Chapter 10 Accounting systems and VAT Flashcards
1.1 Source documents
For the sales cycle: the sales order received from customer details goods required, goods sent to customer together with a goods delivery note (GDN), a sales invoice sent to customer as request for payment and a credit note issued if customer overcharged or goods returned.
For the purchases cycle: purchase order sent to supplier as request for goods, goods received with a goods received note (GRN) completed, purchase invoice received from supplier and matched to GRN and a debit note may be issued in order to request credit note from supplier.
2.1 Accounting systems
The majority of businesses use some accounting software to manage their records, and these will have a degree of automation built into them. These often contain different modules which perform different functions and provide different information for the business.
The nominal ledger contains a separate ledger account for each type of income, expense, asset, liability, or capital balance.
The receivables leger contains a separate ledger account for each credit customer, allowing the business to manage outstanding receivables balances, and chase late payments. The total of these ledger accounts should equal the balance in the nominal ledger for trade receivables.
Payables ledger contains a ledger account for each credit supplier, allowing the business to ensure they make payments to suppliers within agreed credit terms. The total of these ledger accounts should equal the balance in the nominal ledger for trade payables.
Other modules: these include recording and processing payroll, maintaining a record of non-current assets in the non-current asset register
2.2 Processing transactions in the computerised accounting system
Inputs: source documents (documents that trigger an accounting entry, such as the generation of an invoice to a customer) and standing data (reference data that does not regularly change, such as name of the business)
Processes:
• Transactions that are undertaken by the business need to be entered in the system. The recording may be real-time and batch processing (transactions are inputted into the system and processed later in one go)
• Calculations: standing data can be used, for example to calculate the VAT payable on an invoice
• Ledgers: refers to a record held within the electronic system
• Record keeping records maintained within T-accounts. In an electronic system a ledger can be created and updated for each of these T accounts
• Journal entries: a double entry entered into the system
Outputs:
• Trial balance: this will now occur automatically on request and can be extracted at any point in time.
• Reports: an electronic system is able to generate a variety of reports
3.1 Processing bank and cash transactions
Electronic banking: a computerised system can accept information from reports extracted from the banking system. These reports are the source documents, they contain details of payments and receipts in the bank account.
The data on the report is upload to the system, the system attempts to match transactions and process them. Any known transactions are recorded. Any unknown transactions are recorded in a temporary account known as a suspense account and will be reporting on an exception report to be investigated. Once identified, the suspense account with be removed and the transactions will be recorded in the correct account.
Petty cash:
Petty cash is accounted for in a separate book. All transactions involving small amounts are recorded in the book. Is it designed to deal with small sundry expenses. The imprest system is used here:
- The business decides on the amount of cash held as float and withdraws from the bank
- Payments are recorded in the petty cash book, all expenditure evidenced by a receipt which is attached to an expense voucher
- When the petty cash runs low, a cheque is drawn to return the petty cash to the original float amount, at this stage the expense vouchers are produced to the cheque signatory, the total of these will equal the cheque required
- Float = cash in petty cash box + sum of expense vouchers since last reimbursement
The petty cash book details amounts paid into petty cash from the bank, as well as analysing the nature of each item of expenditure.
4.1 Journal entries
These are a way of presenting accounting double entry transactions. They are generally used to record non-routine transactions, such as disposal and acquisition of non-current assets and yearend adjustments like depreciation and closing inventory.
The format of the journal is a debt and credit with narrative. For example:
- Dr Depreciation expense
- Cr Accumulated depreciation
5.1 The initial and final trial balance
The trial balance initially extracted from the accounting system is a starting point in the process. Year-end adjustments such as closing inventory and corrections need to be processed in order to produce the final statement of profit or loss and the statement of financial position. Adjustments for the initial trial balance are shown in a columnar format with columns for the initial trial balance, journals, and the final trial balance (used to create the financial statements).
To adjust a trial balance, extract the TB from the ledger accounts, enter the journals in the adjustments column and add across the debits and credits for each item and enter into the final trial balance.
6.1 VAT
VAT is a form of indirect taxation, a business registered for VAT collects the tax on behalf of HMRC. Output tax is charged on sales, input tax is paid on purchases and may be reclaimed. If output tax exceeds input, the business periodically pays the excess to HMRC, if input tax is greater the business reclaims the excess.
6.2 Calculating VAT
The standard rate of VAT is 20%, the gross selling price is 120% of the net selling price. The bet selling price is what the business receives, the gross selling price is charged to customers and the difference is paid to HMRC. When provided with the net (VAT exclusive) figures, we take 20% to arrive at the VAT amount. When provided with the gross (VAT inclusive) figure, we take 1/6 to arrive at the VAT amount.
6.3 Accounting for VAT
A VAT registered business will need a VAT ledger account. This may be a receivable or payable account depending on circumstances. The correct double entries are:
VAT on sales
- Dr Receivables account (VAT inclusive price)
- Cr Sales (VAT exclusive amount)
- Cr VAT account
VAT on purchases/ expenses
- Dr Purchases (VAT exclusive amount)
- Dr VAT account
- Dr Payables account (VAT inclusive amount)
6.4 Blocked input VAT
In some circumstances input VAT cannot be recovered, the most common instances are purchase of motor cars and client entertaining expenses. The VAT inclusive cost to the business is debited to non-current assets/expenses.
6.4 VAT and prompt payment discounts
VAT is calculated on the account actually paid. For prompt payment discounts, it is unclear whether the customer will get the discount and therefore we calculate the VAT initially on the full sales price. VAT will then be adjusted if they achieve the discount. This can be done by issuing a credit note in respect of the VAT overcharged or by detailing the terms of the discount on the face on the invoice.
Invoices are advisable to show the net, VAT, and gross amounts to pay if the payment is made within the discount period and if it is not.
