AAT Level 2 - Introduction to Bookkeeping

Glossary of main terms

The Accounting Equation

Assets - Liabilities = Capital

Analysis Columns

Columns in accounting records used to categorise transactions e.g. to analyse the type of expenditure

Assets

Items that are owned or controlled by the business

Balance Brought Down

The balance of an account brought forward from the previous period

Balance Carried Down

The balance of an account carried forward to the next period

Bank Draft

A payment on behalf of a payer that is guaranteed by the issuing bank

Bank Statement

A record of all transactions that have been or paid out of a bank account over a period of time

Banker’s Automated Clearing System (BACS)

An electronic money transfer between banks

Bulk Discount

A reduction in price given for large volume purchases

Capital

The amount owed by a business to its owner(s). Alternative term: equity

Cash Purchases

Purchases paid for at the time of purchase

Cash Receipt

A document acknowledging the receipt of cash

Cash Sales

Sales paid for at the time of sale

Cheque

A document that instructs a bank to pay for a specific amount of money from a person’s bank account to the person named on the cheque

Cheque Stub

The part of a cheque kept as a record of the transaction

Clearing House Automated Payment System (CHAPS)

A UK system for same-day, high-value payments between banks

Comma Separated Values (CSV) Files

Type of file used to export and import data in different software applications

Compensating Errors

An error where the result of two errors cancel each other out e.g. £75 extra is entered in the advertising account, and £75 too little in the rent account equalling nil. Errors will still need to be corrected

Control Account

An account in the general ledger that summarises a set of subsidary ledgers

Credit Card

A card that allows purchases on credit, to be paid back later

Credit Note

Document issued by a supplier to a customer, reducing the amount owed due to returns or errors

Credit Purchases

Purchases paid for within an agreed period of time after the time of purchase e.g. 30 days

Credit Sales

Sales paid for within an agreed period of time after the time of sale e.g. 30 days

Customer Order

A document received from a customer, requesting to purchase goods or services, listing the items and quantities required

Daybook

Book of prime entry, first place that transactions are recorded. The daybook totals are posted to the general ledger on a regular basis

Daybooks contain the following:

• Sales Daybook: credit sales

• Sales Return Daybook: sales credit notes

• Purchases Daybook: credit purchases

• Purchases Return Daybook: purchase credit notes

• Discounts Allowed Daybook: prompt payment discounts that customers have taken

• Discount Received Daybook: prompt payment discounts that have been taken from suppliers

• Cash Book: payments in an out of the bank account

• Petty Cash Book: payments in and out of petty cash

• Journal: journal entries

Debit Card

A card that deducts money directly from a bank account to pay for purchases

Delivery Note

Document that accompanies a delivery of goods, listing the items delivered and their quantities

Digital Bookkeeping Systems

Bookkeeping done using software and digital tools

Direct Credit

An electronic deposit on money into your bank account

Direct Debit

An electronic withdrawal of money out of your bank account by an authorised organisation

Discount Policy

A document containing the conditions and rates of discounts offered to customers

Discounts Allowed

Reductions in the amount owed by customers, offered by the business

Discounts Received

Reductions in the amount owed by the business to suppliers

Double Entry Bookkeeping

A bookkeeping system in which every transactions is recorded in at least two accounts, with debits equalling credits, ensuring the accounting equation remains balanced

Dual Effect

The principle that every accounting transaction has two effects on the accounting equation, e.g. a cash sale increases the asset of cash and increases sales income

Duplication

Where transactions are recorded more than once in the accounting records, leading to inaccuracies.

Employee’s National Insurance Contributions (NIC)

A UK tax incurred by employees on employment income, deducted at source by their employer

Employee’s Pension Contributions

Contributions made by an employee to their pension

Employer’s National Insurance Contributions (NIC)

A UK tax incurred by employers as a result of employing an employee

Employer’s Pension Contributions

Contributions made by an employer to an employee’s pension

Error of Commission

Error where a transaction has been posted to the correct class of account but the wrong type of account e.g. ‘motor expenses’ posted to ‘general expenses’. Both are expenses, so class is correct, but it is the wrong expense account

Error of Omission

Error where a transaction has been missed and not entered into the records e.g. if documentation got misplaced

Error of Original Entry

Error where the original posting has been entered incorrectly e.g. numbers are entered wrong

Error of Principle

Error where a transaction has been posted to an account of a different class e.g. ‘motor expenses’ posted to the ‘motor vehicle at cost’ asset account

Expenditure

Total amount of money paid out by an individual, organisation or government for goods, services or assets

