be required to update the cashbook.
Adjustment Amount £ Debit Credit
Activity 2
The following differences have been identified when comparing the cash book with the bank statements.
(i) Bank charges £70, had not been entered in the cashbook (ii) A BACS receipt of £12,100 and £1,569 from two customers has not been
entered in the cashbook
(iii) There are unpresented cheques of £300
(iv) A receipt from a customer for £1,500 has been entered in the cash book but it is not yet showing on the bank statement.
(v) A cheque for £450 has been incorrectly entered in the cashbook as £540.
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Using the table below show those items that would be required to update the cashbook.
Adjustment Amount £ Debit Credit
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SESSION 12: SUSPENSE ACCOUNTS AND ERRORS Suspense accounts are set up when a problem arises:
• the totals of the debit and credit columns of the trial balance are not the same; or
• the correct posting for one half of the double entry is unknown.
The trial balance difference / unknown posting is initially placed in a suspense account. Once the solution to the problem has been identified, the suspense account is cleared by the relevant entry
Errors causing the trial balance not to balance include:
But there are other errors which will not cause the trial balance totals to be different:
Obviously, these do not require an initial entry in the suspense account.
It is important that you have a firm understanding of what does and does not affect the suspense account as examination questions on this area aim to test this understanding. You may well be asked to make the entries which clear the suspense account.
You will normally be given a number of adjustments and be asked to write out the journal entries to correct them. Some will affect suspense, but others won’t!
Correction of errors
There are three key steps:
1 Determine the incorrect double entries 2 Determine the entries that should have been made 3 Produce a journal entry that cancels the error and results in the correct
entries
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Example 1
The rent expense of £100 was credited correctly to the bank but the debit entry went to repairs and renewals.
1 The incorrect entry has been debited to repairs and renewals with £100 2 The correct entry is to debit rent with £100 3 The journal entry required to correct this is:
Example 2
Some purchases for cash of £600 had been correctly debited to the purchases account. No other entry was made.
1 An entry has been omitted 2 The correct entry is to Cr Cash £600 3 The journal entry required to correct this is:
Activity 1
The electricity expense of £550 has been correctly credited to the bank account but has been debited to the rent account. Prepare the journal to correct the error.
Activity 2
The repairs expense of £735 has been correctly credited to the bank account but has been debited to the wages account. Prepare the journal to correct the error.
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Activity 3
The rates expense of £1,500 has been correctly debited to the expense account, but has been credited to the fixed assets account. Prepare the journal to correct the error and clear suspense.
Activity 4
Some sales for cash of £900 had been correctly credited to the sales account. No other entry was made. Prepare the journal to correct the error and clear suspense.
Activity 5
Some credit sales for £450 had been correctly credited to the sales account, and £540 debited to the debtors control account. Prepare the journal to correct the error and clear suspense.
Activity 6
A new fixed asset had been purchased for £5,800. The credit entry had been correctly made, but the debit entry had been made for £58,000. Prepare the journal to correct the error and clear suspense.
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Example 3 The following errors were discovered during the year in the accounts of ‘Comedy R Us’ (i) Purchases of comedy stage equipment for £35,000 was debited to
purchases and credited to bank. (ii) Discounts received of £75 were debited to the discount allowed. The other
side of the entry was correctly recorded in the credit supplier’s account. (iii) A payment received of £69 from a credit customer was debited to the sales
ledger control account and credited to the bank account (iv) A fixed asset which originally cost £7,890, accumulated depreciation £2,367
was disposed of for £9,000. The only accounting entry was to debit cash. (v) A cash payment to purchase a mobile comedy van had been correctly
entered in the cash book but had been debited to the motor expenses account. The amount was £15,000.
(vi) A cash payment of £250 to purchase some stationery had been correctly entered in the cashbook but no other entry was made.
(vii) Cash drawings of £250 have not been accounted for.
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Complete the journal entries to correct the errors. The balance on the suspense account was £8,900 credit; show the entries that affect the suspense account to clear it.
£ £ (i) (ii) (iii) (iv) (v) (vi) (vii)
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Suspense account Date Detail £ Date Detail £
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SESSION 13: SSAP 9 STOCK Goods held for resale at the end of an accounting period
For API you will be required to calculate stock at the end of an accounting period and post it to the ledger system by way of a journal entry.
