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AP1 student notes

  1. 1. Study Notes aatQCF Level 3 ACCOUNTS PREPARATION I (API) STUDENT NOTES
  2. 2. © Kaplan Financial Limited, 2011All rights reserved. No part of this publication may be reproduced, stored in a retrievalsystem, or transmitted, in any firm or by any means, electronic, mechanical,photocopying, recording or otherwise, without the prior written permission of KaplanPublishing.The text in this material and any others made available by any Kaplan Group companydoes not amount to advice on a particular matter and should not be taken as such. Noreliance should be placed on the content as the basis for any investment or otherdecision or in connection with any advice given to third parties. Please consult yourappropriate professional adviser as necessary. Kaplan Publishing Limited and all otherKaplan group companies expressly disclaim all liability to any person in respect of anylosses or other claims, whether direct, indirect, incidental, consequential or otherwisearising in relation to the use of such materials.ii KAPLAN PUBLISHING
  3. 3. CONTENTSSESSION TITLE PAGE1 Introduction to API 12 Key definitions 33 Double entry and the trial balance 54 Accounts preparation 375 SSAP 5 VAT 436 Fixed assets 497 Depreciation 538 Disposal of fixed assets 619 Irrecoverable and doubtful debts 7510 Accruals and prepayments 8111 Control accounts and reconciliations 9112 Suspense accounts and errors 10113 SSAP 9 Stock 10714 The extended trial balance 11115 Solutions to session 3 121KAPLAN PUBLISHING iii
  4. 4. iv KAPLAN PUBLISHING
  5. 5. SESSION 1: INTRODUCTION TO APIThis session covers the background for APIThe new Accounts Preparation units are designed to develop the student’sdouble entry bookkeeping skills.The student will need to deal with fixed asset accounting, including acquisition,depreciation, disposal and completing relevant accounting entries. They alsoneed to be familiar with recording transactions in a fixed asset register andunderstand the purpose of such records.The student will need to complete an extended trial balance. There will be arange of accounting adjustments such as writing off an irrecoverable debt, anallowance for doubtful debt adjustment, accruals, prepayments andreconciliations that the student should be able to deal with.For each section of the exam there will be a range of short answer questionstesting the student’s knowledge of principles of accounts preparation.AssessmentSection 1 is about accounting for fixed assets.There will be two independent tasks.These will require managing a range of transactions such as addition, disposaland depreciation, relating to fixed asset accounting.Section 2 is about accounting adjustments.There will be five independent tasks.Journal entries will be required to record the adjustments in the extended trialbalance and then extending these balances correctly to the profit and loss orbalance sheet columns.The assessment for the units will be two hours computer based and thecomputer will mark the assessment for the student.Learners will be expected to demonstrate competence in both sections of theassessment.Successful completion of this Accounts Preparation I will result in the award oftwo QCF units:Accounting for fixed assets (skills)Extending the trial balance using accounting adjustments (skills).KAPLAN PUBLISHING 1
  6. 6. AAT STUDY NOTES (STUDENT) : API2 KAPLAN PUBLISHING
  7. 7. SESSION 2: KEY DEFINITIONSAssetsFixed – Asset for long term use in the businessCurrent – Assets that are currently cash or will soon be converted into cash inthe trading activities of the businessLiabilitiesCurrent – Creditors that are due to be paid within 12 monthsLong-term – Creditors which are due to be paid over the longer termCapital – Monies or goods invested by the owner/owners of the businessDrawings – Monies or goods taken out of the business by the owner/owners ofthe businessKAPLAN PUBLISHING 3
  8. 8. AAT STUDY NOTES (STUDENT) : APIExample 1Place the following under the correct heading –1 A customer owes the business £10,0002 The business owes a supplier £2,0003 The business owns a van worth £1,0004 The business has a bank overdraft of £1,5005 The owner of the business introduces £30,000 into the business6 The business owes £50,000 on a mortgage7 The business owns computer equipment worth £3,0008 Year end stock is valued at £5,0009 The business has cash in hand of £10010 The owner of the business takes goods worth £500 FIXED ASSET CURRENT ASSET CURRENT LIABILITY LONG TERM LIABILITY CAPITAL DRAWINGS4 KAPLAN PUBLISHING
  9. 9. SESSION 3: DOUBLE ENTRY ANDTHE TRIAL BALANCEIn order to complete API you must have sound knowledge of double entry beforeyou can move onto the more difficult aspects of API.Main PrinciplesDual Effect – Every transaction that a business makes has two effectsE.g. Purchase a motor vehicle for cashEvery transaction must be of corresponding equal amounts. For everytransaction you must have at least one DEBIT entry and one CREDIT entry DEBITS will increase CREDITS will increaseExpenses Liabilities• Purchases • Loans• Rent and rates • Mortgages• Light and heat • Creditors• Wages and salaries• Motor expenses• StationeryAssets Income• Motor vehicles • Sales• Equipment • Rents received• Computers • Interest received• Furniture• Land and buildings• Debtors• Stock• Cash/bankDrawings CapitalTo help you remember these use the mnemonic: DEAD CLICKAPLAN PUBLISHING 5
  10. 10. AAT STUDY NOTES (STUDENT) : APILedger accountingDr CrDate Detail £ Date Detail £Example 1John Dunn started trading as a sole trader on the 1 March 2003.The following transactions took place in the first month of trade.You are required to prepare the double entry for all the transactions.NB – Only set up one debtors control account and one creditors control account;subsidiary ledgers come in later when dealing with reconciliations1 John introduced £2,000 into the business bank account2 Made purchases of £175 worth of goods for resale from H Mills on credit3 Purchased £150 worth of fixtures and fittings, paying by cheque4 Made cash sales of £2755 Made purchases of £114 worth of goods from D Frazer on credit6 Paid rent of £15 by cash7 Paid stationery expenses of £27 by cash8 Returned goods to H Mills to the value of £239 Made credit sales of £7710 Purchased a motor vehicle for £300 and paid by cheque11 Paid cash wages of £11712 Withdrew £44 worth of cash6 KAPLAN PUBLISHING
  11. 11. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCE JOURNAL1 Dr Cr2 Dr Cr3 Dr Cr4 Dr Cr5 Dr Cr6 Dr Cr7 Dr Cr8 Dr Cr9 Dr Cr10 Dr Cr11 Dr Cr12 Dr CrKAPLAN PUBLISHING 7
  12. 12. AAT STUDY NOTES (STUDENT) : APIUsing the journal entries that you prepared above, write up the Ledgeraccounts to show the first months transactions. BankDate Detail £ Date Detail £ CapitalDate Detail £ Date Detail £ PurchasesDate Detail £ Date Detail £ Creditors (PLCA)Date Detail £ Date Detail £8 KAPLAN PUBLISHING
  13. 13. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCE Fixtures and fittingsDate Detail £ Date Detail £ SalesDate Detail £ Date Detail £ CashDate Detail £ Date Detail £ RentDate Detail £ Date Detail £KAPLAN PUBLISHING 9
