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Bookkeeping Controls
P.2
© Kaplan Financial Limited, 2016
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any firm or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Kaplan Publishing.
The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials.
P.3
CONTENTS
Page
Chapter 1 Re-cap: Accounting for sales 1
Chapter 2 Re-cap: Accounting for purchases 15
Chapter 3 Re-cap: Ledger accounts and the trial balance 21
Chapter 4 Errors and suspense accounts 31
Chapter 5 Control accounts and reconciliations 55
Chapter 6 Payroll procedures 83
Chapter 7 Bank reconciliations 99
Chapter 8 The banking system 115
Bookkeeping Controls
P.4
INTEGRATED WORKBOOK ICONS
Definition
Important Calculation
Key Point
Question
Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to mykaplanreporting@kaplan.com with full details.
Our Quality Co-ordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions.
1
By the end of this session you should be able to:
define the key concepts of dual effect, separate entity and the accountingequation
distinguish between assets, liabilities, capital, drawings, income and expenses
prepare journal entries relating to sales in the business
record entries in ledger accounts and balance the ledger accounts
identify whether items are debit or credit balances in a trial balance
and answer questions relating to these areas.
Chapter 1 Re-cap: Accounting for sales
Outcome
Outcome
The underpinning detail for this Chapter in your Workbook can be found in
Chapter 1 of your Study Text
Bookkeeping Controls
2
Overview
Overview
Accounting principles
Re-cap: Accounting for sales
Definitions
Accounting for sales
Ledger accounting
Re-cap: Accounting for sales : Chapter 1
3
It is essential that you have studied the Bookkeeping Transactions unit prior toBookkeeping Controls.
Many of the tasks in the assessment require double entries, so the knowledgefrom Bookkeeping Transactions is a fundamental part of passing the exam.
The assessment will last for 2 hours.
Re-cap of Bookkeeping Transactions
This unit builds on knowledge from Bookkeeping Transactions which is required to study the following areas:
types of errors and journal adjustments
the suspense account
control account reconciliations
VAT control account
payroll
bank reconciliations
banking procedures and services.
Introduction
Basic principles of accounting
Bookkeeping Controls
4
These accounting principles form the basis for double entry bookkeeping:
1 Dual effect
For every transaction that a business encounters there are two effects.
2 Separate entity
The business and the owner of the business are seen as two separate entities for accounting purposes. Transactions are viewed in the perspective of the business.
3 Accounting equation
As long as the above two principles have been correctly adhered to, the accounting equation should always balance:
Assets – Liabilities = Capital + Profit – Drawings
Accounting principles
Re-cap: Accounting for sales : Chapter 1
5
Statement of financial position – definitions
Asset
Something owned by the business, available for use by the business
Examples:
Buildings, Vehicles, Inventory, Receivables, Bank, Cash
Assets can be categorised as being either ‘non-current’ or ‘current’:
Non-current asset
An asset which is to be used for the long term and not resold as part of trading activities.
Examples:
Buildings, Vehicles, Plant & Machinery
Current asset
A short term asset which is either cash or will soon be converted into cash.
Examples:
Inventory, Receivables, Bank, Cash
Receivable – Someone owing the business money following a credit sale. Receivables may also be referred to as the sales ledger control account (SLCA)
Key definitions
Bookkeeping Controls
6
Liability
An amount owed by the business. It is an obligation to pay money at a future date.
Examples: Loans, Mortgages, Payables, Bank Overdraft.
Liabilities can be categorised as being either ‘current’ or ‘non-current’:
Current liability
An amount owed and due to be paid by the business in the short term (less than 12 months).
Examples:
Trade payables, bank overdraft, VAT payable
A payable is someone the business owes money to. A payable is created when the business buys goods on credit from a supplier. The balance of payables may also be referred to as the purchases ledger control account (PLCA)
Non-current liability
An amount owed by the business and due to be paid in the longer term (after 12 months).
Examples:
Loans, Mortgages
Re-cap: Accounting for sales : Chapter 1
7
Capital
The amount which the owner has invested in the business; this is owed back to the owner and is therefore considered to be a special liability of the business.
Drawings
Amounts withdrawn from the business by the owner for the owner’s personal use. Drawings can either be cash or inventory.
Statement of profit or loss – definitions
Sales revenue – Income generated from trading activities i.e. selling your goods
Cost of sales – This is the cost of buying the goods for resale
The cost of sales equation:
Opening inventory + Purchases – Closing inventory
Gross profit – The profit remaining, after the cost of sales have been deducted from sales revenue
Expenses – The day to day running costs of the business
Examples: Stationery, wages, rent and rates, heat and light
Net profit or (loss) – The profit or (loss) remaining after expenses have been deducted
Bookkeeping Controls
8
The ledger account (‘T’ account)
Ledger accounts are where we record our accounting entries. An example of a ledger account is shown below.
DEBITS (Dr) CREDITS (Cr)
Title of account
Date Details Amount
£ Date Details
Amount £
Key points to remember:
Debits (Dr) are posted on the left-hand side of the ledger account.
Credits (Cr) are posted on the right-hand side of the ledger account.
The details column contains the title of the other account that holds the second part of the dual effect or a day book reference/linked reference.
The date column refers to the date of the transaction.
The amount column simply contains the monetary value of the transaction.
Ledger accounting
Re-cap: Accounting for sales : Chapter 1
9
The golden rule
The golden rule is that every debit has an equal and opposite credit.
Ledger account
A debit entry represents:
An increase to an asset
A decrease to a liability
An increase to an item of expense
A decrease to an item of income
A credit entry represents:
An increase to a liability
A decrease to an asset
An increase to an item of income
A decrease to an item of expense
The mnemonic DEAD CLIC may help you to remember these effects:
Debit Cash Credit
Cash in
Debits increase:
Expenses
Assets
Drawings
Cash out
Credits increase:
Liabilities
Income
Capital
Bookkeeping Controls
10
There are some fundamental double entries relating to sales and it is essential that you are able to process these. Common sales items are outlined below.
Credit sale:
Dr Trade receivables (SLCA) (Gross amount)
Cr Sales revenue (Net amount)
Cr VAT (VAT amount)
Cash is received from a credit customer:
Dr Cash
Cr Trade receivables (SLCA)
Goods returned by a credit customer:
Dr Sales returns (Net amount)
Dr VAT (VAT amount)
Cr Trade receivables (SLCA) (Gross amount)
Settlement discount given to a credit customer:
Dr Discounts allowed (Net amount)
Dr VAT (VAT amount)
Cr Trade receivables (SLCA)
Accounting for sales
Bookkeeping Controls
12
Accounting principles
Dual effect
Accounting equation
Separate entity
Definitions
Assets
Liabilities
Capital
Drawings
Income
Expenditure
Ledger accounting
Every entry has two sides
Accounting for sales
Credit sales
Sales returns
Discounts given
Summary
Re-cap: Accounting for sales : Chapter 1
13
Further reading
For more detailed explanation, analysis and illustration of this topic please read Chapter 1 of the Bookkeeping Controls Study Text. Please complete any TYU that have not been completed in class.
Less detailed summaries can be found in Chapter 1 of the BKCL Pocket Notes.
We recommend the following additional material for the topics covered in this chapter:
Study Text (for teaching throughout the Chapter)
Re-cap: Accounting for sales (Chapter 1)
Additional tutor guidance
Illustrations and further practice
15
By the end of this chapter you should be able to:
prepare journal entries relating to purchases in the business
and answer questions relating to these areas.
Chapter 2 Re-cap: Accounting for purchases
Outcome
Outcome
The underpinning detail for this Chapter in your Workbook can be found in
Chapter 2 of your Study Text
Bookkeeping Controls
16
Similar to accounting for sales, there are a number of entries which need to be considered in accounting for purchases.
Credit purchase:
Dr Purchases (Net amount)
Dr VAT (VAT amount)
Cr Trade payables (PLCA) (Gross amount)
Goods are returned by the business to a credit supplier:
Dr Trade payables (PLCA) (Gross amount)
Cr Purchase returns (Net amount)
Cr VAT (VAT amount)
Cash is paid to a credit supplier:
Dr Trade payables (PLCA)
Cr Cash
Prompt payment discount received from suppliers
Dr Trade payables (PLCA)
Cr Discounts received (Net amount)
Cr VAT (VAT amount)
Accounting for purchases
Basic principles of accounting
Re-cap: Accounting for purchases : Chapter 2
17
Example 1
Identify whether the items below will represent debits or credits, and give the reason why (assets, liabilities, income, expenses, capital, drawings)
Details Debit/Credit Why
Cash in hand Debit Asset
Bank overdraft Credit Liability
Sales Credit Income
Motor vehicles Debit Asset
Money withdrawn by owner Debit Drawings
Rent Debit Expense
Loan from bank Credit Liability
VAT payable Credit Liability
Trade receivables Debit Asset
Capital invested by owner Credit Capital
Bookkeeping Controls
18
Accounting for purchases
Credit purchases
Purchases returns
Prompt payment discounts
Summary
Re-cap: Accounting for purchases : Chapter 2
19
Further reading
For more detailed explanation, analysis and illustration of this topic please read Chapter 2 of the Bookkeeping Controls Study Text. Please complete any TYU that have not been completed in class.