Expenses

A business’s day-to-day running costs

Faster Payments / Bank Transfer

UK system for sending money between bank accounts where the payment should arrive almost immediately

Financial Statement

Formal record of the financial performance and position of a business, typically including the statement of profit or loss and statement of financial position

Full Payment

Complete settlement of an amount owed

General Ledger

Main ledger containing all the accounts of a business. The totals from the daybooks are recorded in the general ledger using double-entry bookkeeping

Goods Received Note

Document used to confirm the receipt of goods delivered by a supplier

Goods Returned Note

Document used to record the return of goods to a supplier

Gross Amount

Net Amount + VAT

Gross Pay

Total amount earned by an employee before deductions

Imprest System

System where a fixed amount of petty cash is kept on hand and replenished as needed

Income / Sales Revenue

Sales revenue is the income a business makes from it’s trading activities, but may also have other income such as interest earned on savings

Income Tax

UK Tax charged on most types of income earned by individuals. If an individual receives employment income, this is deducted by their employer at source through the Pay As You Earn (PAYE) system

Irrecoverable Debts

Debts that are unlikely to be collected

Journal Entry

Double-Entry posting directly into the ledgers, which is often used for less frequent transactions such as depreciation, irrecoverable debts and year-end adjustments

Ledger

Book or account in which accounting transactions are recorded

Liabilities

Amounts that are owed by a business

Net Monthly Account

Payment in full is expected by the end of the calendar month, following the calendar month that the invoice was issued e.g. invoice was issued 18 May, so it should be paid by 30 June at the latest

Manual Bookkeeping System

Bookkeeping where transactions are posted, reconciliations are completed, and trial balances are produced manually rather than relying on automation within accounting software

Net Amount

Amount before VAT is added

Non-Imprest System

System where petty cash is not kept at a fixed amount

Outstanding Lodgements

Deposits that have been made but not yet recorded by the bank

Overpayments

Payments made that are more than the amount due

Overstatement

When the value of an accounting transaction, account or records is more than it should be

Part Payment

A partial settlement of an amount owed

Payables Ledger

The subsidiary ledgers showing the amount owed by the business to each supplier

Payables Ledger Control Account (PLCA)

Control account summarising the total amount owed to suppliers

Paying in Slip

Document used to deposit money into a bank account

Petty Cash

Small amount of cash kept on hand for minor expenses

Petty Cash Voucher

Document used to record payments out of petty cash

Price List

Document that lists the prices of goods or services offered by a business

Prompt Payment Discount (PPD)

Discount offered to customers for paying invoices within an agreed shorter time period than the standard payment terms

Purchase Order

Document sent to a supplier, requesting to purchase goods or services, listing the items and quantities required

Quotation

Document provided by a supplier to a potential customer, detailing the estimated price of goods or services

Receipts and Payments Listing

Record of all cash received and paid out. May be split into a separate receipts listing and payment listing

Receivables Ledger

Subsidiary ledgers showing the amounts owed to the business by each customer

Receivables Ledgers Control Account (RLCA)

Control account summarising the total amount owed from customers

Reconcile

To ensure that two sets of records are in agreement e.g. cash book to the bank statement

Recurring Entry

Regular, repeating accounting entry e.g. monthly rent

Remittance Advice

Document sent by a customer to a supplier, informing them of the payment of an invoice

Reversal of Entries

Error where the double-entry posting has been reversed e.g. an expense has been debited to the cash book and credited to the expense account

Sales Invoice

Document issued by a supplier to a customer, detailing goods or services provided and the amount due

Standing Order

Instruction to a bank to pay a set amount at regular intervals

Statement of Financial Position (SFP)

Financial statement summarising the assets, liabilities and capital of a business at a specific point in time

Statement of Profit or Loss (SPL)

Financial statement that summarises the income and expenses of a business for a specified period, showing the overall profit or loss

Subsidiary Ledger

A ledger that provides details of individual account that are summarised in the general ledger

Suspense Account

An account used to temporarily hold a difference where the trial balance does not balance, until the cause of the imbalance can be identified and resolved

Trade Discount

A reduction in the list price granted to customers

Trial Balance

List of all general ledger balances, separated into debits and credits which should balance

Underpayments

Payments made that are less than the amount due

Understatement

When the value of an accounting transaction, account or record is less than it should be

Unpresented Cheques

Cheques that have been written but not yet cashed or deposited

Value Added Tax (VAT)

A UK tax which is added to the selling price of goods and services sold by registered businesses

VAT Control Account

Account that tracked VAT owed, recoverable and paid

Voluntary Payroll Deductions

Deductions from an employee’s pay that are not required by law