SSAP 9 – and the calculation of stock
Stock should be valued at the lower of cost and net realisable value.
Cost – expenditure incurred in the normal course of business in bringing a product to its present location and condition.
Net realisable value – the actual or estimated selling price less all further costs to complete the item and less marketing, selling and distribution costs.
Stock valuation is the
Lower of
COST NRV
Closing stock and the final accounts
Once the stock has been counted and valued, then it must be included in the accounting records.
Accounting for closing stock
At the period end adjustments must be made to account for stocks in the profit and loss account and the balance sheet.
The journal required is:
Dr Stock B/S X Cr Stock P and L X
The stock in the balance sheet is shown as a current asset. The stock in the profit and loss account forms part of the cost of sales calculation.
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Balance sheet
The closing stock is an asset of the business and is carried on the balance sheet as shown in the extract below:
£ £ Current assets Closing stock X Debtors X Less allowance for irrecoverable debts (X) ––– X Prepayments X Bank and cash X
Accounting for opening stock
This is the balance on the stock account, being the closing stock figure for the previous accounting period.
No entries are put through this stock account until the period end; this is why it appears in the trial balance.
The opening stock balance in the stock account (debit balance) is transferred to the trading and profit and loss account as part of cost of sales.
The double entry for this is:
Dr Stock P and L Cr Stock B/S
This opening stock balance has now been removed from the stock account.
Trading profit and loss account
The layout of the profit and loss account was considered in detail in an earlier chapter. Below is a reminder of how the trading element is set out:
£ £ Sales X Less: cost of sales Opening stock X Plus: purchases X ___ X Less: closing stock (X) ___ (X) ___Gross profit X ___ As you will see the ‘cost of sales’ figure is made up of the opening stock plus the purchases for the period less the closing stock.
SESSION 13: SSAP 9 STOCK
KAPLAN PUBLISHING 109
Example 1
At 31 December 20X6 Football had the following items of stock.
Total cost £
Realisable value
£
Estimated Cost of
realisation £
40 pairs of goal –keepers gloves
160
400
40
20 footballs 300 240 20 12 pairs of football socks 12 14 4 24 copies of the book “Best Goals”
72
24
2
Requirement
Show the value of the stock items as they would appear in the balance sheet of Football at 31 December 20X6.
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Example 2
At 31 December 20X8 Racquets had the following items of stock.
Total cost £
Realisable value
£
Estimated cost of
realisation £
400 “Sampras” racquets
40,000 85,000 4,000
350 “MacEnroe” headbands
1,050 1,500 200
240 pairs of “Murray” trainers
9,600 19,200 5,000
500 copies of the book “British Tennis Champions”
25,000 100 25
Requirement
(a) Prepare the journal entry to account for the total cost of closing stock in the accounts for the year ended 31 December 20X8.
(b) Prepare a revised valuation for closing stock to include in the accounts for the year ended 31 December 20X8 in accordance with SSAP 9, and show the journal adjustment required to restate closing stock to the correct valuation.
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SESSION 14: THE EXTENDED TRIAL BALANCE The extended trial balance is a working paper that allows the initial trial balance to be adjusted to provide the figures required for preparation of the final accounts.
It brings together the trial balance and all additional adjustments that we have previously gone through.
Typical layout
Trial balance Adjustments P and L account
Balance sheet
Account name Dr Cr Dr Cr Dr Cr Dr Cr
Steps for preparing the ETB
1 Enter trial balance 2 Put through adjustments
• Accruals/prepayments • Closing stock • Irrecoverable and doubtful debts • Depreciation/disposals/additions re fixed assets • Errors • Clear suspense
3 Total the adjustments columns (they should equal one another) 4 Cross cast the information to the profit and loss account columns and the
balance sheet columns as appropriate 5 The figure required to make the totals of the profit and loss Dr and Cr
columns equal is entered on the extended trial balance as the profit or loss for the period. The other half of the double entry is in one of the balance sheet columns, to make their totals equal.
