Acorn AAT L2 The Business Environment Mock Exam One PDF

MarZar Mock Exam One AAT L2 The Business Environment Contents Page Mock practice assessment 3 Revision Notes 27 Solutions to mock practice assessment 65...

MarZar Mock Exam One AAT L2 The Business Environment Contents Page Mock practice assessment 3 Revision Notes 27 Solutions to mock practice assessment 65 1|Page This practice assessment is one of a set of five AAT mock practice assessments which have been published for this subject. They are produced by our expert AAT tutors, giving real AAT exam style and standard tasks, that ensure the very best for exam success. All practice assessments are relevant for the current syllabus. We also sell Study Text and Exam Practice Kits produced by our expert team of AAT tutors. Our team have extensive experience teaching AAT and writing high quality study materials that enable you to focus and pass your exam. Our Study Text and Exam Practice Kits cover all aspects of the syllabus in a user friendly way and build on your understanding by including real style exam tasks for you to practice. Our AAT tutors work extensively to produce study material that is first class and absolutely focused on passing your exam. We hope very much that you enjoy this product and wish you the very best for exam success! For feedback please contact our team [email protected] or [email protected] Polite Notice! © Distributing our digital materials such as uploading and sharing them on social media or e-mailing them to your friends is copyright infringement. 2|Page  Mock Exam One 1 AAT L2 The Business Environment Assessment information: You have 2 hours to complete this practice assessment. This assessment contains 8 tasks and you should attempt to complete every task. Each task is independent. You will not need to refer to your answers to previous tasks. The total number of marks for this assessment is 100. Read every task carefully to make sure you understand what is required. Where the date is relevant, it is given in the task data. Both minus signs and brackets can be used to indicate negative numbers unless task instructions state otherwise. You must use a full stop to indicate a decimal point. For example, write 100.57 not 100,57 or 10057. You may use a comma to indicate a number in the thousands, but you don’t have to. For example, 10000 and 10,000 are both acceptable. Mathematical rounding should be applied where appropriate. Exam Note: Task 4 and Task 7 of your AAT exam assessment is human (not computer) marked, therefore assessment results are not released immediately. 3|Page Task 1 (10 marks) This task is about different business types and their functions. This task contains parts (a) to (d). (a) Identify whether the following statements about charities are true or false. (4 marks) TRUE FALSE A charity exists for public benefit such as for religious or scientific causes. A charity pays corporation tax on any profits that it earns. The Charity Commission is a government body that regulates charities. A charity is controlled by a Board of Directors and is owned by the general public. (b) Identify which one of the following is incorrect about an ‘off the shelf’ company. (1 mark) A purchaser can save time registering a newly formed company themselves. It is a limited company which has already been legally set up at Companies House. It normally has an active trading history and an established credit rating. (c) Identify whether the following statements about companies are true or false. (4 marks) TRUE FALSE A board of directors is appointed by the company shareholders. Shareholders can provide more investment to fund the business. Shareholders of a company have ‘limited liability’. No complex legal or accounting regulations govern companies. 4|Page (d) Complete the following sentence using the drop down list. (1 mark) The department responsible for identifying anticipating and satisfying customer requirements profitably would be the Picklist: Finance department, Marketing department, HR department, IT department. End of Task 5|Page Task 2 (13 marks) This task is about the finance function, its information requirements and sources, and its role within the wider organisation. This task contains parts (a) to (e). (a) Identify the characteristic of useful information for each description below. (3 marks) Description Characteristic All information requested by the recipient was provided. Information was presented in a way that the recipient can understand. Information was delivered to the recipient by the agreed deadline. Picklist: Accurate, Complete, User friendly, Authoritative, Timely. You work in a finance department in a large company. (b) Identify the person that you would most likely contact, or report the following information to. (3 marks) Person Budget cost allocation for monthly factory expenses. Sales credit control and customer collection problems. Query regarding the details on a supplier invoice. Picklist: Payroll manager, Production manager, Purchasing manager, Sales manager. 