  14. 14. AAT STUDY NOTES (STUDENT) : API StationeryDate Detail £ Date Detail £ Purchase returnsDate Detail £ Date Detail £ Debtors (SLCA)Date Detail £ Date Detail £ Motor vehiclesDate Detail £ Date Detail £10 KAPLAN PUBLISHING
  15. 15. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCE WagesDate Detail £ Date Detail £ DrawingsDate Detail £ Date Detail £KAPLAN PUBLISHING 11
  16. 16. AAT STUDY NOTES (STUDENT) : APIExample 2Sasha Glew started trading as a sole trader on 1 December 2003The following transactions took place in the first month of tradeYou are required to prepare the double entry for the following transactions,enter them into the relevant ledger accounts and close them off.(a) Sasha introduced £1,500 cash(b) Made credit purchases of £296(c) Paid rent of £28 in cash(d) Transferred £100 worth of cash to a business bank account(e) Made credit sales of £54(f) Purchased stationery £15 and paid by cheque(g) Made cash sales £49(h) Returned goods to a supplier £18 (these goods where originally purchased on credit)(i) Made credit sale £29(j) Paid for £18 worth of repairs in cash(k) Sasha had £14 worth goods returned to her (these goods had originally been sold on credit)(l) Paid a supplier £278 by cheque (these goods had originally been purchased on credit)(m) Made cash purchases £125(n) Purchased a motor vehicle £395 paying by cheque(o) Paid £15 worth of motor expenses in cash(p) Purchased fixtures and fittings on credit £120 CashDate Detail £ Date Detail £12 KAPLAN PUBLISHING
  17. 17. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCE CapitalDate Detail £ Date Detail £ PurchasesDate Detail £ Date Detail £ Creditors (PLCA)Date Detail £ Date Detail £ RentDate Detail £ Date Detail £KAPLAN PUBLISHING 13
  18. 18. AAT STUDY NOTES (STUDENT) : API BankDate Detail £ Date Detail £ SalesDate Detail £ Date Detail £ Debtors (SLCA)Date Detail £ Date Detail £ StationeryDate Detail £ Date Detail £14 KAPLAN PUBLISHING
  19. 19. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCE Purchase returnsDate Detail £ Date Detail £ RepairsDate Detail £ Date Detail £ Sales returnsDate Detail £ Date Detail £ Motor vehiclesDate Detail £ Date Detail £KAPLAN PUBLISHING 15
  20. 20. AAT STUDY NOTES (STUDENT) : API Motor expensesDate Detail £ Date Detail £ Fixtures and fittingsDate Detail £ Date Detail £16 KAPLAN PUBLISHING
  21. 21. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCETrial balanceOnce the ledger accounts have been prepared and closed off you are then in aposition to prepare the TRIAL BALANCE.DefinitionA list of balances taken from the nominal/general ledger. The trial balance isused to establish that the dual effect/double entry has been successful.Generally• List of balances from the ledgers’ brought forward balances• The starting point for preparing profit and loss account and balance sheet of an organisation• Does not guarantee that double entry is correct (covered later)Example of a trial balanceDetail Dr CrBank 11,700Capital 12,500Purchases 3,250Creditors 1,500Sales 1,800Debtors 800Purchase returns 250Drawings 100Sales returns 200Total 16,050 16,050 –––––– ––––––Notice that the debit and credit columns should equal one another. This provesthat for every debit entry a credit entry of the corresponding amount has gonethrough, although it does not prove that the transaction has gone to the correctaccount!KAPLAN PUBLISHING 17
  22. 22. AAT STUDY NOTES (STUDENT) : APIExample 3Complete the trial balance for Sasha Glew from Example 2.Trial balance as at 31 December 2003 DEBIT CREDIT £ £CashCapitalPurchasesCreditorsRentBankSalesSales ledger control accountStationeryPurchase returnsRepairsSales returnsMotor vehiclesMotor expensesFixtures and fittingsTotal18 KAPLAN PUBLISHING
  23. 23. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCEActivity 1James started a business on 1 January 20X1 selling furniture. In the first year oftrading he entered into the following transactions.(a) Paid £40,000 into a business bank account.(b) Made purchases from Bill for £2,000 cash.(c) Purchased goods costing £6,000 from Samantha, and agreed to pay within one month.(d) Paid £400 for insurance in cash.(e) Bought storage units for £1400 on credit from Jo.(f) Paid £300 cash for advertising.(g) Sold furniture to Pete for £3,000 cash.(h) Paid the telephone bill of £240 in cash.(i) Paid Samantha £2,000 on account.(j) Sold further furniture to Chris for £8,000 on credit.(k) Bought stationery for £160 cash.(l) Paid Jo in full.(m) Received £2,000 from Chris.(n) Withdrew £1000 cash to pay for a holiday for himself.(Treat bank and cash as the same)You are required to prepare the double entry for the following transactions,enter them into the relevant ledger accounts and close them off.KAPLAN PUBLISHING 19
  24. 24. AAT STUDY NOTES (STUDENT) : API CashDate Detail £ Date Detail £ CapitalDate Detail £ Date Detail £ PurchasesDate Detail £ Date Detail £20 KAPLAN PUBLISHING
  25. 25. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCE CreditorsDate Detail £ Date Detail £ InsuranceDate Detail £ Date Detail £ AdvertisingDate Detail £ Date Detail £ TelephoneDate Detail £ Date Detail £KAPLAN PUBLISHING 21
  26. 26. AAT STUDY NOTES (STUDENT) : API StationeryDate Detail £ Date Detail £ Storage unitsDate Detail £ Date Detail £ SalesDate Detail £ Date Detail £ DebtorsDate Detail £ Date Detail £22 KAPLAN PUBLISHING
  27. 27. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCE DrawingsDate Detail £ Date Detail £Prepare the Trial Balance for JamesTrial Balance as at 31 December 20X1Detail Dr Cr £ £KAPLAN PUBLISHING 23
  28. 28. AAT STUDY NOTES (STUDENT) : APIActivity 2Show by means of T accounts how the following transactions duringJanuary 20X1 would be recorded in the books of Clive for January.(a) Started business by putting £10,000 in a business bank account.(b) Made purchases for £200 cash.(c) Made further purchases from Margaret for £400 on credit.(d) Paid rent of £1000 cash.(e) Bought stationery for £60 cash.(f) Bought a second-hand van from Peter for £4,000 and promised to pay him soon.(g) Made a sale to Greg for £1000 cash.(h) Paid Margaret £100 cash.(i) Made a sale on credit to Dean for £140.(j) Bought more stationery for £40 cash.(k) Paid cash of £150 for motor expenses.(l) Paid Peter £1000.(m) Took £300 from the business to pay for his own living expenses.(n) Received £100 from Dean. (Treat bank and cash as the same)24 KAPLAN PUBLISHING
  29. 29. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCE BankDate Detail £ Date Detail £ CapitalDate Detail £ Date Detail £ PurchasesDate Detail £ Date Detail £KAPLAN PUBLISHING 25
  30. 30. AAT STUDY NOTES (STUDENT) : API CreditorsDate Detail £ Date Detail £ RentDate Detail £ Date Detail £ StationeryDate Detail £ Date Detail £ VanDate Detail £ Date Detail £26 KAPLAN PUBLISHING
  31. 31. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCE SalesDate Detail £ Date Detail £ DebtorsDate Detail £ Date Detail £ Motor expensesDate Detail £ Date Detail £ DrawingsDate Detail £ Date Detail £KAPLAN PUBLISHING 27
