Chapter 17 Correction of errors
Chapter 17
Correction of errors
Slide 2 notes reference - page 187
2 main uses:
Suspense accounts
Never appear in the final accounts
To account for a Dr or Crwhen the accountant isunsure where it should go
To make a preliminary trial balance balance
Slide 3 notes reference - page 187
Lecture example 1
The double entry would be: Dr Suspense account 400
Cr Cash at bank 400
Bank 400
Suspense
Suspense 400
Bank
Slide 4 notes reference - page 187
Lecture example 1 (cont)
The double entry is: Dr Rent expense 400
Cr Suspense account 400
Bank 400
Suspense
Suspense 400
Rent
Rent 400
Slide 5 notes reference - page 188
Lecture example 2
(W1) Should Dr SLCA 8,132 Cr Sales 8,132 Have Dr SLCA 8,132 Cr Sales 1,832 Now Dr Suspense 6,300 Cr Sales 6,300
Dr Suspense 6,300Cr Sales 6,300
(ii) Dr Electricity expense (615-516) 99Cr Suspense 99
(W2) Should Dr Telephone 70 Cr Accruals 70 Have Dr - Cr Accruals 70 Now Dr Telephone 70 Cr Suspense 70
Dr Telephone 70Cr Suspense 70
(iv) Dr Purchases (77,356 – 76,182) 1,174Cr 1,174Suspense
(i) (W1)
(iii) (W2)
Slide 6 notes reference - page 189
Lecture example 2 (cont)
Suspense account
(i) Sales 6,300
(ii) Electricity 99
(iii) Telephone 70
bal b/d 4,957
(iv) Purchases 1,174
6,3006,300
Slide 7 notes reference - page 189
Dr Cr £ £ Motor van at cost 5,500 Inventories 6,230 Receivables ledger control 19,167 Cash at bank 218 Petty cash 50 Payables ledger control 13,166 Prepayments 490 Accruals 70 Motor van - provision for depreciation 2,000 Sales 100,170 Purchases 77,356 Rent expense 1,200 Wages and salaries expense 12,500 Electricity expense 615 Telephone expense 300 Accountancy expense 500 Van expenses 280 Depreciation expense 1,000 Capital 10,000 125,406 125,406
Lecture example 2 (cont)
Slide 8 notes reference - page 190
Ledger codes
• Vital to record all transactions without error – but also be able to retrieve them
• Need to organise all these transactions by means of individual flags
• Format can be in a hierarchy e.g.– Assets
• Non current assets• Current assets
– Inventories– Receivables
– Liabilities– Capital– Expenses– Revenues
• Audit trail of all items and transactions• Time
Slide 9 notes reference - page 191
Ledger codes
Accounting codes used should be:– Unique– Useful– Compact– Meaningful– Self-checking & of standard size– Expandable
Slide 10 notes reference - page 191
Example of how a Ledger stores data for retrieval
X
Co
st c
entr
e
Time
Ledger code
All data must be unique to be easily stored and
located within the ledger and represent one item in
one place at one time
Literally, a “cube” of data. How do you find
one item out of all transactions in the year
so far?
At one “slice” of time, you can find an
individual transaction e.g. Newcastle Wages
on 16/4/05
e.g. 16/4/05
e.g.
New
cast
le
e.g. Wages
Chapter 18
Sales tax, PAYE and NI
Slide 12 notes reference - page 197
Sales tax
An indirect taxAn indirect tax
Charge sales tax on sales
OUTPUT TAXOUTPUT TAX
Suffer sales tax on purchases
INPUT TAXINPUT TAX
Slide 13 notes reference - page 197
Lecture example 1
(a) Grow raw materials &
Net Tax Gross
sell for $117.50 (W1)100 17.50 117.50
(b) (1) Buy raw materials for $117.50
(2) Sell to wholesaler for $293.75 (W2)
100 17.50 117.50
250 43.75 293.75
17.50
26.25
(W1) 17.5
117.5x $117.50 = $17.50
17.5
117.5x $293.75 = $43.75
(W2)
Slide 14 notes reference - page 197
Lecture example 1 (cont)
(c) (1) Wholesaler buys goods for $293.75
Net Tax Gross
250 43.75 293.75
(d) (1) Retailer buys goods for $352.50
(2) Sells to customer for $470 (W4)
300 52.50 352.50
400 70.00 470.00
8.75
17.50
(W3) 17.5
117.5x $352.50 = $52.50
17.5
117.5x $470.00 = $70.00
(W4)
(2) Sells to retailer for $352.50 (W3) 300 52.50 352.50
Slide 15 notes reference - page 197
Lecture example 1 (cont)
(e) Customer bought goods for $470
Net Tax Gross
400 70.00 470
Tax paid directly to HMRC is:
(a)
(b)
(c)
(d)
(e)
17.50
26.25
8.75
17.50
0
70.00
Tax suffered by customer
Slide 16 notes reference - page 199
Lecture example 2The double entry to record the purchases is:
Purchases 1,000Sales Tax Control 175
Dr Cr
