1. AAT L3 Advanced Bookkeeping
Revision

2. Accounting Concepts
Consistency
Going Concern
Accruals
Prudence

3. Accounting Characteristics
Relevance
Materiality – affecting the decisions made on using the information
Comparability
Reliability – Faithful representation, complete, accurate and timely
Ease of understanding

4. 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

5. Accounting Principles
The dual effect principle – every transaction has two financial effects
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
The accounting equation
assets = liabilities + capital – drawings + profit
assets – liabilities = capital – drawings + profit

6. 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

7. 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

8. VAT (Sales Tax)
Input Tax – Tax on Purchases
Output Tax – Tax on Sales

9. 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
CAPITAL EXPENDITURE
Purchase or improvement of non-current assets e.g. purchase of a delivery van, premises
REVENUE INCOME
From the sales of goods and services
REVENUE EXPENDITURE
Day to day costs of running the business

10. 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

11. 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)

12. Accounting Standards
Accounting standards exist to standardise the way that accounts are prepared
Enables comparison of accounts for different companies
Companies must follow the Law and the accounting standards

13. UK Accounting Standards
SSAPs - Statements of Standard Accounting Practice
FRS – Financial Reporting Standards
These are the UK GAAP – Generally Accepted Accounting Principles
IFRS – International Financial Reporting Standards
IAS – International Accounting Standards
Advanced Bookkeeping
IAS 16 : Non-current assets
IAS 2 : Inventory

14. Quality of information
Timely
Accurate
Complete

15. Organisational policies and Procedures
Authorisation processes
Physical controls
Processing checks- reconciliations
Organisational policies and Procedures
Comparison / review
Segregation of duties
Written procedures:
Depreciation policy

16. What are ethical values?
Ethics = moral principles that guide behaviour
Ethical values = assumptions and beliefs about right and wrong behaviour
Business ethics = moral responsibility and accountability for actions and effects on people and society
Duty of behaviour in business – explicit or implicit

17. AAT – Code of Professional Ethics: Fundamental Ethical Principles
Integrity – honesty and open about abilities and knowledge, work accurately and conscientiously
Objectivity – work and opinion is free from prejudice and bias, independent, impartial (no conflict of interest), act in the public interest
Professional competence and due care – obligation to know what you are doing, maintain professional and technical competence for the work you carry out, work within the law, due care to work to your best ability; due diligence
Confidentiality – basis of trust, maintained in respect of personal and professional information acquired unless:
Legal or professional requirement or obligation to disclose
Specific authorisation to disclose
Professional behaviour- comply with laws and regulations; maintain the reputation of your profession; avoid exaggerations and disparaging references; courtesy; actions which a reasonable and informed third party would believe were not upholding the reputation of AAT; avoid any action that brings the profession into disrepute

18. AAT Code of Professional Ethics 2014
Summary
Completely avoid any conflict of interest
Be objective and act in the public interest
Confidentiality of sensitive information
Be straightforward and honest
Maintain professional skills and knowledge at the level required by a client or employer
Act within the spirit and the letter of the law

19. What are the threats to the fundamental principles?
Self-Interest
Self-review
Advocacy
Familiarity
Intimidation

20. Non-current assets

21. Non - Current Assets Land and buildings Machinery Motor vehicles
Furniture and fittings
Computers

22. Criteria for capitalising an asset
the purpose for which an item is acquired and - (long-term use)
the useful life of an item (longer than 1 period)
future economic benefits will be gained from the asset
cost is reliably measurable
Capital expenditure is the addition, replacement or improvement of non-current assets
Following the accruals concept to match the cost of an asset to the income generated

23. Capitalisation Policy
Set by the business as the level of expenditure above which items are capitalised
E.g over £500
Items under £500 will be shown in SOPL even if they fit the non-current asset definition
Materiality

24. What costs can be included in non-current assets?
Purchase price (after vat for vat registered business and discounts)
Directly attributable costs to bring the asset to its intended location and condition (ready to “use”)
Deliver and handling
Installation and assembly
Site preparation
Testing
Professional fees

25. VAT and non-current assets
If the business is VAT registered then assets are recorded net of VAT
If the business is not VAT registered then assets are recorded inclusive of VAT – i.e the VAT is also capitalised

26. Non-current assets acquisitions
Authorisation
Application - justification
Quotation – price, quality, delivery, service
Authorisation policy
Justification
Cost/benefit
Profitability
Further future costs (staffing, training, servicing) Longevity
How to fund ? Cash, loan, hire purchase, finance lease, part exchange

27. Non-current assets acquisitions
Financed non-current asset acquisition:
Interest charges – expense item (P&L)
Outstanding loan amount – liability (FS)

28. Double Entry for Non-current asset Purchase (cash)
For vat registered business
Dr NCA (SOFP) Net
Dr VAT (SOFP) Vat
Cr BANK (SOFP) Gross
For non vat registered business
Dr NCA (SOFP) Gross
Cr BANK (SOFP) Gross

29. Double Entry for Non-current asset Purchase (loan)
For vat registered business
Loan:
Dr NCA (SOFP) Net
Dr VAT (SOFP) Vat
Cr BANK (SOFP) Gross
Dr BANK (SOFP) Gross
Cr LOAN (SOFP) Gross
Hire Purchase:
Cr Liability (SOFP) Gross

30. Depreciation IAS 16 Definition
‘Depreciation is the systematic allocation of the cost of an asset less its residual value over its useful life’
Matching costs and revenue generated = accruals concept

31. What is depreciated?
All non-current assets Except LAND - Allocate costs to the accounting periods over the useful life of the asset