Less detailed summaries can be found in Chapter 2 of the BKCL Pocket Notes.
We recommend the following additional material for the topics covered in this chapter:
Study Text (for teaching throughout the Chapter)
Re-cap: Accounting for purchases (Chapter 2)
Illustrations and further practice
Additional tutor guidance
21
By the end of this session you should be able to:
understand the purpose of the trial balance
balance off ledger accounts
use ledger accounts to create a trial balance
and answer questions relating to these areas.
Chapter 3 Re-cap: Ledger accounts and the trial
balance
Outcome
Outcome
The underpinning detail for this Chapter in your Workbook can be found in
Chapter 3 of your Study Text
Re-cap: Ledger accounts and trial balance : Chapter 3
23
The trial balance is a list showing the balance brought down on each ledger account. It acts as a control. It shows us that our debits and credits balance, prior to us preparing the financial statements.
Although preparing the final financial statements isn’t examined within this unit, we do still have to be able to prepare a trial balance in preparation for this.
To be able to get our ‘balance b/d’ which is the balance to go into our TB, we have to first of all ‘balance off’ the ledger accounts.
The trial balance
Basic principles of accounting
Bookkeeping Controls
24
Procedure for balancing a ledger account:
Step 1 Total both the debit and the credit side of the ledger account and make a note of each total.
Step 2 Insert the higher of the two totals as the total on both sides of the ledger account leaving a line beneath the final entry on each side of the account.
Step 3 On the side with the smaller total insert the figure needed to make this column add up to the total. Refer to this figure as the ‘balance carried down’ (or ‘Bal c/d’ as an abbreviation).
Step 4 On the opposite side of the ledger account, below the total insert this same figure and refer to it as the ‘balance brought down’ (or ‘Bal b/d’ as an abbreviation).
Balancing ledger accounts
Re-cap: Ledger accounts and trial balance : Chapter 3
25
Step 1: Total up each side (to find the highest valued side)
Bank
Date Detail £ Date Detail £
16.02 Capital 20,000 16.02 Machinery 5,000
16.02 SLCA 500 16.02 PLCA 200
Dr side totals £20,500, CR side totals £5,200 – higher total is Dr side.
Step 2: Put the highest total to the bottom of both sides.
Bank
Date Detail £ Date Detail £
16.02 Capital 20,000 16.02 Machinery 5,000
16.02 SLCA 500 16.02 PLCA 200
20,500 20,500
Step 3: In the lower valued side, insert the ‘balance carried down’ (balance c/d) to make it up to the total.
Bank
Date Detail £ Date Detail £
16.02 Capital 20,000 16.02 Machinery 5,000
16.02 SLCA 500 16.02 PLCA 200
16.02 Balance c/d 15,300
20,500 20,500
Step 4: Bring the same balance as the balance c/d to the opposite side below the total and refer to as ‘balance brought down’ (balance b/d).
Bank
Date Detail £ Date Detail £
16.02 Capital 20,000 16.02 Machinery 5,000
16.02 SLCA 500 16.02 PLCA 200
16.02 Balance c/d 15,300
20,500 20,500
17.02 Balance b/d 15,300
Re-cap: Ledger accounts and trial balance : Chapter 3
27
The balance brought down is transferred to the Trial Balance. These balances appear in the Trial Balance on the same side as they are brought down on.
After all the accounts have been balanced off, the brought down figures can be listed in a trial balance on the same side as the brought down figure.
Example of a trial balance:
£ £
Dr Cr
Bank 9,730
Capital 10,000
Drawings 500
Van (non-current asset) 2,000
Gas 70
Loan 2,000
PLCA 3,200
Purchases 5,600
Rent 500
Sales 8,900
SLCA 2,200
Wages 3,500
Total 24,100 24,100
The debit and the credit column totals should agree. However there may be occasions that this does not happen due to errors or omissions. We will look at what can cause this to happen and how to correct this in a later chapter.
In the assessment, tasks may involve preparing journals for opening entries. This would mean that a trial balance, or extracts of a trial balance, will be given. Students would then be required to state whether each balance is a debit or credit.
Many other tasks will involve journal entries where it is essential that you are comfortable with making double entries.
Bookkeeping Controls
28
Ledger accounts
Balancing off ledger accounts
Being able to successfully construct a trial balance
The trial balance
Using the b/d balance
Common double entries
Summary
Re-cap: Ledger accounts and trial balance : Chapter 3
29
Further reading
For more detailed explanation, analysis and illustration of this topic please read Chapter 3 of the Bookkeeping Controls Study Text. Please complete any TYU that have not been completed in class.
More challenging TYUs in this chapter are TYU 5, 6, 7.
Less detailed summaries can be found in Chapter 3 of the BKCL Pocket Notes.
You should now be able to answer these questions from the Exam Kit:
Question 1 – Intrepid Interiors
Question 2 – Bedroom Bits
If you are attending a revision course, please do not attempt the Exam Kit questions until your tutor instructs you to do so.
Illustrations and further practice
Exam Kit questions
Bookkeeping Controls
30
Tutor’s question bank
Support Questions
Q1 is a simpler question for students who may be struggling
Q13 is a trickier question to challenge more able students
These questions and answers may be printed off separately and distributed to students as necessary, to supplement the material listed above.
We recommend the following additional questions for the topics covered in this chapter:
Study Text (for teaching throughout the Chapter)
Re-cap: Ledger accounts and the trial balance (Chapter 3): TYU 2, 3, 6, 7
Additional tutor resources Additional tutor resources
Additional tutor guidance
31
By the end of this session you should be able to:
identify which errors are detected by the trial balance, and which errors are not
understand how the journal works, and use the journal to make corrections
make adjustments for irrecoverable debts and contras
understand how the suspense account works
create a suspense account
produce journals to clear the suspense account
and answer questions relating to these areas.
Chapter 4 Errors and suspense accounts
Outcome
Outcome
The underpinning detail for this Chapter in your Workbook can be found in
Chapter 4 of your Study Text
The underpinning detail for this Chapter in your Workbook can be found in
Chapter 4 of your Study Text
Bookkeeping Controls
32
In this chapter, we will look at using the journal to correct errors, produce adjustments to financial statements and to deal with suspense accounts.
The principles of double entry and the journal are fundamental to this unit and numerous tasks are likely to relate to this.
Overview
Overview
Purpose of the journal
The journal
Errors
Errors detected by the trial balance
Errors not detected by the trial balance
Correction of errors
The suspense account
Errors and suspense accounts : Chapter 4
33
A journal is a written instruction to record an item by double entry in the general ledger accounts.
Journals are generally made when adjustments are made to the ledgers and should have narratives accompanying them to explain the reason for the adjustment.
Reasons you may have to write up a journal:
Correction of errors
Other year-end adjustments (i.e. writing off of an irrecoverable debt or contra)
Firstly, we will look at journal entries for year-end adjustments, and then we will look at how the journal is used to correct errors.
(a) Irrecoverable debts
A debt which is highly unlikely to be received is known as an irrecoverable debt: it is not prudent for the business to consider this debt as an asset and therefore the debt is written off.
Reasons for irrecoverable debts
Customer in liquidation
Customer having difficulty paying
Customer disputes all/part of debt.
The journal
Basic principles of accounting
Bookkeeping Controls
34
How do we account for irrecoverable debts – if not considering VAT?
Dr Irrecoverable debt expense
Cr SLCA (and subsidiary sales ledger)
How do we account for irrecoverable debts – if considering VAT?
If the debt is over 6 months overdue, you can reclaim the VAT that you would have paid over to HMRC.
Dr Irrecoverable debt expense
Dr VAT
Cr SLCA (and subsidiary sales ledger)
Example 1
Simpson and King, a credit customer of Cars R Us, has ceased trading. The amount owing in the account is an 8 month old debt of £720 inclusive of VAT at 20%. Today’s date is 30 June 2012.
Dr Irrecoverable debt expense £600
Dr VAT £120
Cr SLCA (and subsidiary sales ledger) £720
Errors and suspense accounts : Chapter 4
35
(b) Contra entries
A business will be both a receivable and a payable of another business if it both buys from the other business and sells to it.
If this is the case, then there will be money owed to the business and money owing from it. Under the condition of both businesses agreeing, we net these amounts off against each other to show the net position.
