AAT Level 2 Foundation Certificate in Accounting Revision Objectives Requirements of the assessment Recap business documentation, preparation and checking process Enter business documentation into books of prime entry Make transfers from the books of prime entry into the general ledger and sales/purchase ledgers Balance off accounts Extract a trial balance

Unit 1: Bookkeeping Transactions Assessment See page v in course book Assessment 2 hours 70% pass mark 10 questions Computer based assessment All assessments in Room 1 Southchurch college, Ambleside Drive, arrive 15 mins earlier than assessment start time Letters will be given out with assessment details Only permitted to bring in pens and calculator (not internet enabled) Rough paper will be provided if asked for You will be instructed where to leave bags and phones

What is Accounting?

Accounting is a system of recording information about a business

What information? Mainly Financial Business Transactions buying and selling (goods or services) paying money into / with drawing money from banks paying expenses paying tax

What is a business? An organisation that regularly enters into different transactions Exists to make a profit for its owners Profit (simply) = Income less expenditure

Level 2 Business types Sole Trader - run your own business as an individual. You keep all of the profits and are responsible for all losses. You can employ other staff to work for you. The amount you invest in the business is the CAPITAL. Partnership – two or more people pool money, skills and resources to run the business. They share profit and loses in accordance with a partnership agreement. Company – an organisation set up to run a business. It is responsible for itself and the company finances are separate from personal finances of the owners. A company is run by its managers. In a Limited company the profit is owned by the company and shared between the members (people or organisations that own shares in it). The shareholders financial responsibility is limited to the value of the shares they have invested.

Why do we need to record information? Run the business effectively Meet legal obligations

Financial records Financial records are used to produce financial statements for the business: Statement of Profit and Loss Statement of Financial Position

Statement of Profit and Loss £ £ Sales revenue X Less: cost of sales opening inventory X purchases X closing inventory (X) (X) Gross Profit X Other income X Discounts received X X Less Expenses: Wages X Travel X Repairs X Motor expenses X Stationery X Telephone X Rent X Discounts allowed X Profit for the year (net profit) X Trading account

Statement of Financial Position £ £ £ Non-current assets X Current assets Inventory X Receivables X Bank & cash X X Current liabilities Payables (X) Net current assets X Non-current liabilities Loans (X) Net assets X Financed By: Capital X Add: Profit X Less: Drawings (X)

Financial Transactions should be: Accurate Complete Valid Time

Business Documentation Financial records must be supported by documentation

SALES and PURCHASES (Goods and services) CASH- pay now Is is a sale or is it a purchase? Who is buying and who is selling? CASH- pay now CREDIT- pay later RISKS? RECEIPT INVOICE

Sales and purchases documentation Order enquiry Quotation / price list Purchase order Sales order Delivery note (Goods Received Note/Goods Returned Note) Sales Invoice Credit note Remittance advice ‘The checking process’ – what needs to be verified?

Credit note – reduces the amount owed on an invoice Has the same information as the invoice but is clearly marked CREDIT NOTE and has a credit note number Details why it has been raised and the amount of the credit Used for: Errors on original invoice Damaged goods Returned goods

Coding Product type Customer / supplier Codes enable information to be recorded and used accurately, in detail, and quickly. Codes can be numeric, alpha or alpha-numeric Letters usually relate to the product, customer or supplier – e.g. first three letters Coding structures must be used consistently and carefully to avoid errors

Other business documentation Petty cash voucher These are completed for small amounts of cash taken to purchase incidental items for the business e.g. tea, milk, stamps, stationery

Books of Prime Entry ‘day books’

Invoices / Credit notes Receipts Payments Cash book/ petty cash book Sales day book Sales returns day book Purchases day book Purchases returns day book Books of Prime Entry GENERAL LEDGER – DOUBLE ENTRY SUBSIDIARY LEDGER – SALES LEDGER SUBSIDIARY LEDGER – PURCHASE LEDGER

Books of Prime Entry A book or computer record in which transactions are first recorded before total amounts are entered into the ledgers. Transactions are recorded into the books of prime entry from their source document.