  32. 32. AAT STUDY NOTES (STUDENT) : APIPrepare the Trial Balance for CliveTrial Balance as at 31st January 20X1Detail Dr Cr £ £28 KAPLAN PUBLISHING
  33. 33. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCETrial Balance – other methodsYou may come across the situation where you do not have to prepare all theledger accounts for an organisation.It could be that these have already been prepared on your behalf and you arepurely given a list of balances. The twist is that you will not be told whether thebalances are debit or credit!Recap Debits CreditsFixed assets LoansDebtors MortgagesStock CreditorsCash SalesPurchases Interest receivedDiscounts allowed Rent receivedSales returns Discounts receivedExpenses Purchase returnsThe following could be either:BankA debit (DR) balance represents money in the bankA credit (CR) balance represents an overdraftVAT (Value added tax)A debit (DR) balance represents a refund due from HMRCA credit (CR) balance represents a liability owed to HMRCKAPLAN PUBLISHING 29
  34. 34. AAT STUDY NOTES (STUDENT) : APIExample 4(a) Close off the following ledger accounts Sales Date Details Amount Date Details Amount 2000 £ 2000 £ 30-Nov Balance B/d 309,000 30-Nov Debtors 10,200 Sales returns Date Details Amount Date Details Amount 2000 £ 2000 £ 30-Nov Balance B/d 2,968 30-Nov Debtors 1,400 Debtors control Date Details Amount Date Details Amount 2000 £ 2000 £ 30-Nov Balance B/d 106,840 30-Nov Sales returns 1,645 30-Nov Sales 11,985 30-Nov Bank 2,700 30-Nov Discount allowed 50 Bank charges Date Details Amount Date Details Amount 2000 £ 2000 £ 30-Nov Balance B/d 367 30-Nov Bank 8730 KAPLAN PUBLISHING
  35. 35. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCE Discounts allowed Date Details Amount Date Details Amount 2000 £ 2000 £ 30-Nov Balance B/d 170 30-Nov Debtors 50 Insurance Date DetailsAmount Date Details Amount 2000 £ 2000 £ 30-Nov Balance B/d 600 30-Nov Bank 700 Rent paid Date Details Amount Date Details Amount 2000 £ 2000 £ 30-Nov Balance B/d 850 30-Nov Bank 300 VAT Date Details Amount Date Details Amount 2000 £ 2000 £ 30-Nov Sale returns 245 30-Nov Balance b/d 16,512 Sales 1,785KAPLAN PUBLISHING 31
  36. 36. AAT STUDY NOTES (STUDENT) : API(b) Prepare the trial balance from the ledger accounts above and the following list of balances Account name £ Motor vehicles 37,200 Office equipment 9,700 Other debtors 56,540 Cash 190 Creditors 47,910 Capital 19,381 Purchases 126,003 Purchase returns 459 Commission paid 890 Wages 42,078 Rates 1,200 Electricity 981 Telephone 1,585 Motor expenses 900 Miscellaneous expenses 1,500 Bank 4,31332 KAPLAN PUBLISHING
  37. 37. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCETrial balance as at 30 November 2000 DEBIT CREDIT £ £SalesSales returnsDebtors controlBank chargesDiscounts allowedInsuranceRent paidVATMotor vehiclesOffice equipmentOther debtorsCashCreditors controlCapitalPurchasesPurchase returnsCommission paidWagesRatesElectricityTelephoneMotor expensesMiscellaneous expensesBankTotalKAPLAN PUBLISHING 33
  38. 38. AAT STUDY NOTES (STUDENT) : APIActivity 3Prepare the trial balance from the following list of balancesCapital 30,000Drawings 12,000Sales 45,625Purchases 32,652Rates 2,530Light and heat 3,560Interest received 356Motor vehicles 2,853Fixtures and fittings 1,520Cash 560Bank overdraft 237Creditors 3,500Debtors 6,526Discounts received 650Discounts allowed 560Purchase returns 123Sales returns 150Wages 10,000Rent 4,500Insurance 1,500Stationery 980Advertising 60034 KAPLAN PUBLISHING
  39. 39. SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCETrial balance as at ……. £ £CapitalDrawingsSalesPurchasesRatesLight and heatInterest receivedMotor vehiclesFixtures and fittingsCashBank overdraftCreditors (PLCA)Debtors (SLCA)Discounts receivedDiscounts allowedPurchase returnsSales returnsWagesRentInsuranceStationeryAdvertisingKAPLAN PUBLISHING 35
  40. 40. AAT STUDY NOTES (STUDENT) : API36 KAPLAN PUBLISHING
  41. 41. SESSIONS 4: ACCOUNTSPREPARATIONFinancial statements of an organisation are made up of:• Balance sheet• Profit and loss account (Income statement Ltd Company)• Cash flow statement (not examined in this syllabus)The following are examples of a Profit and loss account and a Balance sheet.You should ensure that you make yourself familiar with the formats. Profit and loss account for the year ended 31 December 2005 For .................................................... £ £Sales XLess: Cost of sales XOpening stockPurchases XClosing stock (X) X –––––– ––––––Gross profit X ––––––Sundry income XExpensesRent XRates XElectricity XDepreciation XIrrecoverable debt XStationery XTelephone X ––––––Total expenses X ––––––Net profit X ––––––KAPLAN PUBLISHING 37
  42. 42. AAT STUDY NOTES (STUDENT) : API Balance Sheet as at 31 December 2005 For ................................................... £ £ £Fixed assets Cost DepreciationFixed assets X X X –––––– ––––––Current assetsStock XDebtors XLess allowance of doubtfuldebt (X) –––––– XBank XPrepayment X –––––– X ––––––Current liabilitiesCreditors XAccrual X –––––– (X) ––––––Net current assets X ––––––Total assets less current liabilities XLong term liabilities (X) ––––––Net assets X ––––––Financed byCapital XProfit XDrawings X –––––– X ––––––38 KAPLAN PUBLISHING
  43. 43. SESSION 4: ACCOUNTS PREPARATIONExample 1At the end of the financial year the following trial balance was drafted for Harrywho owns an event organisation business.Prepare the profit and loss account and balance sheet from this information.Trial balance for the year ended 31 December 2009 for Harry trading as AsterFlorists.Description Dr CrSales 689,250Purchases 414,875Opening stock 69,376Closing stock BS 65,456Closing stock P&L 65,456Salaries and wages 115,654General expenses 82,440Shop fittings 48,140Computer equipment 12,900Debtors 58,200Creditors 45,320Bank – current account 4,658Cash 550VAT 13,500Discounts allowed 8,740Discounts received 3,658Drawings 22,000Bank – deposit account 20,000Capital 105,805Total 922,989 922,989 ––––––– –––––––KAPLAN PUBLISHING 39
  44. 44. AAT STUDY NOTES (STUDENT) : APIProfit and Loss account for the year ended 31 December 2009 for Harry trading as Aster Florists. £ £SalesLess: Cost of salesOpening stockPurchasesClosing stockGross profitSundry incomeDiscounts receivedExpensesWagesGeneral expensesDiscounts allowedTotal expensesNet profit40 KAPLAN PUBLISHING
  45. 45. SESSION 4: ACCOUNTS PREPARATION Balance sheet as at 31 December 2009 for Harry trading as Aster Florists £ £ £Fixed assets Cost DepreciationShop fittingsComputer equipment ––––––– ––––––– –––––––Current assetsStockDebtorsBankCash –––––––Current liabilitiesCreditorsVAT –––––––Net current assets –––––––Total assets less current liabilitiesLong term liabilities –––––––Net assets –––––––Proprietors fundsCapitalProfitDrawings ––––––– –––––––KAPLAN PUBLISHING 41
  46. 46. AAT STUDY NOTES (STUDENT) : APIThe accounting equationAssets – liabilities = Capital + profit – drawings42 KAPLAN PUBLISHING