Trade Payables 1,175
Purchases
Tr Pay 1,000
Trade Payables Sales Tax Control
Tr Pay 175Purchases 1,175(incl ST)
Slide 17 notes reference - page 200
Lecture example 2The double entry to record the sales is:
Trade Receivables 1,762.50Sales 1,500.00
Dr Cr
Sales Tax 262.50
SalesTr Rec 1,500
Trade Receivables Sales Taxb/d 175Sales 1,762.50
(incl ST)Tr Rec 262.50
262.50262.50
c/d 87.50
b/d 87.50
Slide 18 notes reference - page 200
Lecture example 3
Sales Tax calculated after accounting for all discounts
Settlement discount (10% x 11,000) (1,100)
Trade discount (4,000)
11,000
Sales net of all discounts 9,900
Sales Tax = 9,900 x 17.5% = 1,732.50
Sales 15,000$
Slide 19 notes reference - page 201
Lecture example 3 part (a)
The double entry to record the sale will be:
Sales 11,000Receivables 12,732.50
Dr Cr
Sales Tax 1,732.50
Slide 20 notes reference - page 201
Lecture example 3 part (b)
Sales tax control account
Receivable 1,732.50
Receivables
Sales 12,732.50
Sales
Receivable 11,000
Cash 12,732.50
Slide 21 notes reference - page 201
Lecture example 3 part (c)
Sales
Receivables 11,000
Receivables
Sales 12,732.50
Sales Tax control account
Receivables 1,732.50
Cash 11,632.50
Discounts allowed
Receivables 1,100
Discount allowed 1,100
12,732.50 12,732.50
Slide 22 notes reference - page 202
Sales tax on motor cars & business entertaining
• Sales tax on motor cars can be reclaimed if the car is purchased solely for the use of the business
difficult to prove, therefore normally sales
tax not reclaimed
• Sales tax not reclaimed on business entertaining
Slide 23 notes reference - page 203
National Insurance and PAYE
Employer’sNI
paid to employee
paid topension fund
paid to HMRC
TOTAL EXPENSE
Net wage Pension PAYE
GROSS WAGE
Employee’sNI
Slide 24 notes reference - page 203
Lecture example 4
(a) The total cost to the employer is $33,000
33,00030,000
The double entry would be:
Wages & salaries expenseWages control (gross pay)
Dr Cr
NIC (employer’s contribution) 3,000
(Gross pay 30,000 + Employer’s NI 3,000)
(b) The 3 items deducted from gross pay are (i) Employee’s National Insurance contribution (ii) PAYE (iii) Trade Union deductions
Slide 25 notes reference - page 204
Lecture example 4 (cont)
8,1002,0006,000
The double entry to reflect the deductions would be:
Wages controlNIC control
Dr Cr
PAYE controlTrade union account 100
(c) The net pay received by employees is £21,900(Gross pay 30,000 - deductions 8,100)
21,90021,900
The double entry would be:
Wages controlBank
Dr Cr
Slide 26 notes reference - page 204
Lecture example 4 (cont)
(d) The total amount paid to the Inland Revenue is $8,900
3,900
8,900
The double entry would be:
NIC control
Bank
Dr Cr
PAYE control 5,000
600600
(e) The double entry to reflect payments to the TU would be:
Trade union accountBank
Dr Cr
Slide 27 notes reference - page 205
Lecture example 4 part (f)
NIC control
bal b/d 4,000Wages & salaries expense(employer’s NI)
3,000
Wages & salaries control(employee’s NI)
2,000
3,900Bank
5,100bal c/d
9,0009,000
Trade Unions
bal b/d 500Wages & salaries control 100
600Bank
600600
Slide 28 notes reference - page 205
Lecture example 4 part (f)
Bank
Wages & salaries control 21,900NIC control 3,900
Trade Union 60031,400bal c/d
31,40031,400
PAYE control
bal b/d 5,000Wages & salaries control 6,000
5,000Bank
PAYE control 5,000
bal c/d 6,000
11,00011,000
Slide 29 notes reference - page 205
Lecture example 4 part (f)
Wages & salaries control
NIC control(employee’s NI)
2,000
Trade Union 10021,900Bank
30,00030,000
Wages & salaries expense
IS 33,000
PAYE control 6,000
33,000Wages control &NIC control
33,00033,000
Wages & salaries 30,000expense
Chapter 19
Incomplete records
Slide 31 notes reference - page 211
Lecture example 1
The records that are likely to be kept would include:
• Bank statements• Till rolls• Supplier invoices and statements• Sales invoices and statements
Slide 32 notes reference - page 211
Lecture example 2
The problems likely to arise are
• Cash sales not recorded• Drawings not recorded• Thefts of cash or inventory• Inventory not counted at year-end