The amount netted off will be the lowest common figure owed by both parties.
For a contra entry, we are always reducing both the payables and the receivables.
The double entry for this is always:
Dr PLCA (and subsidiary purchases ledger)
Cr SLCA (and subsidiary sales ledger)
This has the effect of reducing the liability to the payable and reducing the receivable’s debt.
Bookkeeping Controls
36
For example: Company ‘A’ owes Company ‘B’ £500 and Company ‘B’ owes Company ‘A’ £200. You work for Company ‘A’.
Company ‘A’ General ledger
PLCA
C’B 500
SLCA
C’B 200
The contra entry for Company ‘A’ would be:
Dr PLCA 200
Cr SLCA 200
Company ‘A’ General ledger
PLCA
SLCA 200 C’ B 500
c/d 300
SLCA
C’B 200 PLCA 200
The net effect of this would be that:
Company ‘A’ would owe Company ‘B’ £300.
Errors and suspense accounts : Chapter 4
37
If the TB doesn’t balance this indicates that an error or a number of errors have occurred. Errors of this type are referred to as errors that can be detected by the TB.
If errors cause the TB to not balance, a suspense account is opened. The useof a suspense account is reviewed later on in this chapter.
As well as errors causing the TB to not balance, there will also be errors wherethe TB still balances.
Errors detected by the trial balance
Errors detected by the trial balance
Basic principles of accounting
Single entry
Casting error
Transposition error
Extraction error
Omission
Two entries on one side
Errors detected
by the trial
balance
Bookkeeping Controls
38
Errors that cause a difference to occur between the debit and credit column totals in the TB:
Single entry Only one side of the entry being made
e.g. if only the credit entry for payments to payables has been made, the credit total on the trial balance will exceed the debit total.
Casting (addition) error
If a ledger account has not been balanced correctly due to a casting error then this will mean that the trial balance will not balance.
Transposition error If an amount in a ledger account or a balance on a ledger account has been transposed and incorrectly recorded
e.g. a debit entry was recorded correctly as £5,291 but the related credit entry was entered as £5,219.
Extraction error 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.
Omission (of one ledger balance)
If a ledger account balance is inadvertently omitted from the TB.
Two entries on one side
A debit in two accounts, or credit in two accounts, rather than a corresponding debit and credit.
Errors and suspense accounts : Chapter 4
39
Errors not detected by the trial balance
Basic principles of accounting
Error of original entry
Compensating error
Error of omission
Error of commission
Error of principle
Reversal of entries
Errors not detected
by the trial
balance
Bookkeeping Controls
40
The errors that have appeared in the diagram above are those which do not cause the debit and credit columns of the trial balance to be different:
Error of original entry
This is where the wrong figure is entered as both the debit and credit entry, meaning the figure is wrong on both sides.
Compensating error This is where two separate errors of the exact same amount are made, one on the debit side and the other on the credit side.
Error of omission This is where an entire double entry is omitted from the ledger accounts.
Error of commission
With this type of error a debit entry and an equal credit entry have been made but one of the entries has been to the wrong account
e.g. if the heat and light expense was debited to the rent account but the credit entry was correctly made in the bank account.
Error of principle This is similar to an error of commission but the entry has been made in the wrong type of account
e.g. if the electricity expense was debited to a non-current asset account
Reversal of entries Debit and credit entries have been made in the correct accounts but have been made to the wrong sides of the accounts
e.g. a cash payment for electricity was debited to the cash account and credited to the electricity account.
Errors and suspense accounts : Chapter 4
41
In the assessment, you may have to write a journal to correct errors.
For each error, it may be helpful to consider the following questions:
1 What journal entry did we make?
2 What journal entry should we have made?
3 How do we correct this?
Correcting errors
Basic principlesof accounting
Bookkeeping Controls
42
Example 2
The following errors have been made in Night Night Beds Ltd.
Error 1
£170 has been debited to the insurance account instead of the motor tax account
This error has been caused by £170 being debited to insurance instead of motor tax. We have to assume that the other side to the journal was posted correctly; let us assume that the other side was a credit to the bank account.
1 What journal did we make?
Dr Insurance £170
Cr Bank £170
2 What journal entry should we have made?
Dr Motor tax £170
Cr Bank £170
3 How do we correct this?
Dr Motor tax £170
Cr Insurance £170
Errors and suspense accounts : Chapter 4
43
The following errors have been made in Night Night Beds Ltd.
Error 2
Purchases valued at £9,000 have been credited to the purchases account and debited to the payables ledger control account (ignore VAT)
1 What journal did we make?
Dr PLCA £9,000
Cr Purchases £9,000
2 What journal entry should we have made?
Dr Purchases £9,000
Cr PLCA £9,000
3 How do we correct this?
We need to reverse these entries. This can be done by doing the correct entry by double the amount, the first amount of £9,000 eliminates the reversed postings, the second £9,000 posts the correct entry.
Dr Purchases £18,000
Cr PLCA £18,000
Showing it as two entries:
Dr Purchases £9,000
Cr PLCA £9,000
Dr Purchases £9,000
Cr PLCA £9,000
Bookkeeping Controls
44
A suspense account is used in two circumstances.
To hold a difference in a TB prior to its correction
When the correct posting for an item is uncertain – the suspense account is just used as a temporary holding account until the correct account to post to has been decided.
Only those errors which cause a difference on the TB need to be adjusted by means of an entry in the suspense account.
Example 3
Mr Plum’s trial balance was extracted and did not balance. The debit column of the TB totalled £109,798 and the credit column totalled £219,666.
What entry would be made in the suspense account to balance the trial balance?
Account name Amount £
Debit
Credit
Suspense 109,868
The suspense account
Basic principles of accounting
Errors and suspense accounts : Chapter 4
45
Example 4
The trial balance didn’t balance, so a suspense account of £60 was created. The following two errors have been discovered.
Error 1: A payment of £900 has been recorded as £1,000 in the heat and light account.
Error 2: An amount of £40 has been omitted from the discounts allowed account (ignore VAT).
Error 1
For the first error, the heat and light expense has been overstated at £1,000 instead of £900 as recorded in the bank (if assuming it is a bank payment).
As the two sides of the accounting entry were for differing amounts, a suspense balance of £100 would have been created. See below:
Dr Heat & Light expense £1,000
Cr Bank £900
Cr Suspense £100
When correcting this entry we need to bring the heat and light expense down to £900 and also eliminate the suspense balance of £100.
Dr Suspense £100
Cr Heat and light expense £100
Bookkeeping Controls
46
As well as knowing how to correct errors, it is also important that you are able to identify from a list of transactions which will be disclosed by the trial balance and which will not.
Error 2
The second error has been an omission to the discounts allowed account of £40. The entry to record a discount allowed is:
Dr Discounts allowed £40
Cr SLCA £40
As the debit entry to the discounts allowed was omitted, in replacement of this to make the entry balance, the debit would have been posted to the suspense account instead:
Dr Suspense £40
Cr SLCA £40
To correct this error we need to post £40 as a debit to discounts allowed and eliminate the debit that is in the suspense account for this amount.
Solution
Dr Discounts allowed £40
Cr Suspense £40
We can now see how these entries have cleared the original suspense balance of £60. The suspense account is cleared when both sides balance to the same amount.
SUSPENSE
Date Detail £ Date Detail £
Heat and light 100 Opening balance 60
Discounts allowed
40
100 100
Bookkeeping Controls
48
Example 5
Which of the errors below are disclosed by the trial balance?
Details Disclosed by trial
balance?
Recording a receipt from a receivable in the bank account only.
Yes – single entry
Recording bank payment of £56 for motor expenses as £65 in the expense account.
Yes – transposition error
Recording a credit purchase on the debit side of the purchases ledger control account and the credit side of the purchases account.
No – compensating error (reversal of entries)
Recording a payment for electricity in the insurance account.
No – error of commission
Recording a bank receipt for cash sales on the credit side of both the bank and the sales account.
Yes – Two entries on one side
Incorrectly calculating the balance on the motor vehicles account.
Yes – Casting error
Writing off an irrecoverable debt in the irrecoverable debt expense and sales ledger control accounts only.
No – Double entry is correct, subsidiary ledger
isn’t
An account with a ledger balance of £3,500 was recorded on the trial balance as £350.
Yes – extraction error
Bookkeeping Controls
50
Example 6
Identify the type of error described in each situation below.
Details Type of error
Recording a gas bill paid in the bank account but nowhere else.
Single entry
Recording a bill for electricity expense as an asset rather than an expense.
Error of principle
Recording a credit purchase on the debit side of the purchases ledger control account and the credit side of the purchases account.
Reversal of entries
Copying the total from the SLCA into the trial balance incorrectly.
Extraction error
Errors and suspense accounts : Chapter 4
51
Errors
Errors detected by the trial balance
Errors not detected by the trial balance
Types of error
Correcting errors
What journal entry did we make?