Credit Sales BUY NOW, PAY LATER Payment received from customer Credit Sale to customer Payment received from customer Invoice issued to customer Business document Sales Day Book

The sales day book It is a list of sales invoices sent to credit customers for a period of time; week, month Details of the customer and the amount of the invoices are analysed

Sample sales day book Date Customer Ref Invoice number Total £ VAT Net 1/05/14 Grigsons Ltd SL21 10356 199.20 33.20 166.00 Hall & Co SL05 10357 103.60 15.60 88.00 Harris & Sons SL17 10358 120.00 20.00 100.00 2/05/14 Jaytry Ltd SL22 10359 309.60 51.60 258.00 TOTAL 732.40 120.40 612.00 Casting – adding vertically Cross casting – adding horizontally

Sales Ledger The sales ledger keeps all transaction information for each credit customer Credit customers who owe money are known as TRADE RECEIVABLES (Debtors)

Sales Returns day book Date Customer Ref Credit note number Total £ VAT Net 4/05/14 Grigsons Ltd SL21 CN668 72.00 12.00 60.00 5/05/14 Harris & Sons SL17 CN669 96.00 16.00 80.00 TOTAL 168.00 28.00 140.00

Credit Purchases BUY NOW, PAY LATER Credit Purchase from supplier Payment made to supplier Invoice issued by supplier Business document Purchases day book

The purchases day book Similar to the sales day book but records a list of the purchases invoiced; detailing the supplier, vat and analysed goods.

Purchase day book Date Supp Ref Invoice number Total £ VAT Net Purchases Telephone £ Stationery 1/1/16 Haley Ltd PL25 33728 60.00 10.00 50.00 2/1/16 JJ Bros PL14 242G 1440.00 240.00 1200.00 4/1/16 B Tel PL06 530624 154.00 24.00 130.00 TOTAL 1654.00 274.00 1380.00 Ref – the supplier code number in the purchase ledger Invoice number – this is on the sales invoice from the supplier Total – gross figure including VAT as on the invoice Net – the total on the invoice before VAT is added Vat – the value on the purchase invoice

Purchase Ledger The purchase ledger keeps records of individual credit purchases by supplier Credit suppliers who a business owes money to are known as TRADE PAYABLES (Creditors)

Purchase Returns day book Date Supp Ref Credit note number Total £ VAT Net Purchases Telephone £ Stationery 4/5 Haley Ltd PL25 CN783 24.00 4.00 20.00 5/5 JJ Bros PL14 C52246 69.60 11.60 58.00 TOTAL 93.60 15.60 78.00

The Cash Book The cash book records cash receipts and payments, whether through the bank or in coins or notes – excluding petty cash (payments for low value everyday items comes out of a petty cash float) Receipts and payments may be in cash, cheque or by bank transfer

The Cash Book The cash book is split into two sides: Cash Receipts Book (CRB) = Debit side Cash Payments Book (CPB) = Credit side

Credit Sales BUY NOW, PAY LATER Payment received from customer Credit Sale to customer Payment received from customer Invoice issued to customer Business document Sales Day Book Cash Receipts Book

Cash receipts book - Debit side Date Description Ref Bank £ Cash £ Vat Trade Receivables Sales £ TOTAL Description- such as the name of the customer paying Ref – sales ledger code for that customer, or BACS, Cq etc Cash = notes and coins Total - including VAT VAT – vat on items that have not gone through the SDB Trade receivables are receipts from credit customers – INCUDING VAT

Credit Purchases BUY NOW, PAY LATER Credit Purchase from supplier Payment made to supplier Invoice issued by supplier Business document Purchases day book Cash payments book

Cash payments book – credit side Date Desc Ref Total £ Vat Trade Payables Cash Purchases £ Premises Costs Stationery TOTAL Description- such as the name of the supplier you are paying Ref – purchase ledger code for that supplier, or BACS, Cq etc Total - included VAT Trade payables - total amount paid to a supplier (or a ‘payable’), this would include the vat Expenses paid will be analysed in columns such as premises costs and stationery

Treatment of the Cash book The cash book may itself be part of the double entry system – if so, you do not need to do the ‘cash’ and ‘bank’ entries If the cash book is a book of prime entry only, then the ‘cash’ and ‘bank’ entries need to be done