Slide 33 notes reference - page 212
Cost structures
Margin: gross profit as a % of sales e.g. 25% marginMargin: gross profit as a % of sales e.g. 25% margin
100%75%25%
Rule: Set sales to 100%
SalesCOSGross Profit
Mark-up: gross profit as a % of cost e.g. 25% mark-upMark-up: gross profit as a % of cost e.g. 25% mark-up
100%25%
Rule: Set COS to 100%
SalesCOSGross Profit
125%
Slide 34 notes reference - page 212
Lecture example 3
The cost of sales is $285,600
100%60%40%
Rule (margin): Set sales to 100%
SalesCOSGross Profit
476,000285,600
x 60%
Slide 35 notes reference - page 213
Lecture example 4
Credit sales for the year are £290,560
130%100%30%
Rule (mark-up): Set COS to 100%
SalesCOSGross Profit
257,000334,100
x 130%
Total salesCash salesCredit sales
334,100(43,540)290,560
Slide 36 notes reference - page 214
Lecture example 5Purchases for the year are $174,500
130%100%30%
Rule (mark-up): Set COS to 100%
SalesCOSGross Profit
221,000170,000
x 100/130
170,000
43,000174,500
Opening inventoryPurchases
Cost of sales
Less: closing inventory (47,500)
Slide 37 notes reference - page 215
Lecture example 6Sales for the year were £276,400
100%65%35%
SalesCOSGross Profit
179,660276,400
x 100/65
Opening stockPurchases
Cost of sales 179,660
0187,470
Less: closing inventory (7,810)
Slide 38 notes reference - page 215
Lecture example 7(a) Purchases for the year are $173,029
Cash 430Bank 167,224bal c/d 43,825
bal b/d 38,450Purchases 173,029
211,479 211,479
Purchase Ledger Control Account
(b) The double entry for the purchases figure is:
Purchases 173,029
PLCA 173,029
Slide 39 notes reference - page 216
Lecture example 8
(a) Cash received from trade receivables during the
year was
$39,204
bal b/d 50Receipts from receivables39,204
General expenses 4,500Drawings 6,250Bankings 28,454
39,25439,254
Cash
bal c/d 50
Slide 40 notes reference - page 216
Lecture example 8 (cont)
(b) The sales figure for the year was $39,685
bal b/d 1,447Sales 39,685
Cash 39,204bal c/d 1,928
41,13241,132
Sales Ledger Control A/C
(c) The double entry for the sales figure is:
SLCA (Trade Receivables) 39,685Sales 39,685
Dr Cr
Slide 41 notes reference - page 217
Lecture example 9
(a) Purchases for the year were $158,345
Bank 157,300bal c/d 15,456
bal b/d 14,411Purchases 158,345
172,756172,756
PLCA
The double entry for the purchases figure is:
Purchases 158,345PLCA 158,345
Dr Cr
Slide 42 notes reference - page 217
Lecture example 9 (cont)
130
100
30
(c) Cost of sales for the year was $156,160
Opening inventories
Purchases
Cost of sales 156,160
10,200
158,345
Less: closing inventories (12,385)
(b) Sales
COS
Gross Profit
%
Slide 43 notes reference - page 217
Lecture example 9 (cont)
(d) Sales for the year were $203,008
The double entry for the sales figure is:
Trade Receivables 203,008Sales 203,008
Dr Cr
Sales
COS
Gross Profit
130%
100%
30%
156,160
203,008x 130%
Slide 44 notes reference - page 217
Lecture example 9 (cont)
(e) Cash received from trade receivables during the year was $200,877
bal b/d 19,246Sales 203,008
Receipts from receivables 200,877bal c/d 21,377
222,254222,254
SLCA
Slide 45 notes reference - page 217
Lecture example 9 (cont)
(f) The amount of cash stolen by the cashier was $36,824
bal b/d 100 Expenses 2,080($40 x 52)
200,977200,977
Cash
Receipts from 200,877receivables Drawings 2,860
($55 x 52)Bankings 159,213
Stolen 36,824
bal c/d 0
Chapter 20
Profit adjustments
Slide 47 notes reference - page 221
Proforma
Original profit
Adjustment(a) over depreciation(b) accrual(c) unrecorded sale
Dr Cr££ £
- +
X
X(X)
X
(X) X X
XAdjusted profit
decrease profit increase profit
Slide 48 notes reference - page 221
Lecture example 1
Draft profit(a) Bad debt recovered(b) Inv written down to NRV
(d) Rates prepaid
$$ $- + 43,865
563990
(1390) 1053
Adjusted profit
(c) Goods on sale or return treated as a firm sale (W1) 400
490
(337)
43,528
(W1) Reverse sale Dr Sales (2,000 x 120%) 2,400Cr Receivables 2,400
Reinstate stock Dr Inventory (B/S) 2,000Cr Inventory (IS) 2,000
Net decreasein profit 400
Slide 49
End of day 5 - what to do now…
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