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Remember
Profit and loss account will include anything that relates to a particular period i.e. the income and expenses
Balance sheet incorporates anything that straddles a period-end and is carried forward
Example 1
Set out below is the trial balance of Jackson, a sole trader, extracted at 31 December 20X5: Dr Cr £ £ Capital account 15,660Cash at bank 4,020Fixed assets at cost 18,840Accumulated depreciation at 31.12.X4 6,940Sales ledger control account 3,660Stock at 31.12.X4 3,360Purchases ledger control account 780Sales 28,840Purchases 16,360Rent 2,200Electricity 1,880Rates 1,900 –––––– –––––– 52,220 52,220 –––––– ––––––
On examination of the accounts, the following points are noted:
• Depreciation for the year of £1,884 is to be charged
• An allowance for doubtful debts of 3% of total debts is to be set up.
• Purchases include £3,000 of goods which were bought for the proprietor’s personal use.
• The rent account shows the monthly payments of £200 made from 1 January to 1 November 20X5 inclusive. Due to an oversight, the payment due on 1 December 20X5 was not made.
• The electricity charge for the last three months of 20X5 is outstanding and is estimated to be £800.
• Stock at 31.12.X5 was £2,280.
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Acc
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ial b
alan
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Adj
ustm
ents
Pr
ofit
and
loss
a/c
B
alan
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heet
D
r C
r D
r C
r D
r C
r D
r C
r £
£ £
£ £
£ £
£ C
apita
l 15
,660
Cas
h 4,
020
Fixe
d as
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18
,840
Acc
umul
ated
dep
’n
6,94
0
S
LCA
3,
660
Ope
ning
sto
ck
3,36
0
P
LCA
78
0
S
ales
28
,840
Pur
chas
es
16,3
60
R
ent
2,20
0
E
lect
ricity
1,
880
Rat
es
1,90
0
D
epre
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expe
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L
Net
pro
fit –
bal
fig
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Activity 1
Set out below is the trial balance of Blackstone, a sole trader, extracted at 31 December 20X5: Dr Cr £ £ Capital account 7,830Cash at bank 2,010 Fixed assets at cost 9,420 Accumulated depreciation at 31.12.X4 3,470Sales ledger control account 1,830 Stock at 31.12.X4 1,680 Purchases ledger control account 390Sales 14,420Purchases 8,180 Rent 1,100 Electricity 940 Rates 950
______ ______ 26,110 26,110 –––––– –––––– On examination of the accounts, the following points are noted:
• Depreciation for the year of £942 is to be charged.
• An allowance for doubtful debts of 3% of total debts is to be set up.
• Purchases include £1,500 of goods which were bought for the proprietor’s personal use.
• The rent account shows the monthly payments of £100 made from 1 January to 1 November 20X5 inclusive. Due to an oversight, the payment due on 1 December 20X5 was not made.
• The rates account shows the prepayment of £150 brought forward at the beginning of 20X5 (and representing rates from 1 January 20X5 to 31 March 20X5) together with the £800 payment made on 1 April 20X5 and relating to the period from 1 April 20X5 to 31 March 20X6.
• The electricity charge for the last three months of 20X5 is outstanding and is estimated to be £400.
• Stock at 31 December 20X5 was £1,140.
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and
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a/c
B
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heet
D
r C
r D
r C
r D
r C
r D
r C
r £
£ £
£ £
£ £
£ C
apita
l 7,
830
C
ash
2,01
0
Fixe
d as
sets
9,
420
P
rovi
sion
for d
ep’n
3,
470
S
LCA
1,
830
O
peni
ng s
tock
1,
680
P
LCA
39
0
Sal
es
14,4
20
Pur
chas
es
8,18
0
Ren
t 1,
100
E
lect
ricity
94
0
Rat
es
950
D
epre
ciat
ion
expe
nse
A
llow
ance
for D
D
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ance
for D
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– P
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Net
pro
fit –
bal
fig
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Detailed below is the proforma layout of the sole trader profit and loss account and balance sheet.
