AAT Level 2 - Principles of Bookkeeping Controls

What is an adjusted trial balance?

A trial balance prepared to show updated balances after adjusting entries have been made

Give examples of possible debit entries in an RLCA

1. Balance b/d

2. Sales per sales day book (gross amounts)

Give examples of possible credit entries in an RLCA

1. Returns per sales returns day book (gross amounts)

2. Cash receipts

3. Discounts allowed

4. Irrecoverable debt written off

5. Contra entry

6. Balance c/d

What is irrecoverable debt written off?

A debt/receivables balance which is highly unlikely to be received. It is not prudent to recognise this debt as an asset, so it is removed from the ledger

How do we account for an irrecoverable debt?

Dr Irrecoverable debt expense (net amount)

Dr VAT Control (VAT amount)

Cr RLCA (gross amount)

What is a contra entry?

An entry that is made to net off the amounts two businesses owe to each other and show the net amount receivable or payable

The amount that is netted off is always the lower of the figures owed by either party

How do we account for a contra entry?

Dr PLCA (with lower of the figures)

Cr RLCA (with lower of the figures)

Give examples of possible debit entries in a PLCA

1. Cash payments made (gross amounts)

2. Discount received

3. Purchase returns

4. Contra entry

5. Balance c/d

Give examples of possible credit entries in a PLCA

1. Balance b/d

2. Purchases per purchases day book (gross amounts)

What is a control account reconciliation?

The process of comparing the control account balance with the total of the balances of the subsidiary ledger accounts to ensure they are equal

What are the steps for completing a control account reconciliation?

1. Balance control account in general ledger

2. Balance individual accounts in subsidiary ledger

3. List subsidiary account names and balances and find total

4. Compare balance on control account to total of subsidiary accounts

What is output tax?

VAT charged on sales made by business

What is input tax?

VAT recovered on purchases made by business

How do you find out whether the balance on the VAT Control account represents an asset or liability?

If output tax > input tax, excess is VAT liability

If input tax > output tax, excess is VAT asset

Give examples of possible debit entries on a VAT control account

1. VAT on credit purchases

2. VAT on cash purchases

3. VAT on sales returns

4. VAT on irrecoverable debts written off

5. VAT on discounts allowed

6. Balance c/d

Give examples of possible credit entries on a VAT Control account

1. VAT on credit sales

2. VAT on cash sales

3. VAT on purchases returns

4. VAT on discounts received

5. Balance b/d

How do we account for payment of a VAT balance to HMRC?

Dr VAT Control

Cr Bank

How do we account for a refund of a VAT balance from HMRC?

Dr Bank

Cr VAT Control

What is a journal?

A written instruction to record an item by double-entry in the general ledger accounts

Give possible reasons for writing a journal

1. To correct errors

2. To make year-end adjustments

Give a list of types of errors that are detected by the trial balance

1. Only one side of double entry made in general ledger

2. Casting (addition) error when balancing accounts

3. Transposition error

4. Extracting incorrect figure from accounts or putting balance on wrong side

5. Omission of one ledger account from trial balance

6. Two entries made on same side of both accounts

Give a list of types of errors that are not detected by the trial balance

1. Entering wrong figure as both debit and credit entries in general ledger

2. Compensating error

3. Omission of both ledger accounts from trial balance or entire double entry in general ledger

4. Error of commission

5. Error of principle

6. Reversal of entries

What is a transposition error?

When an amount has been incorrectly recorded in an account because the digits have been swapped

What is a compensating error?

When two errors are made in two different double entries, one on debit side and one on credit side, and coincidentally both errors are the same amount and offset each other

What is an error of commission?

When one of the sides of a double-entry in the general ledger has been made to the wrong account of the correct type

What is an error of principle?

When one of the sides of a double-entry in the general ledger has been made to the wrong account of the incorrect type

What is a reversal of entries error?

When the debit and credit sides of a double-entry are the wrong way round in the general ledger (the debit side is in the account that should be credited and vice versa)

What are the steps we take to correct errors using journal entries?

1. Ask the question “What entries did we make?”

2. Ask the question “What entries should we have made?”

3. Write a journal entry to go from Step 1 to Step 2

What is a suspense account?

An account that is used to hold a trial balance difference before correction or as a temporary holding account when the correct posting for an item is uncertain

It is only used for errors which cause a difference on the trial balance and should not be open at year-end

What is gross pay?

Total amount payable to employee before deductions

Includes wages, salary, overtime, shift payments, bonus commission, holiday pay

What is income tax?

Tax owed by employee on their gross pay to HMRC, collected by employer under Pay As You Earn (PAYE) by deducting it from gross pay

What is the employee’s NIC?

The National Insurance Contributions owed by employee on their gross pay to HMRC, collected by employer by deducting it from gross pay

What is the employer’s NIC?

An expense to the company for employing individuals, paid to HMRC

How do we calculate an employee’s net pay?