What journal entry should we have made?
How do we correct this?
Further adjustments
Irrecoverable debt expense
Contra
Suspense account
Creating a suspense account
Producing journal entries to clear the suspense account
Summary
Basic principles of accounting
Bookkeeping Controls
52
Further reading
For more detailed explanation, analysis and illustration of this topic please read Chapter 4 of the Bookkeeping Controls Study Text. Please complete any TYU that have not been completed in class.
Less detailed summaries can be found in Chapter 4 of the BCKL Pocket Notes.
You should now be able to answer these questions from the Exam Kit:
Question 38 – Pat’s Cafe
Question 14 – Chestnut
Question 22 – Principles
If you are attending a revision course, please do not attempt the Exam Kit questions until your tutor instructs you to do so.
Illustrations and further practice
Exam Kit questions
Errors and suspense accounts : Chapter 4
53
Tutor’s question bank
Support Questions
Question 2 and 3
Challenging questions
Question 14 and 15
These questions and answers may be printed off separately and distributed to students as necessary, to supplement the material listed above.
We recommend the following additional questions for the topics covered in this chapter:
Study Text (for teaching throughout the Chapter)
Errors and suspense accounts (Chapter 4): TYU 3, 4
Exam Kit
Questions 16, 17, 23, 39
Additional tutor resources Additional tutor resources
Additional tutor guidance
55
By the end of this session you should be able to:
record entries into the sales ledger control account, purchases ledger controlaccount and VAT control account.
perform reconciliations between the sales/purchases ledger control accountsand the subsidiary ledger.
complete the VAT control account, identifying whether the balance represents aliability or an asset.
and answer questions relating to these areas.
Chapter 5 Control accounts and reconciliations
Outcome
Outcome
The underpinning detail for this Chapter in your Workbook can be found in
Chapter 5 of your Study Text
Bookkeeping Controls
56
Control accounts are likely to feature in one or more tasks in the assessment.
Overview
Overview
Sales ledger control account
reconciliations
Control accounts and reconciliations
VAT control account
Purchases ledger control account reconciliations
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To increase the balance on the SLCA it has to be debited (increase of an asset)– this shows us that the amounts owed by receivables are increasing.
To decrease the balance on the SLCA it has to be credited (decrease of anasset) – this shows us that the amounts owed by receivables are decreasing.
The standard entries in a sales ledger control account are:
Sales ledger control account
£ £
Balance b/d x Returns per sales returns day book x
Sales per sales day book x Cash from receivables x
Discounts allowed x
Irrecoverable debt written off x
Contra entry x
Balance c/d x
–– ––
x x
–– ––
Balance b/d x
Sales ledger control account (SLCA)
Outcome
Bookkeeping Controls
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Comparing the control account balance with the total of the subsidiary ledger accounts is a form of internal control.
Ensuring that the total on the control account agrees with the total of the subsidiary accounts is referred to as CONTROL ACCOUNT RECONCILIATION.
If the total of the balances on the subsidiary ledgers do not equal the balance on the control account, then an error, has been made in either the general or the subsidiary ledger.
Reconciliations should be done regularly so that any discrepancies are highlighted and investigated in a timely manner. If this is not done, this could lead to potential fraud or errors going unnoticed.
In addition to regular reconciliations, an aged receivables ledger should be kept. This contains a list of how old each receivables balance is, enabling a business to chase up older debts.
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Errors can occur due to the following:
Casting errors in a day book, which will only affect the control account.
Casting errors in the subsidiary ledger either within an individual account orwhen adding the subsidiary ledger balances together.
Posting individual entries twice, affecting the subsidiary ledger.
Omitted items; showing an incorrect balance for either the control account orsubsidiary ledger.
Transactions recorded in the control account, but omitted from the subsidiaryledger.
Transactions recorded in the subsidiary ledger, but omitted from the controlaccount.
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Example 1
The balance on the sales ledger control account for a business at 31 March 2012 is £14,378.37. The total of the list of subsidiary ledger balances for receivables is £13,935.37.
The difference has been investigated and the following errors identified:
The sales day book was overcast by £1,000.
A credit note for £150 was entered into the individual receivable's account as an invoice.
Discounts allowed of £143 were correctly accounted for in the subsidiary ledger but were not entered into the general ledger accounts.
A credit balance on one receivable’s account of £200 was mistakenly listed as a debit balance when totalling the individual receivable accounts in the subsidiary ledger.
Correct any errors in the sales ledger control account and prepare the reconciliation between the balance on that account and the total of the individual balances on the subsidiary ledger accounts.
Step 1
Open up a SLCA and amend this for any errors that have been made.
The adjusted SLCA can be seen below.
Sales ledger control account
£ £
Balance b/d 14,378.37 SDB overcast (1) 1,000.00
Discounts allowed (3) 143.00
Amended balance c/d 13,235.37
–––––––– ––––––––
14,378.37 14,378.37
–––––––– ––––––––
Amended balance b/d 13,235.37
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Step 2
Draw up the list of balances on the subsidiary ledger, and amend this for any errors.
In this example, the first thing to be done will be to copy in the opening balance of £13,935.37
From the list of errors, there are 2 that will affect the list of balances on the subsidiary ledger.
Item 2 will mean that the list of balances on the subsidiary ledger is overstated by £300 due to the credit note of £150 being incorrectly added rather than deducted.
Therefore £300 must be DEDUCTED from the list of balances.
Item 4 will also mean that the list of balances on the subsidiary ledger is overstated, as the recording of a credit incorrectly as a debit would have led to the balances being overstated by £400.
Therefore £400 must be DEDUCTED from the list of balances.
£
Original total 13,935.37
Less: Credit note entered as invoice (2) (2 × 150) (300.00)
Credit balance entered as debit balance (4) (2 × 200) (400.00)
––––––––
13,235.37
From here, it can be seen that the revised SLCA balance of £13,235.37 agrees to the revised list of balances on the subsidiary ledger, and therefore the reconciliation has been performed accurately.
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Example 2
Which of the following errors would cause a difference to occur between the balance of the sales ledger control account and the sales ledger?
Details Difference?
The total column of the sales day book was overcast by £100
Yes
An invoice for £76 was recorded in the sales day book as £67
Yes
The wrong customer’s account was debited £200 No
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To increase the balance on the PLCA it has to be credited (increase of a liability)
To decrease the balance on the PLCA it has to be debited (decrease of a liability)
The standard entries in the purchases ledger control account are:
Purchases ledger control account
£ £
Balance b/d x
Purchases per purchases day book
x
Cash paid x
Discount received x
Purchase returns x
Contra entry x
Balance c/d x
–– ––
x x
–– ––
Balance b/d x
If the total of the balances on the subsidiary ledgers do not equal the balance on the control account, then an error has been made.
The purchases ledger control account
Outcome
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Example 3
The balance on the purchases ledger control account for a business at 30 June 2012 was £12,159. The total of the balances on the individual payables’ accounts in the subsidiary ledger was £19,200.
The following errors were also found:
the cash payments book had been undercast by £70
an invoice from Thomas Ltd, a credit supplier, for £2,400 was correctly entered in the subsidiary ledger but had been missed out of the addition of the total in the purchases day book
an invoice from Fred Singleton for £2,000 plus VAT (20%) was included in his individual account in the subsidiary ledger at the net amount
an invoice from Horace Shades for £6,000 was entered into the individual account in the subsidiary ledger twice
the same invoice is for £6,000 plus VAT (20%) but the VAT had not been included in the subsidiary ledger
returns to Horace Shades of £311 had been omitted from the subsidiary ledger.
You are required to correct any errors in the purchases ledger control account and prepare the reconciliation between the balance on that account with the total of the individual balances on the subsidiary ledger accounts at 30 June.
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Step 1
Open up a purchases ledger control account, and amend this for any errors that have been made.
In this example, the first thing to be done will be to copy in the opening balance of £12,159.
From the list of errors, there are 2 that will affect the control account.
Item 1 will mean that the control account is overstated by £70 due to the cash payments book being undercast. Therefore a DEBIT is needed to the PLCA to correct this.
Item 2 will mean that the control account is understated, as an invoice has been omitted. Therefore a CREDIT is required to record this.
The adjusted PLCA can be seen below:
Purchases ledger control account
£ £
Undercast of CPB (1) 70 Balance b/d 12,159
Invoice omitted (2) 2,400
Balance c/d 14,489
–––––– ––––––
14,559 14,559
–––––– ––––––
Amended balance b/d 14,489
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66
Step 2
Draw up the list of balances on the subsidiary ledger, and amend this for any errors. In this example, the first thing to be done will be to copy in the opening balance of £19,200.
From the list of errors, there are 4 that will affect the list of balances on the subsidiary ledger.
