Lesson 7 Objectives Quick recap bank reconciliations Carry out period end routines – reconcile sales ledger and purchase ledger Carry out period end routines – process payroll transactions Record period end adjustments – including processing errors and clearing the suspense account Prepare a trial balance

Bank Reconciliation – quick recap Unpresented cheques Timing differences Overdrawn account Dishonoured cheque Outstanding lodgments A cheque that has not been paid by the bank on which it was drawn Cheques received and recorded in the debit side of the cash book but not yet showing on the bank statement A debit balance at the end of the month showing on the bank statement Cheques paid and recorded on the credit side of the cash book but not yet showing on the bank statement Receipts and payments that are recorded in the cash book in one period are shown in the bank statement another period

Control Accounts

Sales Ledger and Purchase Ledger Reconciliation Work through Illustration 1 p254 and illustration 2 p256 Show how to make entries to GL,SL,PL from day books Show how GL is reconciled to PL,SL Use white board for T accounts and SMART board for Questions Show how to reconcile supplier statement with supplier J P259

Prompt Payment Discounts (Settlement discounts) When a prompt payment discount is taken, a Prompt payment discount credit note is issued for the amount The PPD CN’s are entered into: Discounts allowed day book Discounts received day book (see p76/77 BKT)

Prompt Payment Discounts (Settlement discounts) Totals are entered into GL: Dr Discounts allowed Dr VAT Cr SLCA Or Dr PLCA Cr Discounts received Cr VAT Individual amounts are entered into the sales ledger or purchase ledger

Contra Entries It is possible that a customer in the sales ledger is also a supplier with an account in the purchase ledger Balances can be offset so that only one amount is left due as a receivable or payable

Eg: Brown is a customer of White Furniture, he is also a supplier to them Sales Ledger Purchase Ledger Brown Brown £ £ £ £ Bal b/d 200 SDB 100 CRB 200 Contra entry 50 Bal c/d 50 Contra entry 50 PDB 50 50 50 300 300 Bal b/d 50 How would this affect the SLCA and PLCA?

Adjustments to the General ledger must be made for contra entries Journal entry: Dr PLCA 50 Cr SLCA 50 Description - Contra entry for Brown

Activity 1 p262 Activity 2 p263

Activity 3 p265 – show first the method

Payroll

Pay Proforma £ Gross Pay X Less: Statutory Deductions Income Tax (X) NI (employee) (X) Non-statutory Deductions Pension (X) Benefits (X) Net Pay X

Cost to the employer of the employee: £ Gross Pay X NI – employers X Pension – employers X Total cost to employer X

The employer must make all payments for deductions made

Payroll Revision Cost to the employer: Gross pay + employers NIC + employer pension contribution Dr Wages expense account Cr Wages control account Payment to employee: Gross pay less statutory and non statutory deductions Dr Wages control account Cr Bank Account for the statutory deductions: Income Tax, Ers NIC and Ees NIC Dr Wages and salaries control account Cr HMRC Liability account When paid: Dr HMRC Liability account Cr Bank Account for the non statutory deductions: Pension, health, union etc Dr wages and salaries control account Cr Other payroll deductions liability account When paid: Dr Other payroll deductions liability account Cr Bank

Question: £ Gross pay 20,000 NI employers 2,000 NI employees 3,100 Income tax 4,800 Pension – ees 500 Pension – ers 300 Prepare the journal entries

Wages and salaries control account £ £ £ £ Wages Expense Account Wages and salaries control account £ £ £ £ HMRC Liability Account Payroll non stat deductions liability account £ £ £ £ £ Gross pay 20,000 Less: PAYE 4,800 Employees NIC 3,100 Personal Pension 500 Net Pay 11,600 Bank £ £

Trial Balance and Year end adjustments

Year End Adjustments Depreciation Accruals and prepayments Closing Inventory Irrecoverable and doubtful debts Errors

Errors where the trial balance does not agree: Two entries on one side - if two debits entered to G/L instead of one debit and one credit Single entry – if only one side of the transaction is entered to G/L (i.e. debit and no credit) Casting error – in ledger accounts or ledger balancing Transposition error – eg £2,345 shown as £2,435 Extraction error – the wrong amount is taken from the ledger account to the trial balance (Balance transfer error) Omission error – an account balance is missing Unequal entries – when a debit and credit have been made to the correct account but of different amounts

Errors where the trial balance agrees: Error of original entry – when the. amount in the original transaction has been entered incorrectly (e.g. stationery costs of £34.90 entered as £24.90) – due to casting or transposition Compensating errors – where two separate errors are equal and opposite Reversal error – amounts and accounts are correct but the debits and credits are the wrong way round Error of omission – a complete entry has been left out Error of commission – an equal double entry has been made but one of the accounts is incorrect (e.g. debit entry to postage has gone to stationery) Error of principle – an equal double entry has been made but one of the accounts is principally incorrect (e.g. debit entry to motor expenses going to motor vehicles non-current asset instead)

Suspense Accounts A Suspense Account is a temporary account for errors and omissions It can be used for differences on the trial balance The suspense account can also be used to collect entries where the correct account is unknown

Clearing the Suspense Account Balances on suspense accounts have to be cleared off Identify the individual items Understand what has happened Work out what should have happened Make the correction

Activity 1 p293 Activity 2 p296 – show ETB and how to process the adjustments Activity 3 p299 Activity 4 p300 Test your learning p308/309