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 and Suspense Accounts & Errors Lesson 5: Extended Trial Balance

3. Lesson 3 www.rmjpilondonbusinessacademy.com2 ACCOUNTING FOR INVENTORY IAS 2 and the calculation of inventory: Inventory is valued at the lower of cost and net realisable value. Cost is calculated as expenditure incurred to bring the product to its present location and condition. Cost will therefore include the cost of shipping. Net realisable value is the expected selling price less selling costs such as marketing, selling and distribution costs.

4. www.rmjpilondonbusinessacademy.com3 Accounting for closing inventory: Closing inventory will need to be recorded in the accounting records. This figure will be included as an asset in the statement of financial position as well as part of cost of sales in the statement of income and expenditure. The journal entry will be: DebitInventory (statement of financial position) CreditInventory (statement of income and expenditure)

5. www.rmjpilondonbusinessacademy.com4 Accounting for opening inventory: The closing inventory figure for the period will become the opening inventory figure for the next accounting period. Opening inventory will feature as part of cost of sales in the statement of income and expenditure only. Opening Inventory Journal is: DebitInventory (statement of income and expenditure) CreditInventory (statement of financial position)

6. www.rmjpilondonbusinessacademy.com5 Impact on the financial statements: Inventory will be treated as an asset on the statement of financial position as well as part of cost of sales in the statement of income and expenditure. Cost of Sales = Opening Inventory plus Purchases less Closing Inventory

7. www.rmjpilondonbusinessacademy.com6 It is necessary to apply the prudence concept when determining whether a debt is irrecoverable (will not be recovered) or doubtful (some likelihood it may not be paid). Under the prudence concept, debts should only be included as assets in the statement of financial position if it is anticipated that the amounts will be paid. The prudence concept states that an organisation is to recognise future losses as soon as it becomes aware of any such loss. Therefore, if a debt is recognised as irrecoverable or doubtful, the organisation needs to account for it accordingly. IRRECOVERABLE AND DOUBTFUL DEBTS

8. www.rmjpilondonbusinessacademy.com7 Accounting procedures: Irrecoverable debts need to be completely removed from the financial statements because such debts will not be paid at all or at any time. A doubtful debt should be recognised in the financial statements but not removed because the debt could be paid at some point (or part payment received). There are two types of doubtful debts: Specific allowance = the debt is a particular invoice/trade receivables’ balance General allowance = this is an allowance against all trade receivables (usually a % of the total balance of all trade receivables).

9. www.rmjpilondonbusinessacademy.com8 Accounting Entries: Irrecoverable Debts DebitIrrecoverable Debt Account (on Statement of Income and Expenditure) CreditSales Ledger Control Account (Statement of Financial Position) Doubtful Debts DebitAllowance for Doubtful Debt Adjustment Account (Statement of Income and Expenditure) CreditAllowance for Doubtful Debt Account (Statement of Financial Position )

10. It is advisable to keep the allowance for doubtful debt under review and adjustments may be necessary to take account of any changes in the allowance for doubtful debts. For example, to increase the allowance you would need to: DebitAllowance for Doubtful Debt Adjustment Account (Statement of Income and Expenditure) CreditAllowance for Doubtful Debt Account (Statement for Financial Position) To decrease the allowance, you will need to: DebitAllowance for Doubtful Debt Account (Statement for Financial Position) CreditAllowance for Doubtful Debt Adjustment Account (Statement of Income and Expenditure) www.rmjpilondonbusinessacademy.com 9

11. Recovery of a debt that has been written off (irrecoverable debt): Should an irrecoverable debt be paid at some point, but you have already removed it from the accounts, it will be necessary to re- enter the debt and make an entry to receive the payment. DebitBank Account (if payment by transfer) (Statement of Financial Position) CreditIrrecoverable Debt Account (Statement of Income and Expenditure) www.rmjpilondonbusinessacademy.com 10

12. www.rmjpilondonbusinessacademy.com 11 The general and subsidiary ledgers: The sales ledger control account and the purchases ledger control account record the total amount due from trade receivables and due to trade payables. Specific details of each trade receivable and trade payable will be accounted for in subsidiary ledgers. A subsidiary ledger will include all transactions relating to an individual trade receivable and trade payable. CONTROL ACCOUNT RECONCILIATIONS

13. It is necessary to ensure that reconciliations of general and subsidiary ledger accounts are carried out on a regular basis to ensure that transactions have been recorded control. Steps: 1.Balance the control account in the general ledger 2.Balance the individual accounts in the subsidiary ledger 3.Compare the balance on the control account to the total of the subsidiary accounts Accounting errors: When carrying out regular account reconciliations, the total balance of the subsidiary ledger accounts should agree to the total balance on the control account. Any differences will need to be investigated and corrected. www.rmjpilondonbusinessacademy.com 12