Item 3 will mean that the list of balances on the subsidiary ledger is understated by £400, as Fred will owe the gross amount, not the net amount. Therefore £400 must be ADDED to the list of balances.
Item 4 will mean that the list of balances on the subsidiary ledger is overstated, as £6,000 has been added to the subsidiary ledger twice. Therefore £6,000 must be DEDUCTED from the list of balances.
Item 5 is the same as item 3. The list of balances will be understated, as the gross amount will be owed, not the net amount. Therefore the VAT of £1,200 (£6,000 × 20%) should be ADDED to the list of balances.
Item 6 means the list of balances is overstated, as the returns have not been recorded. Therefore £311 must be DEDUCTED from the list of balances.
£
Original total 19,200
Add: Fred Singleton VAT (3) 400
Less: Credit balance entered twice (4) (6,000)
Add: Horace Shades VAT (5) 1,200
Less: Horace Shades returns (6) (311)
––––––
14,489
The revised PLCA balance of £14,489 now agrees with the revised total of the list of balances on the subsidiary ledgers. Therefore the reconciliation is accurate.
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Example 4
(a) Show whether each entry will be a debit or credit in the Salesledger control account in the General ledger.
Details Amount
£ Debit
Credit
Receivables at 1 June 96,000
Goods sold on credit 24,830
Receipts from credit customers 45,026
Discount allowed 930
Sales returns from credit customers 640
(b) What will be the balance brought down on 1 July on the aboveaccount?
The balance brought down will be £74,234, as shown below.
Sales ledger control account
£ £
Balance b/d 96,000 Cash received 45,026
Credit sales 24,830 Discount allowed 930
Sales returns 640
Balance c/d 74,234
–––––– ––––––
120,830 120,830
–––––– ––––––
Balance b/d 74,234
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The following debit balances were in the subsidiary (sales) ledger on 1 July.
£
ATD Ltd 42,600
ARD Ltd 10,752
CC Ltd 10,984
SI Ltd 9,258
(c) Reconcile the balances shown above with the sales ledger control account balance you have calculated in part (a).
£
Sales ledger control account balance as at 30 June 74,234
Total of subsidiary (sales) ledger accounts as at 30 June 73,954
Difference 640
(d) What may have caused the difference you calculated in part (c)?
The difference is likely to have been caused by the sales returns being omitted from the SLCA, or the sales returns being included in the subsidiary accounts twice in error.
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VAT
VAT is charged on the taxable supply of goods and services by a taxable person in the course of a business carried on by them. VAT is an indirect tax borne (suffered) by the ultimate consumer. In the UK, it is administered by HM Revenue & Customs (HMRC) which we may refer to as the tax authorities.
VAT is charged on purchases (input tax) and sales (output tax).
Businesses that are VAT registered must charge VAT on top of their sales price and collect the VAT from their customers on behalf of the tax authorities.
The VAT collected from their customers is then owed to the tax authorities (HMRC) and must be shown as a liability within the accounts, until the liability is paid.
When VAT is charged on invoices for purchases and expenses, a business pays the full amount including VAT to that supplier. If the business is VAT registered the VAT that has been paid can be reclaimed from the tax authorities. This reduces the VAT liability within the VAT control account.
VAT
Outcome
Bookkeeping Controls
70
If output tax exceeds input tax, the business has a VAT liability of the excess to the tax authorities. This would be represented by a balance brought down on the credit side of the VAT control account.
If input tax exceeds output tax, the business has a VAT asset of the excess from the tax authorities. This would be represented by a balance brought down on the debit side of the VAT control account.
Re-cap from Bookkeeping Transactions: Understanding and calculating the VAT figures
The standard rate of VAT in the UK is currently 20%.
Let’s review how the figures work:
Cost structure:
Net 100%
+ VAT VAT %
––––– –––––
= Gross 100% + VAT%
With a VAT rate at 20%, the cost structure is as follows:
Net 100%
+ VAT 20%
––––– –––––
= Gross 120%
How to manipulate VAT
The amount known × % of what you want to know
% what you do know
There is also a specific rounding rule to remember with VAT:
VAT should always be rounded down to the nearest penny e.g. VAT of £21.5677 will be rounded down to £21.56.
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Illustration
VAT from Net
Say we want to find out the VAT from a net amount of £120,000.
Using the equation above, the amount we know is the net amount of £120,000, the percentage of what we want to know is 20% (i.e. the VAT), and the percentage of what we do know is the net percentage which is 100%.
£120,000 × 20
100
= £24,000
VAT from Gross
Say we want to find out the VAT from a gross amount of £288,000.
Using the same equation, the amount we know is the gross amount of £288,000, the percentage of what we want to know is 20% (i.e. the VAT) and the percentage of what we do know is the gross percentage which is 120% (the net 100% + VAT rate 20%).
£288,000 ×20
120
= £48,000
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72
As seen in Bookkeeping Transactions, as the sales, sales returns, purchases, purchases returns, discounts allowed and discounts received are entered into the accounts, the VAT is also calculated and accounted for.
Within the assessment:
You may be given extracts from the day books and asked to enter the relevant figures into the VAT control account.
You may be asked to list the entries required to the control account indicating whether they would be on the debit or credit side of the VAT control account.
You may be asked to verify the balance (state if it is owed to HMRC or a refund is due from HMRC).
VAT control account
£ £
VAT on credit purchases x VAT on credit sales x
VAT on cash purchases x VAT on cash sales x
VAT on sales returns x VAT on purchases returns x
VAT on irrecoverable debts w/o
x VAT on discounts received x
VAT on discounts allowed x
Balance c/d x
–– ––
x x
–– ––
Balance b/d x
The illustration above has shown us the VAT control account assuming that the balance brought down is on the credit side and therefore a liability.
Although it is less likely, you may also encounter a VAT control account where the balance brought down is on the debit side and therefore an asset, meaning a refund is due to the business from the tax authorities.
We must be aware of how to account for the payment of the VAT balance to the tax authorities and how we would account for the receipt of a refund from the tax authorities.
VAT control account
Outcome
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74
Example 5
This quarter, Company A had sales of £250,000 exclusive of VAT, made purchases of £90,000 net and made some returns to suppliers amounting to £5,000 plus VAT. Complete the VAT control account for Company A for this quarter.
Solution
Firstly, the VAT amounts must be calculated, as these are not given. The information provided means that VAT will have to be calculated from the net amounts, as all figures have been given without VAT included. The VAT amounts are calculated as a percentage of the amounts given, shown below:
VAT on sales (Output tax): £50,000 (£250,000 × 20%)
VAT on purchases (Input tax): £18,000 (£90,000 × 20%)
VAT on purchases returns: £1,000 (£5,000 × 20%)
The tax on sales will be a CREDIT, as this will increase the amount owed.
The tax on purchases will be a DEBIT, as this could be reclaimed from HMRC, therefore reducing the liability.
The tax on purchases returns will be a CREDIT. Tax on purchases can be reclaimed, so is included initially as a debit balance. However, some of these goods have now been returned to the supplier. As these goods are being returned, then the company cannot reclaim any of the tax. Therefore this is credited to reduce the amount that can be reclaimed.
VAT control account
Detail £ Detail £
Purchases 18,000 Sales 50,000
Balance c/d 33,000 Purchase returns 1,000
Total 51,000 Total 51,000
Balance b/d 33,000
The balance of £33,000 should be PAID to HMRC as it is a LIABILITY.
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Payment of VAT
If the VAT control account has a balance brought down on the credit side of the ledger account, this indicates a liability owed to the tax authorities (HMRC).
When that liability is due to be paid we account for it as follows:
Dr VAT Control Account X
Cr Bank X
Refund of VAT
If the VAT control account has a balance brought down on the debit side, this indicates there is an asset i.e. a refund is due from the tax authorities (HMRC).
When the refund is received we account for it as follows:
Dr Bank X
Cr VAT Control Account X
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Example 6
Which of the following items would be debit balances in the VAT control account?
VAT total in sales day book No – owed to HMRC
VAT total in purchases day book Yes – Reclaimable from HMRC
VAT on petty cash payments made Yes – Reclaimable from HMRC
VAT refund received from HMRC No – this is the business receiving the cash from HMRC that was owed. The double entry will be Dr Cash, Cr VAT Control
VAT on cash sales No – owed to HMRC
VAT in purchase returns day book No – Can no longer reclaim
VAT total in sales returns day book Yes – As these sales have been returned, the VAT is no longer owed to HMRC
VAT on irrecoverable debts written off
Yes – Reclaimable from HMRC as long as debts more than 6 months old
VAT total in discounts allowed day book
This is reclaimable from HMRC, as the amount of VAT recorded on sales would have initially been on the amount invoiced
VAT total in discounts received day book
No – payable to HMRC, as the amount of VAT recorded as initially reclaimable would have been on the full purchase price, which we have not paid
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Example 7
The following VAT figures have been extracted from the books of prime entry:
£
Sales day book 24,530
Sales returns day book 1,270
Purchases day book 11,250
Cash payments book 2,430
Show the entries in the VAT control account.