  47. 47. SESSION 5: SSAP 5 VATVAT is a consumer tax, in that all of us have to pay it. The HM Revenue andCustoms (HMR&C) collect it.The main issue is that if each of us where to pay VAT individually to HMR&C, itwould be an administrative nightmare!!!!To prevent this, VAT is collected on behalf of HMR&C through registeredbusinesses.Registered businessesA VAT registered business must charge VAT on sales. But it can reclaim VAT onpurchases.VAT on sales – OUTPUT VATVAT on purchases/expenses – INPUT VATThe difference between these two amounts must be paid to/received fromCustoms.If output VAT is greater than input VAT, then the business must pay that amountover to HMR&C and vice versa.Rates of VAT and calculating VATVAT is currently charged at two main rates:Standard rated items – VAT is charged at 17.5%Zero-rated items – VAT is charged at 0%There is a reduced rate VAT that is 5% – this is applicable to domestic fuel only.Calculating standard rated VATInvoices are usually broken down under three headings:GROSS (VAT inclusive)VAT (VAT element)NET (VAT exclusive)KAPLAN PUBLISHING 43
  48. 48. AAT STUDY NOTES (STUDENT) : APIThe VAT structureGross 117.50%VAT 17.50%Net 100.00%You need to understand how to calculate VAT from either a gross or a netamount. The calculation in each case is different.GROSS x 17.5 / 117.5 or (7/47) = VAT elementNET x 17.5% = VAT elementDouble entry and accounting for VATSales invoiceDr Debtors X Gross invoiceCr VAT control X VAT elementCr Sales X Net invoicePurchase invoiceDr Purchase X Net invoiceDr VAT control X VAT elementCr Creditors X Gross invoiceThe VAT would appear in the VAT control account as follows: VAT controlDate Detail £ Date Detail £ Input VAT X Output VAT X Payable to HMR&C X X XExample 11 Graham purchases 4 units for resale at £500 plus VAT each on credit2 Graham then sells 3 of the units for £1,000 plus VAT each on credit3 Graham then sells the remaining unit for £900 plus VAT for cash44 KAPLAN PUBLISHING
  49. 49. SESSION 5: SSAP 5 VATRequiredPrepare the journal entries for the above transactions.Prepare the VAT account/control account to show the above transactions.Explain whether the balance on the VAT control account is a debtor or a creditor1 Dr Dr Cr2 Dr Cr Cr3 Dr Cr Cr VAT controlExample 21 Abdul purchases 3 units for resale at £600 plus VAT each on credit2 Abdul then sells 2 of the units for £1,500 plus VAT each on credit3 Abdul then sells the remaining unit for £800 plus VAT for cashKAPLAN PUBLISHING 45
  50. 50. AAT STUDY NOTES (STUDENT) : APIRequiredPrepare the journal adjustments for the above transactions.Prepare the VAT account/control account to show the above transactions.Explain whether the balance on the VAT control account is a debtor or a creditor1 Dr Dr Cr2 Dr Cr Cr3 Dr Cr Cr VAT Control46 KAPLAN PUBLISHING
  51. 51. SESSION 5: SSAP 5 VATActivity 1A business that is registered for VAT has the following records relating to sales,purchases and expenses.Sales for the quarter ending 31 March 20X4 of £236,175 (including VAT)Purchases and expenses of £143,600 (excluding VAT).At 1 January 20X4 there was an amount of £8,455 owing to HM Revenue andCustoms and this was paid on 28 January 20X4.RequiredWrite up the VAT control account for the quarter ending 31 March 20X4. VAT control account £ £Explain what the balance on the account represents.KAPLAN PUBLISHING 47
  52. 52. AAT STUDY NOTES (STUDENT) : API48 KAPLAN PUBLISHING
  53. 53. SESSION 6: FIXED ASSETSDefinitionThe fixed assets of a business are the assets that are purchased with theintention of being for long term use within the business, it is important todifferentiate between capital and revenue expenditure.Capital expenditure – expenditure on fixed assets and is recorded on thebalance sheet as a fixed asset.Revenue expenditure – expenditure for the expenses of the business such astelephone. Revenue expenditure is recorded in the profit and loss account.The following document is an invoice relating to a purchase of an asset. SALE INVOICEWest Yorks Machine Supplies Ltd49 St Pauls StreetLeedsLS1 2TETelephone: 01302 721326Fax: 01302 721325 VAT registration: 235721718 Date/Tax point: 27 December 2009 Invoice no: 7422Your order no: FE763Pickering EngineeringHawsker LaneWhitbyNorth Yorkshire £To: Supply and fit: One 2000 Cutting Machine 25,000 VAT @ 17½% 4,375 Balance to pay £29,375TERMS NET 30 DAYSApproved by: B Curran / J CurranKAPLAN PUBLISHING 49
  54. 54. AAT STUDY NOTES (STUDENT) : APIFixed asset purchases would be recorded in the ledgers as follows: Dr CrFixed asset account 25,000 Net invoice (Dr)VAT 4,375 VAT element (Dr)Bank/Creditors 29,375 Gross invoice (Cr)*Note that each classification of fixed asset has its own ledger account, i.e. onefor motor vehicles, another for fixtures and fittings etcThis is nearly always the double entry for a VAT registered business but there isone exception. VAT CANNOT BE RECLAIMED ON THE PURCHASE OFMOTOR CARS, so the debit to the fixed asset account is for the gross amount ofthe invoice.It may be the case that when you purchase a fixed asset, the invoice amountincludes items other than the fixed asset itself. Prime examples would be motorvehicles when insurance or road tax is included.Financing fixed asset acquisitionsThere are a number of different options available for financing the purchase offixed assets. The following are a few examples:Borrowing – LoansHire purchase50 KAPLAN PUBLISHING
  55. 55. SESSION 6: FIXED ASSETSFinance and operating leasesAccounting for finance leasing and hire purchaseAccounting for operating leasingFixed asset registerObviously the fixed assets of a business will tend to be expensive items that theorganisation will wish to have good control over. In particular the organisationwill wish to keep control over which assets are kept where and check on aregular basis that they are still there.Therefore most organisations that own a significant number of fixed assets willmaintain a fixed asset register as well as the ledger accounts that record thepurchases of the fixed assets.Layout of a fixed asset registerThe purpose of a fixed asset register is to record all relevant details of all of thefixed assets. The format of the register will depend on the organisation, but theinformation to be recorded for each fixed asset will probably be similar.An example of a fixed assets register is given overleaf.KAPLAN PUBLISHING 51
  56. 56. AAT STUDY NOTES (STUDENT) : API Extract from the Fixed Asset Register Plant and Machinery Asset Date Description Cost Depreciation NBV Funding Disposal Disposal type purchased method proceeds date Plant and 1 Aug 00 1512 Cutting 20,000 Cash machinery Machine Year Ended 31 Dec 00 2,000 18,000 Year Ended 31 Dec 01 2,000 16,000 Year Ended 31 Dec 02 2,000 14,000 Year Ended 31 Dec 03 2,000 12,000 Year Ended 31 Dec 04 10,000 27 Dec 0452 KAPLAN PUBLISHING
