AAT Level 2 - Principles of Bookkeeping Controls

Cash

• Physical Money (notes and coins)

• Everyday purchases and face-to-face payments

• No effect on bank balance

Cheque

• Written instruction to a bank to pay someone a specified amount

• Paying businesses or individuals when electronic payments aren’t used

• Approx. 3 working days to be processed

Credit Card

• Payment card that lets you borrow money from the card provider

• Shopping, online purchases and spreading costs of purchases

• Funds will be reduced from bank account at a later date, when repayment is made

Debit Card

• Payment card linked directly to a bank account

• Everyday shopping, online purchases

• Bank will debit the bank balance electronically

• Funds will be reduced immediately

Bank Draft

• A bank-issued payment guaranteed by the bank

• Large purchases e.g. cars where guaranteed funds are needed

• Funds are taken at the time a bank draft is arranged

Standing Order

• Instruction to bank to make fixed regular payments

• Rent, savings, subscriptions

• Amounts cannot be varied by the payee

• Funds are debited immediately from the bank account

Direct Debit

• Permission for a company to collect money from your account

• Utility bills, and other regular bills where amounts may vary

• Funds are debited on the date of payment

Direct Credit

• Electronic payment sent directly into a bank account

• Wages, Pensions, Benefits or supplier payments

• Funds are credited same day from the senders account

BACS

• Bankers Automated Clearing Services

• UK Electronic System

• Payroll, direct debits and direct credits

• Normally takes 3 working days to set up payment and money to clear the bank account of the payee

CHAPS

• Clearing House Automated Payment System

• Fast way to transfer money

• Urgent or high-value payments (property, business payments)

• Payment is guaranteed to arrive by CHAPS same day the transaction is arranged

Faster Payments

• Send a payment from one bank account to another (bank transfer)

• Electronic payments that can be arranged online

• Will clear the payers bank account almost immediately

Reasons for performing a Bank Reconciliation

• Detecting Errors

• Identifying Fraudulent Transactions and Theft

• Keeping Track of Trade Receivables and Trade Payables

Timing Differences

Items that are recorded in the cash book but do not currently appear on the bank statements

Unpresented Cheque

A cheque that has been issued and recorded in the business’s cash book but has not yet been presented to the bank for payment, so has not yet been deducted from the bank account

Actions for Unpresented Cheques in reconciliations

Deducted from the closing balance shown on the bank statement

Outstanding Lodgement

Money that has been received and recorded in the business’s cash book but has not yet been credited to the bank account, so it does not appear on the bank statement

Actions for Outstanding Lodgements in reconciliations

Added to the closing balance shown on the bank statement

Irrecoverable Debt

An amount owed by a customer that is no longer expected to be collected and is written off as an expense in the accounts

Actions for Irrecoverable Debts

Write off the debt by removing it from the RLCA, and a journal entry is required

Journal Entry Required for Bad Debt

• Dr Irrecoverable Debts (expense)

• Cr RLCA (asset)

Journal Entry for Irrecoverable Debts including VAT

• Dr Irrecoverable Debts (Increase expenses)

• Dr VAT (liability to pay HMRC decreases)

• Cr RLCA (decrease asset)

What is the Wages Control Account?

A ledger account used to record the total wages owed to employees and to reconcile the wages figure before they are posted to the payroll and GL accounts

• liability

Wages expenses are journaled on the debit or credit side of the wages control account?

Credit side only

What does net wages consist of?

Net Wages = Gross - employee deductions (e.g. NI, Tax, Pension)

Statement of Financial Position

Assets, Liabilities and Capital - reporting information about the wealth and liquidity position of a business

Statement of Profit or Loss

Expenses and Income - reporting information about sales, costs and profits earned (or losses incurred) by the business

Transposition Error

A digit for an amount is reversed incorrectly for both a debit and credit entry made

Original Entry Error

Documents e.g. invoices are prepared incorrectly, or the wrong amounts are posted incorrectly to the day books

Principle Error

An amount incorrectly posted to the wrong General Ledger and wrong financial element

Commission Error

An amount incorrectly posted to the wrong General Ledger but the right financial element

Reversal of Entries Error

Debit and Credit entries are incorrectly posted the wrong way round

Omission Error

No entry has been made in the General Ledger (transaction is not recorded)

Compensating Error

Two independent errors offset each other, so the trial balance still balances

Transposition Error that affects the trial balance

A digit for an amount is reversed incorrectly for a debit amount posted but the credit is posted correctly or vice versa

Extraction Error

A General Ledger balance in error balances incorrectly. The incorrect balance is extracted and shown correctly in a trial balance

Single-Sided Entry Error

A debit entry is posted without a corresponding credit entry or vice versa

Casting Error

A column in the day book is added up incorrectly and the incorrect amount is posted from a day book to the General Ledger

Same Sided Error

Two debit entries are posted in error without any corresponding credit entries, or vice versa