VAT control account
Detail £ Detail £
Sales returns 1,270 Sales 24,530
Purchases 11,250
Cash payments 2,430
Balance c/d 9,580
Total 24,530 Total 24,530
Balance b/d 9,580
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Sales ledger control account
Control account entries
Types of error
Reconciling sales ledger control account to the subsidiary ledger
Purchases ledger control account
Control account entries
Types of error
Reconciling purchases ledger control account to the subsidiary ledger
VAT
Purpose of VAT
Calculation of VAT
VAT control account
Control account entries
Verify the balance on the control account
Make entries for payment/receipt
Summary
Outcome
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81
Further reading
For more detailed explanation, analysis and illustration of this topic please read Chapter 5 of the Bookkeeping Controls Study Text. Please complete any TYU that have not been completed in class.
Less detailed summaries can be found in Chapter 5 of the BKCL Pocket Notes.
You should now be able to answer these questions from the Exam Kit:
Question 61 – Monster Munchies
Question 65 – Zhang
Question 70 – Disley
If you are attending a revision course, please do not attempt the Exam Kit questions until your tutor instructs you to do so.
Illustrations and further practice
Exam Kit questions
Bookkeeping Controls
82
Tutor’s question bank
Support Questions
Question 5 and 6
More challenging questions:
Questions 16 and 17
These questions and answers may be printed off separately and distributed to students as necessary, to supplement the material listed above.
We recommend the following additional questions for the topics covered in this chapter:
Study Text (for teaching throughout the Chapter)
Control Accounts and Reconciliations (Chapter 5): TYU 1, 2, 6, 7
Exam Kit
Questions 64, 66, 71
Additional tutor resources Additional tutor resources
Additional tutor guidance
83
By the end of this session you should be able to:
give examples of the types of transactions that might be entered into thebookkeeping system by using the journal
prepare and enter the journal entries in the general ledger to process payrolltransactions, including gross pay, income tax, employer’s and employees’ NIC,employer’s and employee’s pension and voluntary deductions
and answer questions relating to these areas.
Chapter 6 Payroll procedures
Outcome
Outcome
The underpinning detail for this Chapter in your Workbook can be found in
Chapter 6 of your Study Text
Bookkeeping Controls
84
Employer’s NI Employer’s pension
Gross pay
Payroll
Net pay
Tax/pension liabilities
Overview
Overview
Payroll procedures : Chapter 6
85
Gross pay This is the total payable to the employee before deductions.
This could consist of wages or salary; overtime; shift payments; bonus; commission; holiday pay.
Income tax (PAYE) This is the tax owed by the employee on their gross pay.
The employer collects it on the employee’s behalf by deducting it from wages and paying it to the tax authorities (HMRC).
Employee’s NIC The national insurance contributions owed by the employee on their gross pay.
The employer collects it on the employee’s behalf by deducting it from wages and paying it to the tax authorities (HMRC).
Employer’s NIC This is NOT deducted from the employee’s gross pay.
This is an additional expense to the company for employing individuals. This is paid by the company to the tax authorities (HMRC).
Employer’s pension This is an additional expense to the company for employing individuals. This is paid by the company into a pension fund.
Other deductions These may be contributions to items such as employee contribution to pension schemes, charitable donations or trade unions. These reduce the amount the employee receives and are paid over to the respective parties.
Overview of the payroll function
Overview
Bookkeeping Controls
86
There are 3 different elements to payroll calculations which will be examined here:
(a) calculating net pay
(b) calculating total wages expense for the employer
(c) working out the liabilities due to various parties.
Net pay
In order to calculate net pay, begin with the figure for gross pay, and then deduct items that relate to the employee. This will mean that PAYE, employee’s NIC and any other employee deductions (such as pension contributions) are taken off.
Note: Employer’s NIC are not deducted here.
£
Gross pay X
PAYE (X)
Employee’s NIC (X)
Other deductions (X)
–––
Net pay X
Payroll calculations
Overview
Payroll procedures : Chapter 6
87
Total wages expense
The total cost to the employer is the employee’s gross pay plus the employer’s national insurance contributions.
Wages expense = Gross pay + Employer’s NIC + Employer’s pension contributions
Liabilities
Once the employee has been paid, the company will be left with other liabilities:
PAYE/NIC – The total of the PAYE and both sets of NIC will be owed to the tax authorities
Items payable to other organisations, such as the amount owed to the pension fund or trade unions based on the monthly deductions.
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Example 1
John earns £12,000 per annum. His deductions for the month of May are:
£
PAYE 125
Employee’s NIC 80
Employer contribution to pension 50
Employee contribution to pension 50
Employer’s NIC 85
Calculate John’s net pay
£
Gross pay (12,000/12) 1,000
PAYE (125)
Employee’s NIC (80)
Other deductions (50)
–––
Net pay 745
The total cost to the employer of employing John will be the total of John’s gross pay, employer’s NIC and the employer’s pension contributions.
Total expense = 1,000 + 85 + 50 = £1,135
Finally, after paying John, the company will have the following liabilities:
Tax authorities (HMRC): £
PAYE 125
Employee’s NIC 80
Employer’s NIC 85
–––
Total owed 290
Pension liability (50 + 50) 100
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The accounting for wages and salaries is based upon two fundamental principles.
The accounts must reflect the full cost to the employer of employing someone.
The accounts must show the liability payable to HMRC for PAYE and NIC.
We need accounts to record the wages expense and liabilities to external parties such as HMRC.
As part of the double entries, we will also use a third account, which is the wages control account.
Accounting for payroll
Overview
Payroll procedures : Chapter 6
91
The T accounts used will therefore be as follows:
1 The wages expense account
This shows the total expense to the business (Gross pay plus employer’s NIC). This is the expense account shown in the trial balance.
2 The liability accounts
The liability account to HMRC shows all the liabilities due to the tax authorities (namely PAYE and all NIC).
There could also be other liability accounts such as a pension liability if there are pension deductions.
3 The wages and salaries control account
One side of each double entry is put through the control account.
This account is cleared out each payroll run and there is never a balance brought down to take to the trial balance.
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The entries to be posted into the ledgers are as follows:
Firstly, record the TOTAL expense to the business (gross pay, employer’s NIC, employer pension contributions).
Dr Wages expense X
Cr Wages control X
Next, from the total expense, record the amount paid to the employee (net pay).
Dr Wages control X
Cr Bank X
Of the remaining amounts, record them in the appropriate liability accounts.
Dr Wages control X
Cr HMRC X (The total of PAYE and all NIC)
Dr Wages control X
Cr Pension liability/Trade union X
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Illustration 1
Using the figures calculated for John’s pay earlier, the accounting entries will now be shown.
Step 1: Firstly, record total wage expense (Dr Wages expense, Cr Wages control).
Step 2: Next, record the amount paid to the employee in wages control (net pay of £745). Note: the bank T account is not given here as we are just looking at the payroll accounts.
Step 3: Now, split out the liabilities. Firstly, record the liability due to HMRC (the total of PAYE and all NIC, which is £290).
Step 4: Finally, record the pension liability of £50 (Dr Wages control, Cr Pension liability).
Step 5: Once all entries have been made, the wages control account can be balanced off to ensure there is no remaining balance. If there is a remaining balance carried down, an error has been made somewhere.
Bookkeeping Controls
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Wages expense
Details
Amount
£
Details
Amount
£
Wages control (step 1) 1,135
Wages control
Details
Amount
£
Details
Amount
£
Bank (step 2) 745 Wages expense (step 1) 1,135
HMRC liability (step 3) 290
Pension liability (step 4) 100
TOTAL (step 5) 1,135 TOTAL (step 5) 1,135
HMRC liability
Details
Amount
£
Details
Amount
£
Wages control (step 3) 290
Pension liability
Details
Amount
£
Details
Amount
£
Wages control (step 4) 100
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95
Elements of payroll
Gross pay
Net pay
PAYE
Employee’s NIC
Employer’s NIC
Other deductions
Calculations
Net pay = Gross pay less employee’s deductions
Total expense = Gross pay plus Employer’s NIC
HMRC payable = PAYE plus all NIC
Accounting for payroll
1 Record total expense
2 Record payment to employee
3 Record HMRC liability
4 Record other liabilities
All entries go through the wages control account. Ensure that the wages controlaccount has no balance carried down at the end
Summary
Overview
Bookkeeping Controls
96
Further reading
For more detailed explanation, analysis and illustration of this topic please read Chapter 6 of the Bookkeeping Controls Study Text. Please complete any TYU that have not been completed in class.