  57. 57. SESSION 7: DEPRECIATIONPrinciples behind depreciationFixed assets as we have previously established are capitalised in the balancesheet at the point when they are purchased. However this is not the end of thestory.The accruals concept states ‘costs incurred in a period should be matched withthe income produced in the same period’. This concept applies to fixed assets inthat an asset is purchased with the view that it will help generate income for thebusiness.Therefore in accordance with the accruals concept some of the cost of the fixedasset should be charged to the profit and loss account each year that the asset isused.What is depreciation?It is the measurement of the cost of the fixed asset consumed in a period. Itreflects the wear and tear of a fixed asset in a period.Calculating depreciationThere are three key factors to consider:Cost of the assetUseful economic lifeResidual valueThere are two main ways of calculating depreciationStraight line/on costWith this method the amount of depreciation charged each year to the profit andloss account remains exactly the same. This means that the book value of thefixed asset is reduced by the same amount each accounting period.There are two different ways that you may be asked to calculate straight-linedepreciation.Formula Cost – residual value OR Cost – residual value x % Useful economic lifeKAPLAN PUBLISHING 53
  58. 58. AAT STUDY NOTES (STUDENT) : APIExample 1 using the formula Cost – residual value Useful economic lifeA new oven has been purchased by Ian for his cafe, calculate the depreciationcharge per year for the ovenCost £100,000Residual value £25,000Useful economic life 5 yearsActivity 1A pub lease has been acquired by Kat, calculate the depreciation charge peryear for the leaseCost £700,000Residual value £50,000Useful economic life 10 years54 KAPLAN PUBLISHING
  59. 59. SESSION 7: DEPRECIATIONPercentage terms using the formula Cost – residual value x %Example 2Roxanne’s business policy for her hairdressing business is to depreciate fixedassets at 25% on cost each yearWhat is the depreciation charge each year if one of the assets costs £15,000?Activity 2Phil has a business policy to depreciate fixed assets at 15% on cost each year.What is the depreciation charge each year if his motor van cost £26,000?Example 3Eric owns a bed and breakfast, his businesss policy is to depreciate fixed assetsat 33% on cost each year.What is the depreciation charge each year if his computer cost £1,800 and has aresidual value of £600?Activity 3Andy’s business policy is to depreciate fixed assets at 15% on cost each year.What is the depreciation charge each year if his tractor for his farm costs £4,200and has a residual value of £200?KAPLAN PUBLISHING 55
  60. 60. AAT STUDY NOTES (STUDENT) : APIReducing balance/depreciation on the net book valueWith this method of depreciation a different charge for depreciation is made inthe profit and loss account each period. It assumes that an asset is used upmore quickly in the first few years of ownership.It is calculated by multiplying the assets net book value (the cost of the asset thathas not been charged to the profit and loss account) and multiplying it by a setpercentage.Example 4Fixtures and fittings in Dev’s corner shop cost £40,000His business policy is to depreciate these assets at 10% per annum on areducing balance basisCalculate the depreciation for the first three years of ownership.Activity 4Vivian’s fixtures and fittings in her corner shop cost £20,000Her business policy is to depreciate these assets at 25% per annum on areducing balance basisCalculate the depreciation for the first 3 years of ownership.Accounting for depreciationAs with any adjustment to the financial statements, double entry is alwaysapplied and at least two accounts will be affected.Double entryDr Depreciation expense account XCr Accumulated depreciation* X*Note that each classification of fixed asset has its own accumulated depreciationledger account i.e. one for motor vehicles, another for fixtures and fittings etc56 KAPLAN PUBLISHING
  61. 61. SESSION 7: DEPRECIATIONMonthly depreciationAn organisations policy may be to calculate depreciation on a monthly basisrather than on an annual basis.If this is the case, the calculation is the same except for the fact that you need totime apportion the annual depreciation charge.Carla’s business has a financial year ending 31 December 2006. Depreciation iscalculated on the basis of complete months of ownership. Calculate thedepreciation charge for each of the following assets.Example 5Cost of fixtures and fittings £100,000Residual value £25,000Useful economic life 5 yearsDate of acquisition 1 April 2006Activity 5Cost of building £700,000Residual value £50,000Useful economic life 10 yearsDate of acquisition 1 June 2006Activity 6Cost of motor car £40,000Depreciation 10% per annum on a reducing balance basisDate of acquisition 31 July 2006KAPLAN PUBLISHING 57
  62. 62. AAT STUDY NOTES (STUDENT) : APIRecording assets in the fixed asset registerActivity 7The following is an extract of a purchase invoice for Staplers office supplies. SALE INVOICEComputer Supplies LimitedHigh StreetNottinghamNE34 1ANTelephone: 0116 259 4562Fax: 0116 649 3255 VAT registration: 289721918 Date/Tax point: 31 October 2009 Invoice no: 7245Your order no: FE2087ToStaplers Office SuppliesPencils Business CentrePencil LaneLeicesterLE3 3EX £ Laser Printer 1,550.00 Delivery 15.00 Printing paper 75.00 1,640.00 VAT @ 17½% 287.00 Total £1,927.00TERMS NET 30 DAYSApproved by: B Dell58 KAPLAN PUBLISHING
  63. 63. SESSION 7: DEPRECIATION Further information • Staplers has a policy of capitalising expenditure over £1000 • Computer equipment is depreciated at 30% on a straight line basis • Fixed assets are depreciated in the year of acquisition but none in the year of disposal Record the acquisition in the fixed asset register: (a) The acquisition during the year ended X09 (b) Depreciation for the year ended X09 Fixed Assets RegisterDescription Acquisition Cost Depreciation NBV Funding Disposal Disposal Date Source Proceeds DateComputerEquipmentComputer 30/6/X7 5,000.00 CashNetworkY/E 31/12/X7 1,500.00 3,500.00Y/E 31/12/X8 1,500.00 2,000.00Y/E 31/12/X9Laser Printer 30/10/X9Y/E 31/12/X9 KAPLAN PUBLISHING 59
  64. 64. AAT STUDY NOTES (STUDENT) : API60 KAPLAN PUBLISHING
  65. 65. SESSION 8: DISPOSAL OF FIXEDASSETSWhen a fixed asset is disposed of, it is unlikely that the proceeds from sale willbe equal to the value of the fixed asset in the balance sheet (the net book value).The difference between the net book value and the sale proceeds will be either aprofit or a loss on the disposal of a fixed asset.Profit – this will occur where the net book value is lower than the sale proceeds.Loss – this will occur where the net book value is higher than the sale proceeds.Steps to disposing of a fixed assetFirstly open disposals T Account, then:Step 1 – Remove the original cost of the disposed asset from the asset accountStep 2 – Remove the accumulated depreciation of the disposed asset from theaccumulated depreciation accountStep 3 – Enter the sale proceeds received/receivable for the disposed assetExample 1Veronica has a motor vehicle with a net book value of £2,800. The motor vehiclehad originally cost £7,000.Veronica sells the asset for £3,000 cash.RequiredShow the journal entries to dispose of the fixed asset above and calculate theprofit or loss on the disposal of the fixed asset.KAPLAN PUBLISHING 61