32. Depreciation methods:
Cost of – Accumulated = CARRYING
the asset Depreciation AMOUNT
(to date)
Methods of depreciation:
Straight Line
Diminishing balance (reducing balance)
Units of production

33. Straight line method (Cost – Residual value) x %
Depreciation = Cost – Residual value
Useful life (yrs)

34. Diminishing Balance (Reducing Balance)
Depreciation = Carrying amount X Depreciation rate % Residual value is not needed in this method

35. Units of Production
Depreciation = Number units produced X (Cost – residual value) Life in units Matches depreciation with the usage of the asset

36. Which method of depreciation to use?
IAS16 = business can choose the most appropriate method for their non-current assets
Buildings usually straight line
Motor vehicles and machinery diminishing balance
Same method and rates maintained – consistency concept (only change if necessary)
Follow the business depreciation policy
Depreciation can be pro rata if the asset has not been owned for the full year (business choice in their depreciation policy)

37. Non-current assets purchase part way through the year
Depreciation can be pro rata if the asset has not been owned for the full year
Or:
Depreciation can be charged for a full year (12 mths) even if not owned for that whole year
Business choice in their depreciation policy
Consistency must be followed

38. Accounting entries
Dr Depreciation charge (Expense SOPL) Cr Accumulated depreciation (Reduces asset value SOFP) With the depreciation cost Separate accumulated depreciation accounts are kept for each asset type

39. Non-current asset Disposal
Non-current assets may be sold for cash or used in a part exchange
sales proceeds > carrying amount = gain on disposal
sales proceeds < carrying amount = loss on disposal

40. Profit / loss on disposal
Disposal proceeds X
Less carrying value (X)
Profit / (loss) on disposal X

41. Accounting entries
Dr Disposal account Cr Non-current asset cost account Original cost of the asset Dr Non-current asset accumulated depreciation Cr Disposal account Accumulated depreciation Dr Bank Cr Disposals Proceeds from sale of the asset Disposal account will have a profit/loss from the disposal – (credit bal) profit shown as income (SOPL) – over-depreciation (debit bal) loss shown as expense (SOPL) – under-depreciation

42. Disposal Account
Cost of Non-current asset X
Accum depn of NCA X
Bank X
SOPL Profit on disposal X
SOPL Loss on disposal X X X

43. Non-current asset part exchange
The value of the part exchange is entered into the disposal account
Dr New NCA cost account - part exchange value
Cr Disposal - part exchange value
Dr New NCA cost account – Bank payment
Cr Bank – balance paid in cash for new asset

44. Replaces the bank receipt
If I part exchanged NCA 1 during the purchase of NCA 2:
Disposal Account
Replaces the bank receipt
Cost of NCA X
Accum depn of NCA X
NCA 2 cost new asset X
(part exch amount)
SOPL Profit on disposal X
SOPL Loss on disposal X X X

45. NCA 2 Accounting:
NCA (2) cost
Disposal NCA X
Bank X

46. Disposal of NCA part way through the year
If depreciation policy is pro rata – pro rata in year of acquisition and disposal
If depreciation is charge full year in the year of purchase – no charge in year of disposal

47. Non-Current Assets register
Lists detailed information on all tangible non-current assets for the business
Not part of the general ledger
Used to reconcile to GL and check ‘actual assets’
Must be updated at least once a year when depreciation is calculated
Records acquisitions and disposals

48. Non- Current Asset Register
Why?
Control
Check everything is listed
Monitor disposals – profit/loss
Physical checks – once a year

50. Accruals and prepayments

51. Accounting periods The time frame for which accounts are prepared
Typically 12 months

52. Accruals and prepayments
Accrued income and expenses
Prepaid income and expenses
ACCRUALS CONCEPT

53. Accruals Concept Fundamental Accounting Principle
Income and expenditure is matched to the accounting period in which they occur
(Not when the cash transaction has occurred)

54. Expenses - accrued
Accrued expenses – incurred by the business but not yet paid for
Expenses in arrears

55. Expenses - accrued Journal Dr expense (SPL)
Cr accrued expenses (current liability SOFP)
Accrued expense for the period
BPP Activity 2 p127

56. Expenses - accrued Journal Reversal of prior period accrual
Dr accrued expenses (current liability SOFP)
Cr expense (SPL)
Reversal of accrued expense for the prior period

57. Expenses - prepaid
Prepaid expenses – paid for by the business but have not yet been incurred
Expenses in advance

58. Expenses - prepaid Journal Dr prepaid expenses (current asset - SOFP)
Cr expense (SPL)
Prepaid expense for the period
BPP Activity 5 p134

59. Expenses - prepaid Journal Reversal of prior period prepayment
Dr expense (SPL)
Cr prepaid expenses (current asset - SOFP)
Reversal of prepaid expense for the prior period

60. Income- accrued
Accrued income – earned but not yet invoiced or received
Income in arrears

61. Income- accrued Journal Dr accrued income (current asset - SOFP)
Cr income (SPL)
Accrued income for the period
BPP Activity 8 p140

62. Income- accrued Journal Reversal of accrued income Dr income (SPL)
Cr accrued income (current asset - SOFP)
Accrued income for the period
BPP Activity 9 p142

63. Income- prepaid (deferred)
Prepaid income – received in advance of being earned
Income in advance

64. Income- prepaid (deferred)
Journal
Dr income (SPL)
Cr prepaid income (current liability SOFP)
Income prepaid (deferred) for the period
BPP Activity 11 p145

65. Income- prepaid (deferred)
Journal
Reversal of prepaid income
Dr prepaid income (current liability SOFP)
Cr income (SPL)
Reversal of Income prepaid (deferred) for the prior period
BPP Activity 12 p147