Customer OWES The Business = a receivable Sales Ledger Customer OWES The Business = a receivable Customer A £ £ Bal b/d X Sales Return Credit Note 045 X Sales Invoice 123 X Bank receipt X Discount allowed X Bal c/d X X X Bal b/d X TOTAL OF ALL SALES LEDGER ACCOUNTS = BAL ON SALES LEDGER CONTROL ACCOUNT

The Business OWES the supplier = a payable Purchase Ledger The Business OWES the supplier = a payable Supplier Z £ £ Sales Return Credit Note 045 X Bal b/d X Bank payment X Sale invoice ZZX56 X Discount received X Bal c/d X X X Bal b/d X TOTAL OF ALL PURCHASE LEDGER ACCOUNTS = BAL ON PURCHASE LEDGER CONTROL ACCOUNT

VAT

What is VAT? Value Added Tax, Goods and Services Tax, or Sales Tax It is levied (charged) on the taxable supply of goods or services in the UK by a taxable person in the course of a businesses i.e. consumer expenditure

Tax charged on the sale of goods and services is known as output tax Tax paid on the purchase of goods and services is known as input tax Businesses (‘taxable persons’) deduct input tax paid from output tax collected and pay the difference to the HMRC (HM Revenue and Customs), usually in a quarterly VAT return

VAT Due/reclaimable from HMRC Simply: £ Output VAT X Less: Input VAT (X) Balance due to/ due from HMRC X

How Does it work? VAT is charged at three rates: Zero rate – eg children’s clothing and footwear, books and newspapers, food (not crisps, confectionary, hot takeaways, ice cream), water, medicines Reduced rate 5% - home fuel and children’s car seats Standard rate 20% - Most goods and services

Roundings VAT is always rounded DOWN to the nearest penny

Discounts Trade discounts Bulk discounts Settlement or cash discounts

Discounts Trade discounts – an amount deducted from the list price of goods for the supplies to some customers to encourage a new sale or loyalty. Bulk discounts – an amount deducted from the list price of goods given for orders above a certain size. These discounts are shown on the invoice before arriving at the total invoice amount

VAT - Discounts VAT is calculated after the Trade and Bulk discounts are deducted No adjustment is made for Prompt payment discount

Prompt Payment Discount Prompt payment (PPD) or settlement discounts – given to customers to encourage early/prompt payment of invoices. Not shown on the invoice as a deduction; it is detailed in the terms and up to the customer to decide whether or not to accept

If the customer pays early and takes advantage of the PPD: The customer calculates the amount due and makes the payment The supplier will then issue a prompt payment discount credit note to the customer to the value of the discount

PPD’s received from suppliers DISCOUNTS RECEIVED PPD’s given to our customers DISCOUNTS ALLOWED

Books of Prime Entry for Discounts Credit notes received for discounts from suppliers are entered into a Discounts received day book Credit notes issued to customers for discounts taken are entered into a Discounts allowed day book

Recording Credit Sales

Customer receipts - checks How has the payment been received – cash, cq, BACS – Bankers Automated Clearing System, online transfer Is the payment correct? Does it match the remittance advice? Does that tie up to the invoice? Are discounts applied correctly? What are you going to do if there are differences?

Receivable or customer statement (Statement of Account) Using the individual account in the sales ledger list all transactions in date order Invoices Credit notes for returns Payments made Discounts allowed

Credit Purchases

Communication with Suppliers Why is it important to be on good terms with your supplier? How do you chose which supplier to pay first? Does it matter which payment method you use?

Authorisation Process Why do invoices need to be authorised? Supplier Statement Checking

Double entry bookkeeping

Accounting Principles The dual effect principle – every transaction has two financial effects

Accounting Principles The separate entity principle – the owner of the business is, for accounting purposes, a separate entity from the business itself The money the owner pays into the business is the capital that the business owes back to the owner Money the owner takes out is called drawings, and reduces the amount of capital owed

Accounting Principles The accounting equation assets – liabilities = capital – drawings + profit

Accounting Principles Key Terms Assets – Something a business OWNS Liabilities – Something a business OWES Capital – Contribution by the OWNER Drawings – Money taken out of the business by the OWNER Profit – Income less Expenses

Every debit entry must have an equal and opposite credit entry Following on from the dual effect principle, (where every transaction has two financial effects), for entries into the ledger: Every debit entry must have an equal and opposite credit entry This is called double entry bookkeeping