Less detailed summaries can be found in Chapter 6 of the BKCL Pocket Notes.
You should now be able to answer these questions from the Exam Kit:
Question 4 – Ivano
Question 9 – Rhyme Time
Question 10 – Down and out
If you are attending a revision course, please do not attempt the Exam Kit questions until your tutor instructs you to do so.
Illustrations and further practice
Exam Kit questions
Payroll procedures : Chapter 6
97
Tutor’s question bank
Support Questions
Question 7 and question 8
More challenging questions:
Question 18 and question 19
These questions and answers may be printed off separately and distributed to students as necessary, to supplement the material listed above.
We recommend the following additional questions for the topics covered in this chapter:
Study Text (for teaching throughout the Chapter)
Payroll procedures (Chapter 6): TYU 4, TYU 5
Exam Kit
Questions 5, 7, 11
Additional tutor resources Additional tutor resources
Additional tutor guidance
99
By the end of this session you should be able to:
understand the different items that can be included within a bank reconciliation
update the cash book and prepare a bank reconciliation
and answer questions relating to these areas.
Chapter 7 Bank reconciliations
Outcome
Outcome
The underpinning detail for this Chapter in your Workbook can be found in
Chapter 7 of your Study Text
Bookkeeping Controls
100
Updating the cash book
Bank reconciliation
Preparing bank
reconciliation
Overview
Overview
Bank reconciliations : Chapter 7
101
Bank reconciliations compare the balance per the bank statement to the balance per the cash book recorded by the business. The difference between the two is then explained.
At regular intervals the cashier must check that the cash book is correct by comparing the cash book with the bank statement.
However, at a particular date the balance as per the cash book and the balance as per the bank statement might not agree due to a number of reasons.
Items on the bank statement but not in the cash book
There may be some items that are accounted for on the bank statement but which have not been updated in the cash book.
These include bank charges, interest and other automated payments.
The cash book needs to be updated for these items. This will give a revised cash book balance.
Items in the cash book but not on the bank statement
There are 2 major items that are recorded in the cash book but which have not yet been accounted for on the bank statement. These are:
unpresented cheques
uncleared lodgements.
Within a bank reconciliation question, it is likely that you will have to deal with both of these, so it is essential that you understand each one.
Understanding bank reconciliations
Basic principles of accounting
Bookkeeping Controls
102
Unpresented cheques
These are cheques that have been written and sent as payment by the business, which are yet to clear the bank.
This will be because the cheque has not yet cleared the banking system.
Uncleared lodgements
This is money received by the business, which has not cleared the bank.
This is likely to be cheques paid into the bank before year end, which has not yet cleared the banking system.
In both cases, the cash book is up to date, but the bank statement is not.
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The bank reconciliation process
1 Agree the opening balance on the bank statement and in the cash book.
If the balance does not agree tick off any prior period reconciling itemswhich have caused the opening balances to disagree.
These items that have been crossed off the bank statement should thenbe ignored.
2 Agree that items on the bank statement appear in the cash book (tick off).
Use the amounts for this, as the descriptions may not match. Often thebanks statement will simply show a cheque number, while the cash bookwill have the details of the customer or supplier name.
If there are items on the bank statement that do not appear in the cashbook, update the cash book for these (these items now updated should beticked off).
3 Any un-ticked items in cash book (i.e. they have not appeared on the bank statement) are reconciling items, i.e. unpresented cheques or uncleared lodgements.
These will appear in the bank reconciliation statement.
To prove that the cash book and the bank statement closing balances agree through reconciliation, we must update the bank statement balance to reflect the entries that have been made to the cash book already.
We add any receipts to the bank amount that we have already added to thecash book balance.
We take away any payments from the bank amount that we have alreadydeducted from the cash book balance.
Producing bank reconciliations
Overview
Bookkeeping Controls
104
The bank reconciliation proforma
£ £
Balance per bank statement x
Add: uncleared lodgements x
Less: unpresented cheques (x)
(x)
Balance per cash book x
If the bank reconciliation proforma starts with ‘Balance per cash book’ we have to reverse the above to reconcile back to the ‘Balance per bank statement’.
Watch out for overdrawn opening or closing balances in either the cash book or bank statement. Be careful!
When you’re given a bank statement, remember that it is from the bank’s perspective rather than the company’s perspective. For example, if a company has £10,000 in a bank account, the cash book would show £10,000 as a debit balance, representing an asset.
However, the bank statement would show a £10,000 CREDIT balance, as the bank have a liability of £10,000, as they owe this money back to the company, who can withdraw it at any time.
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The illustration will walk through how the bank reconciliation process is performed.
Illustration 1
On 2nd July 2012, Night Night Beds Ltd received the following bank statement as at 30th June 2012.
HIGH STREET BANK Plc
High Street, Little Heath, Leeds LS28 1AD
To: Night Night Beds Ltd
Account No: 48917508 30 June 2012
Date Details Debit Credit Balance
2012 £ £ £
1 June Bal b/d 8,196C
5 June Cheque no 816078 800 7,396C
5 June Counter Credit 2,000 9,396C
8 June Counter Credit 3,500 12,896C
10 June Cheque no 816079 1,864 11,032C
16 June Direct debit 700 10,332C
24 June Bank charges 52 10,280C
25 June Direct debit 400 9,880C
30 June Cheque no 816081 1,290 8,590C
D = Debit C= Credit
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Night Night Beds Ltd's cash account for June 2012 was as follows.
Date 2012
Details Bank £
Date 2012
Cheque number
Details Bank £
1 June Balance b/d 7,396 1 June 816079 SpringRite 1,864
5 June Barbara’s Beds
2,000 5 June 816080 Fabric House 2,120
29 June JRB Ltd 5,120 22 June 816081 Heads Up 1,290
29 June 816082 John Joiner 7,400
29 June 816083 Foamies 200
Firstly, we need to agree the opening balances.
The opening balance on the bank statement doesn’t agree with the opening cash book balance, but this is due to the £800 cheque clearing the bank on 5 June, which would have been included in the previous month’s cash book.
Therefore the opening balance of £7,396 can be agreed. The £800 cheque on the bank statement is now dealt with, so can be ticked off.
Secondly, items on the bank statement should be agreed to the cash book and ticked off. Identify from the bank statement the items which have not been entered into the cash book. These are:
8 June – Counter credit of £3,500
16 June – Direct debit of £700
24 June – Bank charges of £52
25 June – Direct debit of £400.
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These must be updated in the cash book. This is seen below.
Date 2012
Details Bank £
Date 2012
Cheque number
Details Bank £
1 June Balance b/d 7,396 1 June 816079 SpringRite 1,864
5 June Barbara’s Beds
2,000 5 June 816080 Fabric House 2,120
29 June JRB Ltd 5,120 22 June 816081 Heads Up 1,290
8 June Counter Credit
3,500 29 June 816082 John Joiner 7,400
29 June 816083 Foamies 200
16 June Direct debit 700
24 June Bank charges 52
25 June Direct debit 400
30 June Balance c/d 3,990
18,016 18,016
1 July Balance b/d 3,990
After entering these items into the cash book:
The closing bank balance per the bank statement is £8,590.
The closing balance per the cash book is £3,990.
This leaves a difference of £4,600.
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This difference should be made up of the unticked items in the cash book. After comparing the cash book to the bank balance, the following items are not included in the bank statement:
29 Jun – JRB Ltd: £5,120 debit (add to the bank balance)
5 June – Fabric House: £2,120 credit (deduct from the bank balance)
29 June – John Joiner: £7,400 credit (deduct from the bank balance)
29 June – Foamies: £200 credit (deduct from the bank balance)
The bank reconciliation therefore looks as follows:
Balance per bank statement 8,590
Add:
Name: JRB Ltd 5,120
Name: – –
Total to add 5,120
Less:
Name: Fabric House (2,120)
Name: John Joiner (7,400)
Name: Foamies (200)
Total to subtract (9,720)
Balance as per cash book 3,990
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Example 1
On 22 June, The Studio received the following bank statement:
MAIN STREET BANK Plc
Main Street, Grimsby, DN34 4AD
To: The Studio
Account No: 48917508 22 June 2012
Date Details Debit Credit Balance
2012 £ £ £
1 June Bal b/d 385 D
7 June Bank Giro Credit PKL Ltd
4,000
3,615 C
8 June Cheque no 007313 250 2,365 C
8 June Cheque no 007315 483 2,882 C
14 June Cheque no 007316 2,165 717 C
15 June Cheque no 007317 1,233 516 D
20 June Direct debit Hampton CC
135
651 D
20 June Direct debit Motor Mania
177
828 D
21 June Bank Giro Credit Bissell
2,500
1,672 C
22 June Bank charges 44 1,628 C
22 June Bank interest 3 1,631 C
D = Debit C= Credit
The cash book as at 22 June is shown below:
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Cash book
Date 2012
Details Bank £
Date 2012
Cheque number
Details Bank £
15 June PKL Ltd 4,000 1 June Balance b/d 635
20 June Beaker plc 3,245 1 June 007315 Abby Photos 483
21 June Bissell 2,500 6 June 007316 LTL Ltf 2,165
22 June Gilchrist Ltd 2,416 6 June 007317 Retro Frames 1,233
22 June 007318 Tonks & Co 1,020
22 June 007319 Taylor Agency
547
(a) Tick off balances in the bank statement and update the cash book, showing the balance carried down at 22 June and the balance brought down at 23 June.