  66. 66. AAT STUDY NOTES (STUDENT) : API Disposal –––––– –––––– –––––– –––––– Motor vehicles –––––– –––––– –––––– –––––– Accumulated depreciation –––––– –––––– –––––– ––––––Activity 1During the year Sarah sold a machine that had originally cost £20,000 for £3,000.At the date of sale the assets accumulated depreciation was £15,000.RequiredShow the journal entries to dispose of the asset and prepare the disposalaccount to calculate the profit or loss on disposal.62 KAPLAN PUBLISHING
  67. 67. SESSION 8: DISPOSAL OF FIXED ASSETS Disposal account –––––– –––––– –––––– –––––– Machine account –––––– –––––– –––––– –––––– Accumulated depreciation account –––––– –––––– –––––– ––––––Example 2Bob sold a car that had been purchased for £25,500. Depreciation on motorvehicles is calculated at 25% on a straight-line basis. The car was owned for 3years before it was sold. Sale proceeds were £1,500RequiredShow the journal entries to dispose of the asset and prepare the disposalaccount to calculate the profit or loss on disposal.KAPLAN PUBLISHING 63
  68. 68. AAT STUDY NOTES (STUDENT) : API Disposal –––––– –––––– –––––– –––––– Motor vehicle account –––––– –––––– –––––– –––––– Accumulated depreciation account –––––– –––––– –––––– ––––––Activity 2A building that had depreciation for ten years at 2% on cost was sold during theyear for £50,000. Its original purchase price was £43,000.RequiredShow the journal entries to dispose of the asset and prepare the disposalaccount to calculate the profit or loss on disposal.64 KAPLAN PUBLISHING
  69. 69. SESSION 8: DISPOSAL OF FIXED ASSETS Disposal –––––– –––––– –––––– –––––– Building account –––––– –––––– –––––– –––––– Accumulated depreciation account –––––– –––––– –––––– ––––––Part exchangeYou may come across a situation where instead of selling a fixed asset for cash,an old asset is taken by the supplier in part exchange for a new asset. Acheque/cash is paid for the net cost of the new asset, after offsetting the partexchange value of the old asset.It is important that the new asset is recorded at its full cost, not the net amountfor which a cheque/cash is paid. So in this situation you have got to deal withboth the sale of one asset and the purchase of another.Journals for part exchange £ £1 Dr Disposal account X Cr Fixed asset cost account X2 Dr Accumulated depreciation X Cr Disposal account X3 Dr Fixed asset cost account X (with part exchange value) Cr Disposal account X4 Dr Fixed asset cost account X (with net cost) Cr Bank/creditors XKAPLAN PUBLISHING 65
  70. 70. AAT STUDY NOTES (STUDENT) : APIExample 3During the year Sarah part exchanged a machine that had originally cost £20,000and had accumulated depreciation of £17,000.The new machine cost £15,000 and a cheque for £14,000 was written for theremaining balance.RequiredPrepare the journal entries to account for the disposal and purchase of theassets and write up the disposal account to calculate the profit or loss ondisposal. Disposal account –––––– –––––– –––––– –––––– Machine account –––––– –––––– –––––– ––––––66 KAPLAN PUBLISHING
  71. 71. SESSION 8: DISPOSAL OF FIXED ASSETS Accumulated depreciation –––––– –––––– –––––– ––––––Activity 3Bob part exchanged a car at a trade in value of £2,500. The car originally cost£24,000 and had been depreciated for 4 years at 10% on cost. The new vehiclesfull cost was £27,000.RequiredPrepare the journal entries to account for the disposal and purchase of theassets and write up the disposal account to calculate the profit or loss ondisposal. Disposal –––––– –––––– –––––– ––––––KAPLAN PUBLISHING 67
  72. 72. AAT STUDY NOTES (STUDENT) : API Motor vehicle account –––––– –––––– –––––– –––––– Accumulated depreciation –––––– –––––– –––––– ––––––Part-exchange with VATYou may be asked to deal with a situation where a business registered for VATdisposes of a fixed asset to a supplier in part exchange for a new asset. Aspreviously, a cheque/cash is paid for the net cost of the new asset, afteroffsetting the part exchange value of the old asset.It is important that the new asset is recorded at its full cost, not the net amountfor which a cheque/cash is paid, and also excluding VAT. Similarly, the grosspart-exchange value of the fixed asset disposed of should be split between netsale proceeds and output VAT.Note that, in the year of disposal, the cost of the fixed asset disposed of will beexclusive of VAT in the accounting records. The split of the gross cost betweenfixed asset cost and input VAT would have been done in a previous year when itwas first purchased.68 KAPLAN PUBLISHING
  73. 73. SESSION 8: DISPOSAL OF FIXED ASSETSJournals for part-exchange of fixed assets with VAT £ £1 Dr Disposal account X (as normally) Cr Fixed asset cost account X2 Dr Accumulated depreciation X (as normally) Cr Disposal account X3 Dr Fixed asset X Account for the gross Dr VAT (input VAT) X cost of the new fixed Cr Creditors X asset purchased split between asset cost and input VAT4 Dr Creditors X Account for the gross Cr VAT (output vat) X part-exchange value Cr Fixed asset disposals X received on the fixed asset disposed – split between disposal value and output VAT5 Dr Creditors X Make net payment to Cr Cash X conclude the transactionExample 4During the year Fernando disposed of a van in part exchange for a new van.This van had originally cost £15,000 plus VAT at 17.5% several years ago andhad accumulated depreciation of £12,750.The new van cost £20,000 plus VAT at 17.5%. The gross part-exchangeallowance including VAT was £4,935. A cash settlement was paid for the netamount outstanding.RequiredPrepare the journal entries to account for the disposal and purchase of theassets and write up the disposal account to calculate the profit or loss ondisposal.KAPLAN PUBLISHING 69
  74. 74. AAT STUDY NOTES (STUDENT) : APISolution £ £1 Dr Disposal account (as normally) Cr Fixed asset cost account2 Dr Accumulated depreciation (as normally) Cr Disposal account3 Dr Fixed asset Account for the gross Dr VAT (input VAT) cost of the new fixed Cr Creditors asset purchased – split between asset cost and input VAT4 Dr Creditors Account for the gross Cr VAT (output vat) part-exchange value Cr Fixed asset disposals received on the fixed asset disposed – split between disposal value and output VAT5 Dr Creditors Make net payment to Cr Cash conclude the transaction Disposal of fixed asset –––––– –––––– –––––– ––––––70 KAPLAN PUBLISHING