Complete the profit and loss account and balance sheet for Blackstone
Profit and loss account for the year ended 31 December 2005 Blackstone
£ £ Sales Less: Cost of sales
Opening stock Purchases Closing stock Gross profit Sundry income Expenses Rent Rates Electricity Depreciation Irrecoverable debt Net profit
SESSION 14: THE EXTENDED TRIAL BALANCE
KAPLAN PUBLISHING 117
Balance sheet as at 31 December 2005
Blackstone £ £ £
Fixed assets Cost Depreciation Fixed assets –––––– –––––– Current assets Stock Debtors Less allowance of doubtful debt
–––––– Bank Prepayment –––––– –––––– Current liabilities Creditors Accrual –––––– –––––– Net current assets –––––– Total assets less current liabilities Long term liabilities Net assets Financed by Capital Profit Drawings –––––– ––––––
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Activity 2
You are working on the final accounts of Inder’s business with a year end of 31 March. A trial balance has been drawn up and a suspense account opened with a credit balance of £2,250. You now need to make some corrections and adjustments for the year ended 31 March 20X1. Extract from extended trial balance
Account name Trial balance Adjustments Dr Cr Dr Cr £ £ £ £
Allowance for doubtful debts
730
Bank 8,600 Closing stock – balance sheet
Closing stock – P&L account
Depreciation charge Irrecoverable debts Loan 8,000 Loan interest 480 Plant and machinery – accumulated depreciation
44,000
Sales 420,000 Sales ledger control account
49,000
Suspense 2,250 VAT 11,200
On examination of the accounts, the following points are noted:
• Entries need to be made for an irrecoverable debt of £384
• A loan repayment of £2,600 has been made. The correct entry was made to the loan account but no other entries were made.
• No entries have been made for closing stock for the year ended 31 March 20X1. Closing stock has been valued at 37,000. Included in this figure are some items costing £2,500 that will be sold for £1,950.
• The figures from the columns of the sales day book for 23 March have been totalled correctly as follows:
SESSION 14: THE EXTENDED TRIAL BALANCE
KAPLAN PUBLISHING 119
Sales column £2,000
VAT column £350
Total column £2,350
The amounts have been posted as follows:
Cr Sales £2,000
Cr VAT £350
Dr Sales ledger control account £2,000
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Final accounts preparation from trial balance – summary
You may be faced with a situation in the exam where you are asked to prepare the extended trial balance and identify the items that should be recorded in the financial accounts.
The set up will be very similar to what you have seen before in that you will be given a trial balance (or asked to prepare one); you will be given adjustments and then asked to prepare the profit and loss account and/or balance sheet.
You need to ensure that you take a step-by-step approach.
1 Prepare the trial balance if it is not already completed
2 Deal with the adjustments (write them out even if you are not requested to do so). This will ensure you pick up all of your adjustments when you come to preparing the financial statements
3 If you have a suspense account to deal with, at this point write up the suspense ‘T’ account to ensure that it is fully cleared out
4 Set up standard proformas for the profit and loss and balance sheet
5 Enter items into the appropriate statement, initially taking the figures from the trial balance but ensuring you check your adjustments to see if any of them affect the trial balance figures.
. .
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SESSION 15: SOLUTIONS TO SESSION 3 Example 1
JOURNAL 1 Dr Bank 2,000.00 Cr Capital 2,000.00 2 Dr Purchases 175.00 Cr Creditors (PLCA) 175.00 3 Dr Fixtures and fittings 150.00 Cr Bank 150.00 4 Dr Cash 275.00 Cr Sales 275.00 5 Dr Purchases 114.00 Cr Creditors (PLCA) 114.00 6 Dr Rent 15.00 Cr Cash 15.00 7 Dr Stationery 27.00 Cr Cash 27.00 8 Dr Creditors (PLCA) 23.00 Cr Purchase returns 23.00 9 Dr Debtors (SLCA) 77.00 Cr Sales 77.00 10 Dr Motor vehicles 300.00 Cr Bank 300.00 11 Dr Wages 117.00 Cr Cash 117.00 12 Dr Drawings 44.00 Cr Cash 44.00
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Using the journal entries that you prepared above, write up the Ledger accounts to show the first months transactions.
