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AAT Level 2 > Bookkeeping Controls > Flashcards

Bookkeeping Controls Flashcards

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1
Q

Dual Effect

A

For every transaction that a business encounters there are two effects

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2
Q

Separate Entity

A

The business and the owner of the business are seen as two separate entities for accounting purposes (although not for legal purposes). Transactions are viewed from the perspective of the business

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3
Q

Accounting Equation

A

Assets - liabilities = capital + profit - drawings

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4
Q

Asset

A

Something owned or controlled by the business, available for use by the business, eg. buildings, vehicles, inventory, receivables, bank, cash

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5
Q

Non-Current Asset

A

An asset which is to be used for the long term and not resold as part of trading activities, eg. buildings, vehicles, plant and machinery

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6
Q

Current Asset

A

An asset where the benefit of the asset will be received in the short term, eg. inventory, receivables, bank, cash

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7
Q

Receivable

A

Someone owing the business money as the result of a credit sale. Receivables may also be referred to as the sales ledger control account (SLCA)

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8
Q

Liability

A

An amount owed by the business, where the business has an obligation to make a payment at a future date, eg. loans, mortgages, payables, bank overdraft

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9
Q

Current Liability

A

An amount owed and due to be paid by the business in the short term (within 12 months), eg. trade payables, bank overdraft, VAT payable

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10
Q

Non-Current Liability

A

An amount owed and due to be paid by the business in the longer term (more than 12 months), eg. loans, mortgages

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11
Q

Payable

A

Someone the business owes money to as the result of a credit purchase. Payables may also be referred to as the purchases ledger control account (PLCA)

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12
Q

Capital

A

The amount which the owner has invested into the business. This is owed back to the owner and is therefore considered to be a special liability of the business

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13
Q

Drawings

A

Amounts withdrawn from the business by the owner for the owner’s personal use. Drawings can be either cash or inventory

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14
Q

Sales Revenue

A

Income generated from trading activities, eg. sale of goods or services

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15
Q

Cost of Sales

A

This is the cost of buying (or manufacturing) the goods or services for sale

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16
Q

Cost of Sales Equation

A

Cost of sales = opening inventory + purchases - closing inventory

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17
Q

Gross Profit

A

The profit remaining after the cost of sales have been deducted from sales revenue

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18
Q

Expenses

A

The day-to-day running costs of the business, eg. stationery, wages, rent and rates, heat and light

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19
Q

Net Profit or Loss

A

The profit or loss remaining after expenses have been deducted from gross profit

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20
Q

DEAD CLIC

A

Debit: expenses, assets, drawings
Credit: liabilities, income, capital

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21
Q

Credit Sale

A

Dr - SLCA (gross)
Cr - sales (net)
Cr - VAT

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22
Q

Cash Received from Credit Customer

A

Dr - cash/bank

Cr - SLCA

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23
Q

Goods Returned by a Credit Customer

A

Dr - sales returns (net)
Dr - VAT
Cr - SLCA (gross)

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24
Q

Prompt Payment Discount Given to a Credit Customer

A

Dr - discounts allowed (net)
Dr - VAT
Cr - SLCA (gross)

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25
Q

Prompt Payment Discount Received

A

Dr - PLCA (gross)
Cr - VAT
Cr - discounts received (net)

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26
Q

Credit Purchase

A

Dr - purchases (net)
Dr - VAT
Cr - PLCA (gross)

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27
Q

Goods Returned by the Business to a Credit Supplier

A

Dr - PLCA (gross)
Cr - purchase returns (net)
Cr - VAT

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28
Q

Cash Paid to a Credit Supplier

A

Dr - PLCA

Cr - cash/bank

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29
Q

Trade Discount

A

A definite amount that is deducted from the list price of the goods for the supplies to some customers, with the intention of encouraging and rewarding customer loyalty

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30
Q

Bulk Discount

A

Similar to a trade discount that it is deducted from the list price of the goods and disclosed on the invoice. However, a bulk discount is given by a supplier for sales orders above a certain quantity

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31
Q

Prompt Payment Discount

A

Offered to customers in order to encourage early payment of invoices

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32
Q

Unpresented Cheques

A

Cheques that have been issued by the business, but are yet to appear on the bank statement (have not been presented for payment by the payee)

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33
Q

Uncleared Lodgements

A

Money that has been received by the business, which has not yet appeared on the bank statement. Often cheques paid into the bank which have not yet cleared into the banking system.