6|Page You work between 9am to 5pm each day of the week and always take lunch between 1pm to 2pm each day. Your monthly work schedule and weekly work schedule is shown below. All routine tasks in the weekly work schedule are required to be completed by the indicated deadline. All non-routine tasks in the monthly work schedule can be completed anytime on the relevant day. Today is Monday (week 1). Weekly work schedule (routine tasks) Day Work task Workoftask Day each week Deadline Duration Duration Wednesday Send sales invoices 12pm 2 hours Friday Bank reconciliations 12pm 2 hours Every day Process sales invoices 5pm 2 hours Every day Process purchase invoices 5pm 1 hour Every day Record and bank cheques 10am 1 hour Monthly work schedule (other routine tasks) Monday Tuesday Wednesday Thursday Friday Send out customer Finance meeting Variance reports Week 1 statements (2 hours) (3 hours) (1 hour) Send out customer Expense reports Week 2 statements (1 hour) (1 hour) Send out customer Staff meeting Week 3 statements (1 hour) (1 hour) Send out customer Payroll reports Week 4 statements (2 hours) (1 hour) Your manager has requested a 2 hour meeting with you on any Tuesday of this month. (c) Identify two days in the month when this meeting can be accepted. (2 marks) Picklist: Tuesday (Week 1), Tuesday (Week 2), Tuesday (Week 3), Tuesday (Week 4). 7|Page (d) Identify whether each policy or procedure described below is for a finance function, or is an organisational-wide policy and procedure. (4 marks) Finance Organisational- department wide Rules about mobile phone use, smoking, drugs and alcohol. Customer statements sent out at the end of each month. Use of the internet and email policies for communication. Procedure for cash handling and banking cheques received. A colleague has a tax query and you have agreed to find out more information. (e) Identify which one of the following is more likely to be a valid source of information. (1 mark) Facebook Twitter HMRC Accounting blog sites End of Task 8|Page Task 3 (14 marks) This task is about corporate social responsibility (CSR), ethics and sustainability. This task contains parts (a) to (e). A business wants to improve its corporate social responsibility. (a) Identify FOUR initiatives that would help improve the welfare of its staff. (4 marks) Ensure employees have regular rest breaks and provide free drinking water. Introduce new production equipment to lower energy consumption. Ensure that all staff know the procedure for claiming back any business expenses. Introduce flexible working practices for all employees. Offer courses for all staff to help develop their IT, Maths and English skills. Ensure that all office and factory employees work overtime. Offer free membership for staff to join their local gymnasium. Ensure that employees send information electronically rather than use printed paper. (b) Match each statement shown below to a fundamental principle of ethics for AAT members. (3 marks) Statement Ethical principle AAT members should be straightforward, honest and truthful. AAT members should comply with relevant laws and regulations as a minimum requirement. AAT members should not allow bias, conflicts of interest or undue influence to override their professional judgement. Picklist: Confidentiality, Objectivity, Integrity, Professional competence and due care, Professional behaviour. 9|Page (c) A fully sustainable business is one that. Choose ONE only. (1 mark) Consumes natural resources from the environment in a positive way. Continually improves the welfare of its customers and employees. Continually improves the welfare of society as a whole. Consumes natural resources without any negative impact on the environment. (d) Match each statement shown below to a category included in ‘triple bottom line’ reporting. (3 marks) Statement Category Maximise sales and profits. Maximise stakeholder welfare. Minimise harm to the natural environment. Picklist: Promotion, Planet, Place, Profit, People. (e) Identify whether each business stakeholder is an internal, or external stakeholder. (3 marks) Internal External Shareholder. Finance Director. Employee. End of Task 10 | P a g e Task 4 (22 marks) This task is about processing bookkeeping transactions and communicating information. This task contains parts (a) to (e). You work for PB Limited, a plumbing wholesale company that sells plumbing and electrical supplies to trade customers. You are a finance assistant and report directly to the financial controller. A sales invoice is being prepared for goods supplied as shown in the customer order below. Customer order MZ Ltd Order number 9587 Please supply: 20 April 20XX 300 units of product WHZ @ £5.70 each less 8.5% trade discount (a) Calculate the amounts that would be included in the sales invoice. (4 marks) £ Net amount before discount Net amount after discount VAT Total (b) Record the amounts entered in the sales daybook, when the invoice in part (a) is completed. (3 marks) Sales daybook Date Invoice Total VAT Net Details 20XX number £ £ £ 20-Apr MZ Ltd 1298 11 | P a g e (c) A prompt payment discount of 3% for payment within 7 days has been offered to MZ Ltd. Calculate the amount that MZ Ltd would pay on the invoice in part (a) above, if they took up the prompt payment discount. (3 marks) £ A colleague who has worked in the finance department for one month, has asked you about the accounting treatment for trade and prompt payment discounts. (d) Explain to the colleague an appropriate response for their accounting query. (4 marks) 12 | P a g e You have received a remittance