Bank Date Detail £ Date Detail £ Capital 2,000.00 Fixtures and
fittings 150.00
Motor vehicles 300.00 Balance c/d 1,550.00 2,000.00 2,000.00 Balance b/d 1,550.00
Capital
Date Detail £ Date Detail £ Bank 2,000.00
Purchases
Date Detail £ Date Detail £ Creditors 175.00 Creditors 114.00 Balance c/d 289.00 289.00 289.00 Balance b/d 289.00
Creditors (PLCA) Date Detail £ Date Detail £ Purchase returns 23.00 Purchases 175.00 Purchases 114.00 Balance c/d 266.00 289.00 289.00 Balance b/d 266.00
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Fixtures and fittings Date Detail £ Date Detail £ Bank 150.00
Sales Date Detail £ Date Detail £ Cash 275.00 Debtors 77.00 Balance c/d 352.00 352.00 352.00 Balance b/d 352.00
Cash Date Detail £ Date Detail £ Sales 275.00 Rent 15.00 Stationery 27.00 Wages 117.00 Drawings 44.00 Balance c/d 72.00 275.00 275.00 Balance b/d 72.00
Rent Date Detail £ Date Detail £ Cash 15.00
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Stationery Date Detail £ Date Detail £ Cash 27.00
Purchase returns Date Detail £ Date Detail £ Creditors 23.00
Debtors (SLCA)
Date Detail £ Date Detail £ Sales 77.00
Motor vehicles Date Detail £ Date Detail £ Bank 300.00
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Wages Date Detail £ Date Detail £ Cash 117.00
Drawings Date Detail £ Date Detail £ Cash 44.00
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Example 2
Cash
Date Detail £ Date Detail £ Capital 1,500.00 Rent 28.00 Cash 49.00 Bank 100.00 Repairs 18.00 Purchases 125.00 Motor expenses 15.00 Balance c/d 1,263.00 1,549.00 1,549.00 Balance b/d 1,263.00
Capital Date Detail £ Date Detail £ Cash 1,500.00
Purchases Date Detail £ Date Detail £ Creditors 296.00 Cash 125.00 Balance c/d 421.00 421.00 421.00 Balance b/d 421.00
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Creditors (PLCA) Date Detail £ Date Detail £ Purchase returns 18.00 Purchases 296.00 Bank 278.00 Fixtures and
fittings 120.00
Balance c/d 120.00 416.00 416.00 Balance b/d 120.00
Rent Date Detail £ Date Detail £ Cash 28.00
Bank Date Detail £ Date Detail £ Cash 100.00 Stationery 15.00 Creditors 278.00 Motor vehicle 395.00 Balance c/d 588.00 688.00 688.00 Balance b/d 588.00
Sales Date Detail £ Date Detail £ Debtors 54.00 Cash 49.00 Debtors 29.00 Balance c/d 132.00 132.00 132.00 Balance b/d 132.00
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Debtors (SLCA) Date Detail £ Date Detail £ Sales 54.00 Sales returns 14.00 Sales 29.00 Balance c/d 69.00 83.00 83.00 Balance b/d 69.00
Stationery Date Detail £ Date Detail £ Bank 15.00
Purchase returns
Date Detail £ Date Detail £ Creditors 18.00
Repairs Date Detail £ Date Detail £ Cash 18.00
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Sales returns Date Detail £ Date Detail £ Debtors 14.00
Motor vehicles
Date Detail £ Date Detail £ Bank 395.00
Motor expenses
Date Detail £ Date Detail £ Cash 15.00
Fixtures and fittings Date Detail £ Date Detail £ Creditors 120.00
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Example 3
Trial balance as at 31 December 2003
DEBIT CREDIT
£ £
Cash 1,263
Capital 1,500
Purchases 421
Creditors 120
Rent 28
Bank 588
Sales 132
Sales ledger control account 69
Stationery 15
Purchase returns 18
Repairs 18
Sales returns 14
Motor vehicles 395
Motor expenses 15
Fixtures and fittings 120
Total 2,358 2,358
SESSION 15: SOLUTIONS TO SESSION 3
