Special Accounting Entries Flashcards
How does a firm deal with receipt of a cheque made out to a client or 3rd party?
If a firm receives a cheque made out to a client or 3rd party, the firm must forward it to the payee without delay
It is neither firm nor client money, so no records on the ledger/cash account need to be made, but a written record on the correspondence file should be made
How does a firm deal with dishonoured cheques?
If the firm draws against a cheque that has been paid into the client account, but not cleared + it is then dishonoured, there will be a breach of the Accounts Rules
- More money taken than is held for the client
- Money improperly withdrawn will need to be immediately replaced, so firm will have to transfer its own money to the client bank account
A well-run firm will ensure its impossible to draw against a cheque before its cleared
What is the first step that a firm needs to take in recording the accounts, when a cheque is dishonoured?
They need to reverse the entries they used to input the cheque, so now they need to do:
DR client ledger
CR cash account
What is ‘abatement’ and how is this recorded on the accounts?
If a client complains the costs are too high, the firm may reduce (abate) them
- HMRC allows the output tax charged on the bill to be reduced proportionately
To record abatement:
- DR entry on profit costs account
- DR HMRC account
- CR entry on client ledger account (business section) with the reduction in professional charges and VAT
Firm must also send the client a VAT credit note
Give an example to show abatement is recorded
Example – firm sends a bill of £600 plus VAT to X, which they agree to lower by £100 plus VAT
- 1a) DR entries of 600 and 120 on client ledger (business side) - cash gained
- 1b) Abatement - CR entries of 100 and 20 on client ledger (business side)
- 2a) CR entry of 600 on profits costs account – income earned
- 2b) Abatement - DR entry of 100 on profit costs account – expense incurred
- 3a) CR entry of 120 on HMRC account
- 3b) Abatement - DR entry of 20 on HMRC account
What are ‘bad debts’ and how are they recorded?
If a client does not pay an amount they owe the firm, they might have to write off the amount owed for its professional charges and VAT + disbursements paid from business account
Recorded as:
- CR entry on client ledger account – business section
- DR entry on bad debts account
VAT relief is available once the debt has been outstanding for at least 6 months since the date payment was due – firm can then get a refund from HMRC
- CR entry on bad debts account with amount of VAT
- DR entry on HMRC account with amount of VAT
How are ‘petty cash’ entries recorded?
When cash is withdrawn from the bank for petty cash:
- CR entry on cash account – business section
- DR entry on petty cash account
When a payment is made using petty cash:
- CR entry on petty cash amount
- DR appropriate ledger account (Sundries)
If the firm uses petty cash to pay for something for the client:
- CR entry on petty cash amount
- DR entry on client ledger - business section – they owe the firm this money
How do firms deal with insurance commissions?
Where firms receive commission from insurance companies and are allowed to keep this, they will have a ‘commission received’ account and a ledger account in the name of each company paying commission
Rare for firms to keep commission, as they must properly account to clients for any financial benefits + it prevents them from relying on the s327 exemption for financial services
Properly account means:
- paying it to the client;
- offsetting it against fees; or
- keeping it only where the firm can justify keeping it, has told the client the amount of the benefit (or an approximation if the exact amount is not known) and the client has agreed to the firm keeping it