  75. 75. SESSION 8: DISPOSAL OF FIXED ASSETSActivity 4During the year Jamie disposed of a fixed asset in part exchange for a new fixedasset. This asset had originally cost £30,000 plus VAT at 17.5% several yearsago and had accumulated depreciation of £18,800.The new fixed asset cost £35,000 plus VAT at 17.5%. The gross part-exchangeallowance including VAT was £9,400. A cash settlement was paid for the netamount outstanding.RequiredPrepare the journal entries to account for the disposal and purchase of theassets and write up the disposal account to calculate the profit or loss ondisposal.Solution £ £1 Dr Disposal account (as normally) Cr Fixed asset cost account2 Dr Accumulated depreciation (as normally) Cr Disposal account3 Dr Fixed asset Account for the gross Dr VAT (input VAT) cost of the new fixed Cr Creditors asset purchased – split between asset cost and input VAT4 Dr Creditors Account for the gross Cr VAT (output vat) part-exchange value Cr Fixed asset disposals received on the fixed asset disposed – split between disposal value and output VAT5 Dr Creditors Make net payment to Cr Cash conclude the transactionKAPLAN PUBLISHING 71
  76. 76. AAT STUDY NOTES (STUDENT) : API Disposal of fixed asset –––––– –––––– –––––– ––––––Recording acquisition and disposals in the fixed asset registerActivity 5The following is an extract from a purchase invoice by Staplers office supplies SALE INVOICEComputer Supplies LimitedHigh StreetNottinghamNE34 1ANTelephone: 0116 259 4562Fax: 0116 649 3255 VAT registration: 289721918 Date/Tax point: 30 November 2009 Invoice no: 7245Your order no: FE2088ToStaplers Office SuppliesPencils Business CentrePencil LaneLeicesterLE3 3EX £ Computer Netbook 1,375.00 Delivery 25.00 Carry case 50.00 1,450.00 VAT @ 17½% 253.75 Total £1,703.75TERMS NET 30 DAYSApproved by: B Dell72 KAPLAN PUBLISHING
  77. 77. SESSION 8: DISPOSAL OF FIXED ASSETS The following relates to the sale of a vehicle (part exchange) Reg No: ST 08 PLS Date of sale 31/10/09 Selling price ex VAT £2,000 Further information • Staplers has a policy of capitalising expenditure over £1,000 • Computer equipment is depreciated at 30% on a straight line basis • Vehicles are depreciated at 20% on a reducing balance basis • Fixed assets are depreciated in the year of acquisition but none in the year of disposal Record the acquisition in the fixed asset register: (a) The acquisition during the year ended X09 (b) Depreciation for the year ended X09 (c) Any disposals in the year ended X09 Fixed Assets RegisterDescription Acquisition Cost Depreciation NBV Funding Disposal Disposal Date Source Proceeds DateComputerEquipmentComputer 30/6/X7 5,000.00 CashNetworkY/E 31/12/X7 1,500.00 3,500.00Y/E 31/12/X8 1,500.00 2,000.00Y/E 31/12/X9 1,500.00 500.00Laser Printer 30/10/X9 1,565.00 CreditY/E 31/12/X9 469.50 1,095.50ComputerNetbook 31/11/X9Y/E 31/12/X9Motor VehiclesST 07 PLS 1/6/X7 7,500.00Y/E 31/12/X7 1,500.00 6,000.00Y/E 31/12/X8 1,200.00 4,800.00Y/E 30/09/X9ST 09 SLP 1/2/X9 10,000.0031/12/X9 KAPLAN PUBLISHING 73
  78. 78. AAT STUDY NOTES (STUDENT) : API74 KAPLAN PUBLISHING
  79. 79. SESSION 9: IRRECOVERABLE ANDDOUBTFUL DEBTSDebtors should only be included as assets in a balance sheet if they areexpected to settle the amounts due from them. The prudence concept requiresan organisation to recognise future losses as soon as it becomes aware of theirexistence. This means that as soon as an organisation is aware that a debt maynot be settled, then the asset value should be reduced by an adjustment beingput through the accounts.Irrecoverable debts (Bad debts)This is a debt that will NOT be recovered. It should be completely removed fromthe ledger accounts and therefore from the balance sheet.Double entry to account for an irrecoverable debt:Dr Irrecoverable debt X (P and L)Cr SLCA X (Balance sheet)Doubtful debtsThis is a debt about which there is some question as to whether or not theamount will be settled. We must recognise this doubt in the accounts but weshould not write off the debt completely, because the cash may be received. Inany event we need to keeping pressing for it to be settled. Therefore we still needto show the debt as outstanding.Example 1Shauna has debtors at her year-end of £25,000.There is concern about whether £5,000 of this will be settled. Dr Doubtful debt adjustments 5,000(P and L) Cr Allowance for doubtful debts 5,000 (Balance sheet)The allowance for doubtful debts is offset against the debtors balance in thebalance sheet.KAPLAN PUBLISHING 75
  80. 80. AAT STUDY NOTES (STUDENT) : APIBalance sheet extract Debtors 25,000 Less allowance for doubtful debts (5,000) –––––– 20,000This treatment clearly shows that there is doubt as to whether the debt will bereceived but does not write it off and we can continue chasing it.Changes in allowanceAs you are aware, any item that appears in the balance sheet is carried forwardinto the next accounting period. This means that there may be a balance on theallowance for doubtful debts account brought forward.It is unlikely that the allowance will stay the same from one year to the next, soyou may need to change the amount carried in the balance sheet.The key thing to remember is that you only need to take account of either theincrease or the decrease in the allowance, in the profit and loss account.Increase Dr Doubtful debt adjustments X Cr Allowance for doubtful debts XIn each case you would only enter the increase in the allowanceDecrease Dr Allowance for doubtful debts X Cr Doubtful debt adjustments XIn each case you would only enter the decrease in the allowanceExample 2Mina has debtors at the year-end of £50,000. There is a allowance for doubtfuldebts brought forward of £8,000. She feels that in this accounting period that thisallowance should be increased to £10,000.76 KAPLAN PUBLISHING
  81. 81. SESSION 9: IRRECOVERABLE AND DOUBTFUL DEBTSRequiredPrepare the journal entries to account for the increase in the allowanceActivity 1Susan has debtors at the year-end of £35,000. There is a brought forwardallowance for doubtful debts of £4,300. Susan believes the allowance should be10% of the year-end debtors figure.RequiredPrepare the journal entries to account for the new allowanceTypes of provision for doubtful debtsThere are two main types:• Specific allowance – calculated by reference to a particular invoice or debtor balance.• General allowance – this is an allowance against debtors as a whole, normally expressed as a percentage of the debtors balance.Example 3A business has debtors of £356,000 of which £16,000 are to be written off as anirrecoverable debts. Of the remainder, a specific allowance is to be madeagainst a debt of £2,000 and a general allowance of 4% is required against theremaining debtors. The opening balance on the allowance for doubtful debtsaccount is £12,000.Show the entries in the allowance for doubtful debts account, the sales ledgercontrol account and the irrecoverable debt expense account.KAPLAN PUBLISHING 77
  82. 82. AAT STUDY NOTES (STUDENT) : APIWorkings Allowance for doubtful debts £ £ Balance b/d 12,000 Sales ledger control account £ £ Balance b/d 356,000 Irrecoverable debt expense account £ £78 KAPLAN PUBLISHING
  83. 83. SESSION 9: IRRECOVERABLE AND DOUBTFUL DEBTSActivity 2A business has debtors of £712,000 of which £32,000 are to be written off asirrecoverable debts. Of the remainder a specific allowance is to be made againsta debt of £4,000 and a general allowance of 4% is required against the remainingdebtors. The opening balance on the allowance for doubtful debts account is£24,000.Show the entries in the allowance for doubtful debts account, the sales ledgercontrol account and the irrecoverable debts expense account.Workings Allowance for doubtful debts £ £ Balance b/d 24,000 Sales ledger control account £ £ Balance b/d 712,000KAPLAN PUBLISHING 79