KAPLAN PUBLISHING 131
Activity 1
Cash Date Detail £ Date Detail £ Capital (a) 40,000 Purchases (b) 2,000 Sales (g) 3,000 Insurance (d) 400 Debtors (m) 2,000 Advertising (f) 300 Telephone (h) 240 Creditors (i) 2,000 Stationery (k) 160 Creditors (l) 1,400 Drawings (n) 1,000 Balance c/d 37,500 45,000 45,000 Balance b/d 37,500
Capital Date Detail £ Date Detail £ Balance c/d 40,000 Cash (a) 40,000 40,000 40,000 Balance b/d 40,000
Purchases Date Detail £ Date Detail £ Cash (b) 2,000 Creditors (c) 6,000 Balance c/d 8,000 8,000 8,000 Balance b/d 8,000
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Creditors Date Detail £ Date Detail £ Cash (i) 2,000 Purchases (c) 6,000 Cash (l) 1,400 Storage units (e) 1,400 Balance c/d 4,000 7,400 7,400 Balance b/d 4,000
Insurance Date Detail £ Date Detail £ Cash (d) 400 Balance c/d 400 400 400 Balance b/d 400
Advertising Date Detail £ Date Detail £ Cash (f) 300 Balance c/d 300 300 300 Balance b/d 300
Telephone Date Detail £ Date Detail £ Cash (h) 240 Balance c/d 240 240 240 Balance b/d 240
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Stationery Date Detail £ Date Detail £ Cash (k) 160 Balance c/d 160 160 160 Balance b/d 160
Storage units Date Detail £ Date Detail £ Creditors (e) 1,400 Balance c/d 1,400 1,400 1,400 Balance b/d 1,400
Sales Date Detail £ Date Detail £ Balance c/d 11,000 Cash (g) 3,000 Debtors (j) 8,000 11,000 11,000 Balance b/d 11,000
Debtors Date Detail £ Date Detail £ Sales (j) 8,000 Cash (m) 2,000 Balance c/d 6,000 8,000 8,000 Balance b/d 6,000
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Drawings Date Detail £ Date Detail £ Cash (n) 1,000 Balance c/d 1,000 1,000 1,000 Balance b/d 1,000
Prepare the Trial Balance for James
Trial Balance as at 31 December 20X1
Detail Dr £
Cr £
Cash 37,500 Capital 40,000 Purchases 8,000 Creditors 4,000 Insurance 400 Advertising 300 Telephone 240 Stationery 160 Storage Units 1,400 Sales 11,000 Debtors 6,000 Drawings 1,000 55,000 55,000 –––––– ––––––
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KAPLAN PUBLISHING 135
Activity 2
Bank Date Detail £ Date Detail £ Capital (a) 10,000 Purchases (b) 200 Sales (cash sale
(g)) 1,000 Rent (d) 1,000
Dean (n) 100 Stationery (e) 60 Margaret (h) 100 Stationery (j) 40 Motor expenses
(k) 150 Peter (l) 1,000 Drawings (m) 300 Balance c/d 8,250 11,100 11,100 Balance b/d 8,250
Capital Date Detail £ Date Detail £ Balance c/d 10,000 Cash (a) 10,000 10,000 10,000 Balance b/d 10,000
Purchases Date Detail £ Date Detail £ Cash (b) 200 Balance c/d 600 Margaret (c) 400 600 600 Balance b/d 600
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Creditors Date Detail £ Date Detail £ Cash (h) 100 Purchases (c) 400 Cash (l) 1,000 Van (f) 4,000 Balance c/d 3,300 4,400 4,400 Balance b/d 3,300
Rent Date Detail £ Date Detail £ Cash (d) 1,000 Balance c/d 1,000 1,000 1,000 Balance b/d 1,000
Stationery Date Detail £ Date Detail £ Cash (e) 60 Balance c/d 100 Cash (j) 40 100 100 Balance b/d 100
Van Date Detail £ Date Detail £ Peter (f) 4,000 Balance c/d 4,000 Balance b/d 4,000 4,000 4,000
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Sales Date Detail £ Date Detail £ Cash (sale to
Greg)(g) 1,000 Dean (i) 140 Balance c/d 1,140 1,140 1,140 Balance b/d 1,140
Debtors Date Detail £ Date Detail £ Sales (i) 140 Cash (n) 100 Balance b/d 40 140 140 Balance b/d 40
