2. www.rmjpilondonbusinessacademy.com 01293 763266 / 0208 133 8243 1 AAT Level 3 Accounts Preparation This Unit will be divided into 5 lessons: Lesson 1: Double Entry Bookkeeping, Accounting for Tax and Capital & Revenue Expenditure Lesson 2: Depreciation, Disposal of Capital Assets and Financial Statements & Accounting Concepts Lesson 3: Accounting for Inventory, Irrecoverable & Doubtful Debts and Control Account Reconciliations Lesson 4: Bank Reconciliations, Accruals & Prepayments, Suspense Accounts & Errors and Extended Trial Balance Lesson 5: Exam Practice

3. Lesson 4 www.rmjpilondonbusinessacademy.com2 BANK RECONCILIATIONS Definitions: Bank Statement = document which shows money going in and out of a bank account over a period of time Deposit = amount of money paid into the bank account Interest received = amount of money received into the bank account from the bank Interest charged = amount of money charged by the bank for lending the account holder money

4. www.rmjpilondonbusinessacademy.com3 Standing order = instruction by the account holder for a certain amount of money to be deducted from the bank account on a regular basis such as once per month on a specific day. Direct debit = instruction set up by a third party to deduct an amount from the bank account on a regular basis. The amount can change and controls around frequency and amount is determined by the recipient not the account holder. BACS = Bankers’ Automated Clearing Services. This is the transfer of funds electronically from the bank account to another bank account. CHAPS = Clearing House Automated Payment. This is a same day transfer from one financial institution to another. The bank will usually apply a charge to any CHAPS payment.

5. www.rmjpilondonbusinessacademy.com4 Bank Reconciliations: It is advisable to carry out bank reconciliations at regular intervals, usually months. Reconciliations will involve checking the records e.g. in a cash book against the bank statement. You may find that the balance of the cash book may not agree to the bank statement and it is therefore necessary to look at any uncleared lodgements (cheques which have been banked by not yet cleared) and cheques that have not yet been presented (cheques issued by the account holder but have not been processed for payment), unrecorded transactions (transactions that appear on the bank statement but not in the cash book such as interest).

6. www.rmjpilondonbusinessacademy.com5 Steps: 1. Agree opening balance on the bank statement and in the cash book 2. Agree items on the bank statement to the cash book 3. Ensure all unrecorded items are now recorded 4. Ensure uncleared lodgements are included 5. Agree closing balance of the bank statement to the cash book In summary, a bank reconciliation will be: Balance per bank statement PLUS uncleared lodgements LESS unrepresented cheques = Balance as per updated cash book

7. www.rmjpilondonbusinessacademy.com6 The Accruals Concept = income and expenditure must be recognised in the period to which they relate irrespective of when they are paid/received. Accruals = an expense that has been incurred but has not been paid. Prepayments = a payment made in advance, or on account and relates to a future accounting period. A good example is insurance and rent deposits which are paid in advance. ACCRUALS AND PREPAYMENTS

8. www.rmjpilondonbusinessacademy.com7 Accounting for accruals DebitExpense Account CreditAccruals Account Accounting for prepayments DebitPrepayments CreditExpense Account

9. www.rmjpilondonbusinessacademy.com8 Opening accruals and prepayments: Sometimes there will be opening accruals and prepayments (carried forward from a previous accounting period) and will need to be reversed in the current accounting period. The journal entry will be the exact reversal of the original journal entry. Income accounts: Some businesses may receive income in advance and this is treated as prepaid income (income received but not yet earned) DebitIncome Account CreditPrepaid Income In contrast, income can be earned but not yet received, known as accrued income and will be: DebitAccrued Income CreditIncome Account

10. www.rmjpilondonbusinessacademy.com 9 The Suspense Account: Suspense accounts are generally used when a problem arises such as the total of debits and credits within a ledger do not balance or it is unknown where to post the other half of a transaction. The suspense account therefore temporarily balances the trial balance. A suspense account is like a holding place for a transaction until the transaction is reallocated to the correct ledger account and the suspense account is cleared. SUSPENSE ACCOUNTS AND ERRORS

11. Detectable errors that can arise in the trial balance: Single entry = only one side of the transaction is entered Casting error = ledger balance does not add up correctly Transposition error = an amount in a ledger has been incorrectly recorded e.g. one side is £5102 and the other side says £5201. The difference in transposition errors are always divisible by 9 Extraction error = when a ledger balance is incorrectly recorded, it will also be transferred to the trial balance incorrectly. Omission (one ledger) = a ledger balance is not included on the trial balance. Two entries on one side = mistake in entering two debits or credits instead of the required debit and credit entry. www.rmjpilondonbusinessacademy.com 10

12. Errors which may go undetected but the trial balance still balances: Error of original entry = wrong figure entered Compensating error = two separate errors are made, as a debit and credit so cancel each other out Error of omission = an entire double entry is omitted from the ledger accounts Error of commission = one side of the entry is allocated to the wrong account Reversal of entries = entries are on the wrong side of the account www.rmjpilondonbusinessacademy.com 11

13. Correcting errors: Steps Determine the incorrect double entries Determine the entries that should have been made Produce a journal entry that cancels out the error and results in the correct entries www.rmjpilondonbusinessacademy.com 12

14. The extended trial balance is a working paper which allows you to adjust the initial trial balance to produce the figures required to prepare the final accounts. Steps: 1. Enter the trial balance 2. Enter the adjustments 3. Total the adjustments 4. Enter the adjusted ledger balances under the SPL or SFP 5. Enter profit as a balancing figure in SPL and SFP account www.rmjpilondonbusinessacademy.com 13 EXTENDED TRIAL BALANCE

15. Types of Adjustments: The following are typical adjustments you may need to make: Depreciation Disposals & acquisitions of NCAs Closing inventory Irrecoverable & doubtful debts Accruals and prepayments of income & expense Correction of errors www.rmjpilondonbusinessacademy.com 14

16. Treatment of goods taken by the owner: Any type of withdrawal by the owner is treated as drawings. Accounting entries when the owner takes goods purchased by the business: DebitDrawings Account (cost of goods taken) CreditPurchases Account (cost of goods taken) www.rmjpilondonbusinessacademy.com 15