  84. 84. AAT STUDY NOTES (STUDENT) : API Irrecoverable debt expense account £ £It is very important that you deal with these allowances in a set order:1 Deal with any irrecoverable debt write off first – remove it from the accounts completely2 Calculate the specific allowance3 Calculate the general allowance4 Calculate the total allowance and enter into the accounts (not forgetting to deal with the increase or decrease in the total allowance only)80 KAPLAN PUBLISHING
  85. 85. SESSION 10: ACCRUALS ANDPREPAYMENTSAn organisations profit and loss account and balance sheet is prepared on thebasis of the accruals concept. Income is included on the basis of when it isearned, irrespective of whether it has been received in cash, and expenditure isincluded on the basis of when it is incurred, irrespective of whether it has actuallybeen paid.This principle applies not only to sales and purchases but also to other incomeand expenses.AccrualDefinitionAn expense incurred in a period but not yet paid for – accounting for the accrualrecords this expense in the ledger accounts as below:Accounting for an accrual – Journal entry Dr Expense account * X Cr Accruals X (current liability in BS)*Will depend on the expense that the accruals relates to i.e. will be rent and ratesExample 1A business has a year-end of 31 December 2006. The last phone bill receivedand paid during the year covered the period to 31 October 2006.Post year-end an invoice that covered November, December 2006 and January2007 was received. The phone charge for that period was £600.RequiredCalculate the year-end accrual for the phone expense.Example 2A business has a year-end of 31 December 2005. The last gas bill received andpaid covered the period from 1 January 2005 to 31 July 2005. The bill was for£1,400.Gas is expected to accrue evenly over the year.KAPLAN PUBLISHING 81
  86. 86. AAT STUDY NOTES (STUDENT) : APIRequiredBased on the information provided, estimate the gas accrual for the year to31 December 2005.Accounting for an accrual – Ledger entries Expense accountDate Detail £ Date Detail £ Bank X Accrual account X Expense for the X year X X –– –– Accrual accountDate Detail £ Date Detail £ Accrual c/d X Expense account X X X –– –– Accrual b/d XExample 3Harry started his business on 1 June 2003.The bank summary shows payments of electricity expenses of £970 during theyear ended 31 May 2004. At the year end there is an amount of £200 owing forelectricity (this is for the two months April and May)Write up the electricity account for the year ended 31 May 2004 and close it offby showing the transfer to the profit and loss account.82 KAPLAN PUBLISHING
  87. 87. SESSION 10: ACCRUALS AND PREPAYMENTS Electricity accountDate Detail £ Date Detail £Note – the accrual account is included so that you can gain a full understandingof the accounting entries required. Normally, only the expense account isrequired in the examination Accrual accountDate Detail £ Date Detail £Example 4Ollie started his business on 1 June 2003.The bank summary shows payments for selling expenses of £985 during the yearended 31 May 2004. Included in this amount is the last payment made of £300,which was for the quarter ended 31 March 2004.Write up the selling expenses account for the year ended 31 May 2004 and closeit off by showing the transfer to the profit and loss account and the appropriateaccrual. Selling expensesDate Detail £ Date Detail £ AccrualDate Detail £ Date Detail £KAPLAN PUBLISHING 83
  88. 88. AAT STUDY NOTES (STUDENT) : APIPrepaymentsDefinitionA payment made in advance –the expense relates to a period following thecurrent accounting period.Example 5Andrews’s year-end is 31 December 2006.The bank summary for premises insurance shows that Andrew paid £1,500.This was to cover the period 1 January 2006 to 31 March 2007.RequiredCalculate the prepayment as at 31 December 2006.Example 6Jason’s year end is 31 December 2008Jason paid road tax of £120. This was for the period 1 July 2008 to 30 June2009.RequiredCalculate the prepayment as at 31 December 2008.Accounting for a prepayment – Journal entry Dr Prepayments X (current asset in BS) Cr Expense* X*Will depend on the expense that the prepayment relates to i.e. will be insuranceand road tax in the examples above.84 KAPLAN PUBLISHING
  89. 89. SESSION 10: ACCRUALS AND PREPAYMENTSAccounting for a prepayment – Ledger entries Expense account*Date Detail £ Date Detail £ Bank X Prepayment c/d X Expense for the X year X X –– –– Prepayment account*Date Detail £ Date Detail £ Expense account X Balance c/d X X –– –– Balance b/dExample 7Jerry started her business on 1 April 2006. During the year ended 31 March20X7 she made the following payments for rent of £3,000. At the year end shehad paid £600 in advance.Write up the rent expense account for the year ended 31 March 20X7 and closeit off by showing the transfer to the profit and loss account. RentDate Detail £ Date Detail £ PrepaymentDate Detail £ Date Detail £KAPLAN PUBLISHING 85
  90. 90. AAT STUDY NOTES (STUDENT) : APIExample 8Sophie started her business on 1 January 2006. During the year ended31 December 2006 she paid £4,000 for administration expenses.Included in this payment is an amount paid in November of £1,500 relating to themonths of November, December and January.Write up the administration expense account including the appropriateprepayment. Administration expensesDate Detail £ Date Detail £Note – the prepayment account is included so that you can gain a fullunderstanding of the accounting entries required. Normally, only the expenseaccount is required in the examination. PrepaymentDate Detail £ Date Detail £86 KAPLAN PUBLISHING
  91. 91. SESSION 10: ACCRUALS AND PREPAYMENTSOpening accruals and prepaymentsIn some questions there will be an opening accrual or prepayment broughtforward from the previous accounting period. This needs to be reversed from theaccrual or prepayment account and recorded in the relevant expense account atthe beginning of the financial year.Example 9The electricity account for the year ended 30 June 20X3 was as follows:Opening balance for electricity accrued at 1 July 20X2 £300The bank payments made during the year were £3,060 and included in thisamount was a payment of £840 relating to the three months ended 30 April20X3.Write up the electricity expense account clearly showing the accrual balancebrought forward and the balance carried forward for the year ended 30 June20X3. Electricity accountDate Detail £ Date Detail £Note – the accrual account is included so that you can gain a full understandingof the accounting entries required, the opening accrual needs to be reversed atthe beginning of the year and recorded in the relevant expense account.Normally, only the expense account is required in the examination. Accrual accountDate Detail £ Date Detail £KAPLAN PUBLISHING 87

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