Motor expenses Date Detail £ Date Detail £ Cash (k) 150 Balance c/d 150 150 150 Balance b/d 150
Drawings Date Detail £ Date Detail £ Cash (m) 300 Balance c/d 300 300 300 Balance b/d 300
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Prepare the Trial Balance for Clive
Trial Balance as at 31 January 20X1
Detail Dr £
Cr £
Cash 8,250 Capital 10,000 Purchases 600 Creditors 3,300 Rent 1,000 Stationery 100 Van 4,000 Sales 1,140 Debtors 40 Motor expenses 150 Drawings 300 14,440 14,440 –––––– ––––––
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KAPLAN PUBLISHING 139
Example 4
(c) Close off the following ledger accounts
Sales Date Details Amount Date Details Amount 2000 £ 2000 £ 30-Nov Balance c/d 319,200 30-Nov Balance b/d 309,000 30-Nov Debtors 10,200 319,200 319,200 01-Dec Balance b/d 319,200 Sales returns Date Details Amount Date Details Amount 2000 £ 2000 £ 30-Nov Balance b/d 2,968 30-Nov Balance c/d 4,368 30-Nov Debtors 1,400 4,368 4,368 01-Dec Balance b/d 4,368 Debtors control Date Details Amount Date Details Amount 2000 £ 2000 £ 30-Nov Balance b/d 106,840 30-Nov Sales returns 1,645 30-Nov Sales 11,985 30-Nov Bank 2,700 30-Nov Discount allowed 50 30-Nov Balance c/d 114,430 118,825 118,825 01-Dec Balance b/d 114,430
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Bank charges Date Details Amount Date Details Amount 2000 £ 2000 £
30-Nov Balance b/d 367 30-Nov Balance c/d 454 30-Nov Bank 87 454 454 01-Dec Balance b/d 454
Discounts allowed Date Details Amount Date Details Amount 2000 £ 2000 £
30-Nov Balance b/d 170 30-Nov Balance c/d 220 30-Nov Debtors 50 220 220 01-Dec Balance b/d 220 Insurance
Date Details Amount Date Details Amount 2000 £ 2000 £
30-Nov Balance b/d 600 30-Nov Balance c/d 1300 30-Nov Bank 700 1,300 1,300 01-Dec Balance b/d 1,300
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KAPLAN PUBLISHING 141
Rent paid Date Details Amount Date Details Amount 2000 £ 2000 £
30-Nov Balance b/d 850 30-Nov Balance c/d 1,150 30-Nov Bank 300 1,150 1,150 01-Dec Balance b/d 1,150 VAT
Date Details Amount Date Details Amount 2000 £ 2000 £
30-Nov Sale returns 245 30-Nov Balance b/d 16,512 30-Nov Balance c/d 18,052 Sales 1,785 18,297 18,297 01-Dec Balance b/d 18,052
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(d) Trial balance
Trial balance as at 30 November 2000
DEBIT CREDIT
£ £
Sales 319,200
Sales returns 4,368
Debtors control 114,430
Bank charges 454
Discounts allowed 220
Insurance 1,300
Rent paid 1,150
VAT 18,052
Motor vehicles 37,200
Office equipment 9,700
Other debtors 56,540
Cash 190
Creditors control 47,910
Capital 19,381
Purchases 126,003
Purchase returns 459
Commission paid 890
Wages 42,078
Rates 1,200
Electricity 981
Telephone 1,585
Motor expenses 900
Miscellaneous expenses 1,500
Bank 4,313
Total 405,002 405,002
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KAPLAN PUBLISHING 143
Activity 3
£ £
Capital
30,000
Drawings
12,000
Sales
45,625
Purchases
32,652
Rates
2,530
Light and heat
3,560
Interest received
356
Motor vehicles
2,853
Fixtures and fittings
1,520
Cash
560
Bank overdraft
237
Creditors (PLCA)
3,500
Debtors (SLCA)
6,526
Discounts received
650
Discounts allowed
560
Purchase returns
123
Sales returns
150
Wages
10,000
Rent
4,500
Insurance
1,500
Stationery
980
Advertising
00
80,491 80,491
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