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34
Q

Bank Reconciliation Process

A

1) agree the opening balance on the bank statement and in the cash book
2) agree that items on the bank statement appear in the cash book (tick off)
3) any unticked items in cash book (do not appear on bank statement) are reconciling items

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35
Q

Bank Reconciliation Proforma

A

(Balance per bank statement) + (uncleared lodgements) - (unpresented cheques) = (balance per cash book)

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36
Q

Bank Reconciliation

A

A statement that explains the differences between the balance in the cash book and the balance on the bank statement at a particular date

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37
Q

Reasons to Write Up a Journal

A

Correction of errors or other year-end adjustments (writing off an irrecoverable debt or contra)

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38
Q

Journal

A

A written instruction to record an item by double-entry in the general ledger accounts, generally used where adjustments are necessary, should be accompanied with narratives

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39
Q

Irrecoverable Debt

A

A debt or receivable that is highly unlikely to be received, may be seen as an asset and written off/removed

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40
Q

Reasons for Irrecoverable Debts

A

Customer in liquidation, having difficulty paying or disputes all/part of debt

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41
Q

Accounting for Irrecoverable Debts

A

Dr - irrecoverable debt expense

Cr - SLCA (and subsidiary sales ledger)

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42
Q

Accounting for Irrecoverable Debts with VAT

A

Dr - Irrecoverable debt expense (net)
Dr - VAT
Cr - SLCA (gross) (and subsidiary sales ledger)

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43
Q

Contra

A

Netting off amounts against each other where businesses buy and sell, reduces liability due to payable and debt due from receivable

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44
Q

Double Entry for Contra

A

Dr - PLCA (and subsidiary purchases ledger)

Cr - SLCA (and subsidiary sales ledger)

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45
Q

Errors Detected by the Trial Balance

A

single entry, casting error, transposition error, extraction error, omission of ledger account, two entries on one side

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46
Q

Single Entry

A

Only one side of the entry being made

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47
Q

Casting (addition) error

A

If a ledger account has not been balanced correctly due to a casting error, this will mean that the trial balance will not balance

48
Q

Transposition Error

A

If an amount is transposed and incorrectly recorded

49
Q

Extraction Error

A

If a ledger account balance is incorrectly recorded on the TB either by recording the wrong figure or putting the balance on the wrong side of the TB

50
Q

Omission

A

If a ledger account balance is inadvertently omitted from the TB

51
Q

Two Entries on One Side

A

A debit/credit in two accounts, rather than a corresponding debit and credit

52
Q

Errors Not Detected by the TB

A

Error of original entry, compensating error, error of omission, error of commission, error of principle, reversal of entries

53
Q

Error of Original Entry

A

Where the wrong figure is entered as both the debit and credit entry, meaning the incorrect figure appears on both sides

54
Q

Compensating Error

A

Where two separate errors of the exact same amount are made, one on debit and one on credit

55
Q

Error of Omission

A

Where an entire transaction is omitted from the ledger accounts

56
Q

Error of Comission

A

A debit entry and equal credit entry have been made but one of the entries has accidentally been to the wrong account (e.g. electricity to rent account)

57
Q

Error of Principle

A

Similar to an error of commission but the error has been made deliberately, but in the wrong type of account (e.g. repair to a non-current asset account, assuming it was a capital expense)

58
Q

Reversal of Entries

A

Debit and credit entries have been made in the correct accounts but have been made to the wrong sides of the accounts

59
Q

Circumstances to Use a Suspense Account

A

To hold a TB difference prior to its correction, when the correct posting for an item is uncertain (used as a temporary holding account)

60
Q

Gross Pay

A

The total payable to the employee before deductions, could include wages, salary, overtime, shift payments, bonus, commission, holiday pay

61
Q

Income Tax

A

Tax owed by the employee on their gross pay. Collected from the employee under the Pay As You Earn (PAYE) system

62
Q

Employee’s NIC

A

The National Insurance Contributions (NIC) owed by the employee on their gross pay. Employer collects it on the employee’s behalf by deducting it from wages and paying to tax authorities (HMRC)

63
Q

Employer’s NIC

A

NOT deducted from the employee’s gross pay. An additional expense to the company for employing individuals. Paid by the company to tax authorities (HMRC).