CLIC DEAD D ebits C redits E xpenses L iabilities A ssets I ncome Ledger Account D ebits E xpenses A ssets D rawings C redits L iabilities I ncome C apital DEAD CLIC

Key Ledger Accounts Bank Capital Drawings Sales Purchases Trade receivables Sales Ledger Control Account (SLCA) Trade payables Purchase Ledger Control Account (PLCA) Bank Capital Drawings Expenses e.g rent, wages, electricity Assets e.g van, machines

CAPITAL AND REVENUE CAPITAL INCOME CAPITAL EXPENDITURE REVENUE INCOME Income from the sale of capital assets (non-current assets) of the business e.g. sell a business warehouse, bank loans received, extra capital invested by the owner of the business. CAPITAL EXPENDITURE Purchase cost of non-current assets, installation cost, cost of improvement and legal cost of purchasing the non-current asset e.g. purchase of a delivery van, premises, machinery REVENUE INCOME From the sales of goods and services; also regular amounts received, eg rent received, commission received, prompt payment discounts. REVENUE EXPENDITURE Day to day costs of running the business: purchases of inventory which will be resold or used in manufacturing, selling expenses (eg advertising and distribution), administration expenses (wages, power bills and stationery), repair and maintenance (eg decorating, cleaning)

Books of Prime Entry Petty Cash

Petty cash book Businesses usually make payments for low value everyday items out of petty cash Petty cash is topped up according to the business policy to ensure there is enough to meet their needs Receipts and petty cash vouchers are kept to support payments and give analysis and vat details Petty cash cashier is responsible for maintaining the petty cash box

Imprest System The Imprest (float) is the amount that the petty cash totals e.g. Imprest £100 Petty cash paid out = vouchers £(64) Cash remaining in box £ 36 Cash withdrawn from bank to restore the imprest £ 64 Cash at start of next period £100 = imprest amount Some businesses don't use the imprest system - they top the petty cash with the same amounts every week

Ledger entries for the Petty cash book Petty cash book not part of double entry system - i.e. book of prime entry only Petty cash entries made Petty cash book is part of the double entry system: No entries to petty cash account made

Ledger entries for the Petty cash book Petty cash book treated as part of the double entry system unless told otherwise Same with cash book No entries for ‘Bank’

Trial Balance Lists all the general ledger account balances (brought down balances) at a specific date in two columns And adds them both up The left-hand column contains the debit balances and the right-hand column contains the credit balances. The two totals should agree.

Example: Trial Balance ABC Ltd Trial Balance as at 31 May Account name Balance £ Bank (cash at Bank) 2,000 Capital 20,000 Electricity 395 Insurance 935 Machinery 4,900 Payables 2,700 Purchases 49,970 Receivables 3,500 Sales 81,000 VAT (payable to HMRC) 870 Wages 42,870 Debit £ Credit £ 2,000 20,000 395 935 4,900 2,700 49.970 3,500 81,000 870 42,870 Total 104,570 104,570

Double Entry Practice Questions Ben sets up in business on 1 May by paying £15,000 into a business bank account Ben buys some goods for resale for £1,000 in cash Ben buys some goods for resale from Price Retail for £2,000 on credit Ben pays rent for premises of £600 in cash Sales of £1,500 for a cheque are made by selling some of the goods Sales of £3,200 are made on credit to Gregs Ben purchases a computer to help with the accounting process at a cost of £1,000 and pays for this by cheque Ben buys computer disks and other stationery for £200 by cheque Ben transfers £500 from the business to his own bank account for his own living expenses Ben pays his trade payable, Price Retail £1,500 by cheque Ben’s credit customer, Gregs pays £3,200 by cheque a) Write up the debit and credit entries for each transaction. Use separate ledger accounts for bank and cash b) Enter the transactions into ledger accounts c) Balance off all of the ledger accounts d) Produce a trial balance

Revision and practice assessments BPP Practice papers from workbook Work through BPP Practice assessments 1-5 BPP Mock Exam paper 1 & 2 Osborne Practice papers AAT Sample papers 1 & 2 – Online or Moodle Any topic you are not sure of – go back to course book and read through again, looking at examples