Gross pay - (PAYE + Employee’s NIC + Other deductions)

How do we calculate the total payroll (wages) expense for the employer?

Gross pay + Employer’s NIC + Employer’s pension contribution

How do we calculate the payroll liabilities of a company to HMRC?

PAYE + Employee’s NIC + Employer’s NIC

What is the Wages Expense account?

General ledger account that shows total payroll (wages) expense

Shown in trial balance

What is the Wages Control account?

Each double entry that is put through the wages expense, bank, and liability accounts has one side put through to the control account

This means that on each payroll run, if the amounts were put through correctly, the control account should be cleared to zero. There should never be a balance b/d

How do we account for a payroll run?

1) Dr Wages Expense (with total payroll expense)

Cr Wages Control (with total payroll expense)

2) Dr Wages Control (with employee net pay)

Cr Bank (with employee net pay)

3) Dr Wages Control (with total of PAYE and NIC)

Cr HMRC (with total of PAYE and NIC)

4) Dr Wages Control (with other liabilities)

Cr Other Liabilities account

How do we find the cash book balance when a business keeps separate cash payments and cash receipts books?

Closing balance per the cash book = Opening balance per the cash book + receipts in the period - payments in the period

What is a cheque?

A document instructing payment to be made from the drawer’s bank account to the payee

Drawer = person writing the check

Drawee = bank of the drawer

Payee = person to whom payment is being made

What details on a cheque should be checked?

1. Date - valid, not more than 6 months old

2. Signature

3. Amount

4. Account number

5. Sort code

What is a sort code?

6 digit number that identifies the bank - the first 2 digits identify which bank it is and the last 4 digits refer to the specific branch where the account was opened

What is the clearing system and how long does the clearing process take?

The method by which cheques are processed by banks and building societies

The clearing process typically takes one working day

What is a banker’s draft or bank cheque?

A cheque issued by the bank rather than the account holder. Funds are transferred from the holder’s account to the bank, then bank issues cheque made payable to payee requested by holder

What are the advantages to the payee of the account holder paying by banker’s draft or bank cheque?

1. The payee does not need to wait for cheque to clear

2. Removes risk to payee of cheque being returned or bouncing due to insufficient funds in drawer’s account

What is a building society cheque?

A cheque issued by a building society made payable to payee requested by account holder

What is an advantage of paying by building society cheque?

The cheque can be stopped by the drawer to prevent a payment from being made

How are payments made using a debit card compared to a credit card?

Payment made with debit card is immediately taken from holder’s bank account

When a credit card is used, the credit card company makes the initial payment and receives equivalent payment from the account holder at a later date

What is a standing order?

Customer’s instruction to their bank to pay fixed amount at regular intervals to named party

What is a direct debit?

A payment method which allows authorised recipients to claim payments from customer’s bank account, where payments can be variable in amount and frequency

What is a direct debit guarantee?

A guarantee that the bank will issue a full refund if a payment is taken from a customer’s account incorrectly

What is BACS and how long does it take to clear payments?

Bankers’ Automated Clearing Services - an electronic system that processes direct debits, direct credits, and standing orders for UK banks

Takes 3 days to clear payments - payments are entered into system on Day 1, processed on Day 2, and cleared on Day 3

What is CHAPS and how long does it take to clear payments?

Clearing House Automated Payment System - electronic system that processes direct debits, direct credits, and standing orders on same day

What is FPS and how long does it take to clear payments?

Faster Payments Service - internet-based system that processes direct debits, direct credits, and standing orders in a few seconds

What is a bank reconciliation?

The process of matching the cash book balance to the corresponding info on the bank statement

What items can cause disagreement on a cash book/bank statement and which ones are reconciling items?

1. Items on the bank statement but not in the cash book (includes bank charges, interest, automated payments, automated receipts) - the cash book is first updated for these items and will give revised cash book balance

2. Items in cash book but not on bank balance (includes unpresented cheques and uncleared lodgements) - these are then included in the bank reconciliation and are called reconciling items

What are unpresented cheques?

Cheques issued by business not yet presented for payment by payee, usually because cheque has not cleared the banking system

What are uncleared lodgements?

Cheques received by the business and paid into the bank which have not yet cleared the banking system

What are the steps we take to complete the bank reconciliation process?

1. Agree opening balance on bank statement and in cash book - if balances differ, review bank statement for first few days to identify prior period reconciling items which have now appeared but caused opening balances to differ - tick these items on bank statement

2. Check that items in bank statement appear in cash book - If there are items in bank statement that do not appear in cash book, update cash book for these and then tick them on cash book and bank statement

3. Check that items in the cash book appear in the bank statement - If there are items in the cash book that do not appear in the bank statement, these are reconciling items and will be recorded in the bank reconciliation statement

4. On the bank reconciliation, add any uncleared lodgements and deduct any unpresented cheques to show their effect on the bank statement balance once these appear