64
Q

Employee’s Pension Contribution

A

Deducted from the employee’s gross pay, then paid into a pension fund by the company

65
Q

Employer’s Pension Contribution

A

NOT deducted from the employee’s gross pay. An additional expense to the company for employing individuals. Paid into a pension fund by the company, together with any employee pension contribution

66
Q

Other Deductions

A

May include charitable donations or trade union subscriptions. Reduce the amount that the employee receives and are paid over to the respective parties

67
Q

Calculate Net Pay

A

Begin with gross pay, then deduct PAYE, Employee’s NIC and Other Deductions. Remainder is net pay

68
Q

Total Wages Expense

A

Wages expense = employee’s gross pay + employer’s NIC + employer’s pension contribution

69
Q

Liabilities

A

Once employee has been paid, company is left with other liabilities - PAYE/NIC and items payable to other organisations

70
Q

PAYE/NIC

A

Total of the PAYE and NIC (employer and employee) will be owed to the tax authorities (HMRC)

71
Q

Items payable to other organisations

A

including the amount owed to the pension fund or trade unions based on the monthly deductions

72
Q

Accounting for Payroll - 2 Rules

A

Accounts must reflect the full cost to the employer of employing an individual, and the accounts must show the liability payable to HMRC for PAYE and NIC

73
Q

Wages Expense Account

A

Shows the total expense to the business (gross pay + employer’s NIC), the expense that is shown in the trial balance

74
Q

Liability Accounts

A

HMRC liability account shows all the liabilities (PAYE and NIC) due to the tax authorities, could be others e.g. pension

75
Q

Wages Control Account

A

One side of each double entry is put through control account, cleared to 0 on each payroll run so should never be a balance brought down to take to the trial balance

76
Q

Double Entry for Total Expense to Business (Gross Pay + Employer Contributions to NIC and Pension)

A

Dr - wages expense

Cr - wages control

77
Q

Double Entry for Amount Paid to Employee (Net Pay)

A

Dr - wages control

Cr - bank

78
Q

Double Entry for Transferring Amounts to Liability Accounts

A

Dr - wages control
Cr - HMRC
Dr - wages control
Cr - pension liability/trade union

79
Q

SLCA - Control Account

A

To increase SLCA - debit account (amount owed by receivables is increasing)
To decrease SLCA - credit account (amount owed by receivables is decreasing)

80
Q

Items on Debit Side of SLCA

A

Balance b/d

Sales (per sales day book, J2)

81
Q

Items on Credit Side of SLCA

A 
Returns (J3, per sales returns day book)
Cash from receivables
Discounts allowed
Irrecoverable debt written off
Contra entry
Balance c/d
82
Q

Control Account Reconciliation

A

Ensuring that the total on the control account agreed with the total of the subsidiary accounts

83
Q

Causes of Errors

A

Casting errors in day book (control account only)
Invoices recorded incorrectly in day book (control account and subsidiary ledger)
Casting errors in subsidiary ledger
Posting individual entries twice (subsidiary ledger)
Omitted items (control account or subsidiary ledger)
Transactions recorded in control account but omitted from subsidiary ledger
Transactions recorded in subsidiary ledger but omitted from control account

84
Q

PLCA - Control Account

A

Increase PLCA balance - credit (increase liability)

Decrease PLCA balance - debit (decrease liability)

85
Q

Debit Side of PLCA

A 
Cash paid
Discount received
Purchase returns
Contra entry
Balance c/d
86
Q

Credit Side of PLCA

A

Balance c/d

Purchases (per purchases day book)

87
Q

VAT

A

Charged on the taxable supply of goods and services by a taxable person in the course of a business carried on by them, an indirect tax borne (suffered) by the ultimate consumer