Date 2012
Details Bank £
Date 2012
Cheque number
Details Bank £
15 June PKL Ltd 4,000 1 June Balance b/d 635
20 June Beaker plc 3,245 1 June 007315 Abby Photos 483
21 June Bissell 2,500 6 June 007316 LTL Ltf 2,165
22 June Gilchrist Ltd 2,416 6 June 007317 Retro Frames 1,233
22 June Bank interest
3
22 June 007318 Tonks & Co 1,020
22 June 007319 Taylor Agency
547
20 June Hampton 135
20 June Motor Mania 177
22 June Bank charges
44
22 June Balance c/d 5,725
12,164 12,164
23 June Balance b/d 5,725
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(b) Complete the bank reconciliation:
Balance per bank statement £1,631
Add:
Name: Beaker plc £3,245
Name: Gilchrist Ltd £2,416
Total to add £5,661
Less:
Name: Tonks & Co £1,020
Name: Taylor Agency £547
Total to subtract £1,567
Balance as per cash book 5,725
Bookkeeping Controls
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Understanding bank reconciliations
Items on the bank statement not recorded in the cash book
Items on the cash book not recorded in the bank statement
Key reconciling items
Uncleared cheques
Unpresented lodgements
Producing a bank reconciliation
Agree the opening balances
Update the cash book
Produce the bank reconciliation
Summary
Basic principles of accounting
Bank reconciliations : Chapter 7
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Further reading
For more detailed explanation, analysis and illustration of this topic please read Chapter 7 of the Bookkeeping Controls Study Text. Please complete any TYU that have not been completed in class.
Less detailed summaries can be found in Chapter 7 of the BKCL Pocket Notes.
You should now be able to answer these questions from the Exam Kit:
Question 47 – Rivers
Question 48 – Luxury Bathrooms
Question 54 – Rivers bank reconciliation
Question 55 – Luxury Bathrooms bank reconciliation
If you are attending a revision course, please do not attempt the Exam Kit questions until your tutor instructs you to do so.
Illustrations and further practice
Exam Kit questions
Bookkeeping Controls
114
Tutor’s question bank
Support Questions
Questions 9 and 10
More challenging questions
Questions 20 and 21
These questions and answers may be printed off separately and distributed to students as necessary, to supplement the material listed above.
We recommend the following additional questions for the topics covered in this chapter:
Study Text (for teaching throughout the Chapter)
Bank reconciliations (Chapter 7): TYU 2
Exam Kit
Questions 49, 50, 56, 57
Additional tutor resources Additional tutor resources
Additional tutor guidance
115
By the end of this session you should be able to:
explain when funds banked are cleared and available for use
identify different forms of payment, including: cash, cheques, credit cards, debitcards, and automated payments
identify the information required to ensure the following payments are valid:cheque, credit card, debit card
describe procedures to ensure the security of receipts and payments
describe the effect that different forms of payment will have on an organisation’sbank balance
and answer questions relating to these areas.
Chapter 8 The banking system
Outcome
Outcome
The underpinning detail for this Chapter in your Workbook can be found in
Chapter 8 of your Study Text
The banking system : Chapter 8
117
There are many different ways a business can make and receive payments. We willnow review a number of different methods of payment that are available.
(a) Cheques
A cheque is a document which instructs a payment to be made from a bank account. There are three key terms relating to the individuals involved.
Drawer – The person writing the cheque
Payee – The person who payment is being made to
Drawee – The bank of the drawer who will be paying the amount out
Payment methods
Overview
Bookkeeping Controls
118
Example 1
ABC Bank PLC Date: 30th January 20X2
Payee: Mr John Smith
£350.00
Three hundred and fifty pounds only MISS ANNE JONES
CHEQUE NUMBER SORT CODE ACCOUNT NUMBER
04312 25–22–78 30087251
Who are the different parties on the cheque?
Drawee – ABC Bank PLC
Drawer – Miss Anne Jones
Payee – Mr John Smith
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Cheques should be examined before they are banked to ascertain whether they are valid.
The checks that are required to ensure that cheques are valid are:
Date: Not less than 6 months old.
Date exists (e.g. not 30th February).
The date cannot be changed by the individual paying it in.
Signature: Ensure cheque is signed.
Amount: Ensure amount in words agrees to the figure written on the right of the cheque.
Account number and sort code: These should be printed on the cheque by the bank, rather than being written in by the drawer.
The clearing system
This is the method by which banks and building societies exchange cheques. The process takes three working days.
The clearing process means that it will be three days before the money will be available to the person receiving the cheque, meaning the bank balance is not affected on the date the payment is made.
(b) Banker’s drafts
A banker’s draft (‘bank cheque’) is a cheque whereby funds are taken directly from the bank rather than an individual’s account.
The individual must transfer the amount from their account to the bank’s account.
This removes the risk of the cheque ‘bouncing’ due to insufficient money.
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(c) Building society cheques
A building society cheque and bankers draft are similar but not exactly the same.
A building society can give you a cheque instead of cash when you want to make a withdrawal from your account.
These cheques are written knowing the cash is available.
(d) Debit cards and credit cards
The checks that are required when accepting a debit or a credit card payment are:
Check expiry date hasn’t lapsed, and the start date has passed
Check that there is a security code on the back of the card
Check that the card has not been tampered with in any way
Check that card has been signed
Differences between a debit care and credit card:
With a debit card as the money is taken out immediately.
A credit card does not alter the balance in your bank account when you pay for something. The goods are bought on credit and payment is made to the credit card company at a later date.
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(e) Standing orders
These are a customer’s instructions to their bank to pay a fixed amount at regular intervals to a named party e.g. a standing order to pay £600 rent on a monthly basis.
(f) Direct debits (DD)
These are authorised by customers for recipients to claim payments from the customers’ accounts.
These can be variable in amount and frequency e.g. you can arrange to pay the full balance of a credit card bill by DD regardless of how much the balance is each month.
(g) BACS (Bankers’ Automated Clearing Services)
BACS is the electronic system that processes Direct Debits, direct credits and standing orders for UK banks.
It takes three working days to clear payments- on the first day they are entered into the system, processed on the second day, and cleared on the third day.
(h) CHAPS (Clearing House Automated Payment System)
This is a same day UK electronic transfer.
These types of payments are useful if urgent or for example if you are buying a house and the solicitor has to send the money to the vendor on the same day.
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Example 2
Select the most appropriate type of payment for each scenario shown below.
Payment of rent of £450 on 18th of each month
Cheque
Payment of a telephone bill that varies each month
Standing order
Purchasing milk for the office Cash
Making a payment to a supplier by post
Direct debit
Payment of rent of £450 on 18th of each month
Standing order
Payment of a telephone bill that varies each month
Direct debit
Purchasing milk for the office Cash
Making a payment to a supplier by post
Cheque
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Payment types
Cheques, including the clearing system
Bankers drafts
Building society cheques
Debit/Credit cards
Standing orders
Direct debits
BACS
CHAPS
Summary
Overview
Bookkeeping Controls
124
Further reading
For more detailed explanation, analysis and illustration of this topic please read Chapter 8 of the Bookkeeping Controls Study Text. Please complete any TYU that have not been completed in class.
Less detailed summaries can be found in Chapter 8 of the BKCL Pocket Notes.
You should now be able to answer these questions from the Exam Kit:
Question 73 – Blossom Blooms
Question 77 – Methods of payment
If you are attending a revision course, please do not attempt the Exam Kit questions until your tutor instructs you to do so.
Illustrations and further practice
Exam Kit questions
The banking system : Chapter 8
125
Tutor’s question bank
Support Questions
Question 11 and question 12
More challenging questions:
Question 21
These questions and answers may be printed off separately and distributed to students as necessary, to supplement the material listed above.
We recommend the following additional questions for the topics covered in this chapter:
Study Text (for teaching throughout the Chapter)
The banking system (Chapter 8): TYU 1, 2, 3, 4
Exam Kit
Question 73, 77
Additional tutor resources Additional tutor resources
Additional tutor guidance
Recommended