88
Q

Output Tax

A

VAT charged on sales by the seller

89
Q

Input Tax

A

VAT recovered on purchases by the purchaser

90
Q

VAT Registered Businesses

A

Must add VAT to their sales price and collect the VAT from their customers on behalf of the tax authorities; VAT collected from customers is then owed to HMRC and must be shown as a liability within the accounts until paid. If charged on invoices, business pays full amount including VAT to supplier. If business is VAT registered the VAT that has been paid can be reclaimed from HMRC - reduces VAT liability within the VAT control account

91
Q

VAT Rounding Rule

A

VAT should always be rounded DOWN to the nearest penny

92
Q

Where Output Tax Exceeds Input Tax

A

Business has a VAT liability of the excess to be paid to HMRC; would be represented by a balance brought down on the credit side of the VAT control account

93
Q

Where Input Tax Exceeds Output Tax

A

Business has a VAT asset of the excess to be received from HMRC; would be represented by a balance brought down on the debit side of the VAT control account

94
Q

Calculate Unknown Amounts Using Cost Structure

A

Unknown amount = amount known X (% you want to know / % you know)

95
Q

Debit Side of VAT Control Account

A

VAT on credit purchases; VAT on cash purchases; VAT on sales returns; VAT on irrecoverable debts w/o; VAT on discounts allowed; balance c/d

96
Q

Credit Side of VAT Control Account

A

VAT on credit sales; VAT on cash sales; VAT on purchases returns; VAT on discounts received; balance b/d

97
Q

Double Entry: Payment of VAT

A

Balance brought down on credit side indicates liability owed to HMRC
Debit - VAT Control Account
Credit - Bank

98
Q

Double Entry: Refund of VAT

A

Balance brought down on debit side indicates asset due from HMRC
Debit - Bank
Credit - VAT Control Account

99
Q

Double Entry: Refund Received from HMRC

A

Debit - cash

Credit - VAT control

100
Q

Cheque

A

A document which instructs a payment to be made from a bank account

101
Q

Drawer

A

The person writing the cheque

102
Q

Drawee

A

The bank of the drawer

103
Q

Payee

A

The person to whom payment is being made

104
Q

What Makes Cheques Valid

A

DATE - less than 6 months old
SIGNATURE - signed with valid signature
AMOUNT - amount in words agrees with amount in numbers
Account no and sort code are printed on cheque, not hand written

105
Q

Clearing System

A

The method by which cheques are processed by banks/building societies, takes 3 working days, so money will take 3 working days to be available to payee (when the cheque is said to have cleared)

106
Q

Banker’s Draft

A

Sometimes referred to as a bank cheque, a cheque issued by a bank rather than a person. Funds are transferred from individual’s account to bank, then the bank issue cheque to payee, requested by individual. Often used for making large purchases so that payee doesn’t need to wait for cheque to clear, removes risk of cheque bouncing due to insufficient funds in drawer’s account

107
Q

Building Society Cheques

A

Similar to banker’s draft, but building society cheque can be stopped by drawer to prevent payment being made. Building society can issue cheque instead of cash when a withdrawal is made, cheque is made payable to payee requested by account holder. Written by building society, knowing cash is available

108
Q

Debit and Credit Card Checks

A

Always check: not expired, start date has passed, security code on back, card has not been tampered with, card has been signed

109
Q

Debit Card

A

When payment is made, money is immediately taken from bank account

110
Q

Credit Card

A

When payment is made, no immediate impact on bank account, goods are paid for by credit card company then payment from card holder to credit card company is made at a later date

111
Q

Standing Orders

A

SO, a customer’s instruction to their bank to pay a fixed amount at regular intervals to a named party

112
Q

Direct Debits

A

DD, allows authorised recipients to claim payments from a customer’s bank account, covered by the Direct Debit guarantee to protect customer

113
Q

BACS

A

Bankers’ Automated Clearing Service, electronic system that processes direct debits, direct credits and standing orders for UK banks. 3 working days to clear - 1) entered into system, 2) processed, 3) cleared

114
Q

CHAPS

A

Clearing House Automated Payment System, same-day UK electronic transfer, usually for large urgent payments like house buying

115
Q

FPS

A

Faster Payment Service, internet-based system introduced to reduce payment times between different banks’ customer accounts from 3 working days to typically a few seconds

AAT Level 2 (3 decks)

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