advice from MZ Ltd shown below for payment of invoice 1298 in part (a) above. Today is the 26 April 20XX. The contact person at MZ Ltd is Mrs Kirsty Smith. MZ Limited 6 Hall Street, Wingleford, WL4 4YV. VAT registration number 123 6790 01 Remittance advice Account code: MZ001 Dated: 25 April 20XX To: PB Limited, 2 Church Street, London, W23 1LL. Payment of invoice 1298 for the amount due of £1,717.99 has been made by BACS today. (e) Write a letter to MZ Ltd informing them that they have underpaid the invoice and to request further payment for any difference due. Also inform them that a credit note is due and how much the total amount of the credit note would be. Your letter must be clear and structured appropriately. (8 marks) 13 | P a g e End of Task 14 | P a g e Task 5 (10 marks) This task is about control accounts, reconciliations and using journals to correct accounts. This task contains parts (a) to (e). BB Ltd sells and hires building equipment. The balances in its receivables ledger at 1 November are shown below. Debit balances Credit balances Amount Amount Transactions Transactions £ £ Fast Traders 3,468 ABC Ltd 260 Hatter Ltd 2,602 Zee Traders 250 MAM Plc 2,748 OSG Ltd 4,599 The balance for the receivables ledger control account on 1 November has not yet been recorded. The receivables ledger control account had total debit entries amounting to £37,880 and total credit entries amounting to £26,984. (a) Complete the reconciliation statement below by: inserting the balance of the receivables ledger control account inserting the total balance in the receivables ledger calculating any difference. (3 marks) Amount Reconciliation statement £ Sales ledger control Receivables accountbalance ledger control balance Total Totalofbalance the balances in the sales ledger in the receivables Difference Difference 15 | P a g e (b) Which ONE of the reasons below could explain the difference you have calculated in (a). (1 mark) Reasons Goodssold Goods were entered were twice entered in the twice receivables in the ledger sales ledger control control account account. Goodsreturned Goods returnedwere werenot notentered enteredininthe thesales receivables ledger account ledger account of a customer of a customer. A An irrecoverable irrecoverable debt debt waswas written written offoff in the in the receivables sales ledger ofledger of a customer a customer but sales but not the omitted as an entry in ledger control account. the receivables ledger control account You are preparing a payables ledger control account reconciliation for the month. The current balance showing in the payables ledger control account is a credit balance of £27,042 and the total amount of all supplier account balances in the payables ledger is a credit balance of £22,044. The payables ledger has been compared to the payables ledger control account and the following errors or omissions have been identified. 1. The total column of the purchases daybook was undercast by £1,000. The amount posted to the payables ledger control account was £131,673 but the correct entry should have been £132,673. 2. Purchases returns of £5,640 were credited to the payables ledger control account in error. The correct entries were made in the payables ledger accounts of suppliers. 3. A purchase invoice for £240 from Streets Ltd was omitted from purchases daybook. The correct entry was made in the payables ledger account of this supplier. 4. A set-off entry of £5,042 was omitted from the payables ledger account of M. Smith. The correct entry was made in payables ledger control account. 5. Purchase returns of £120 were debited in error to the payables ledger account of Winkle Traders Ltd instead of the payables ledger account of Traders RUS Ltd. 6. A purchase invoice was sent by a supplier for £360 in error, the correct amount on the invoice should be £3,600. The incorrect amount of £360 was posted to both the payables ledger and payables ledger control account. 16 | P a g e (c) Using the table below show THREE adjustments that should appear in the payables ledger control account, to reconcile this balance to the payables ledger. Enter only ONE figure for each line. Do not enter zeros in unused cells. Do NOT use minus signs or brackets. (3 marks) Dr Cr Account £ £ Picklist: Adjustment 1, Adjustment 2, Adjustment 3, Adjustment 4, Adjustment 5, Adjustment 6 (d) Show whether the errors below will cause or will not cause an imbalance in a trial balance, by placing the appropriate answer against each error. You may use each answer more than once. (2 marks) Error Effect on the trial balance Answer: A rent payment of £1,000 has been incorrectly debited to the cashbook and credited to rent expenses. Will cause an imbalance The payables ledger control account was correctly credited with £990 but the debit entry made to purchases Will not cause an imbalance was incorrectly entered as £1,071. Interest paid of £246 showing in the bank statement for the month has not been entered in the cash book. The receivables ledger of SS Ltd has been incorrectly debited with a sales invoice which should have been posted to the receivables ledger of SNS Limited. 17 | P a g e At the end of a month a trial balance was extracted and did not balance. The debit column totalled £132,955 and the credit column totalled £129,472. (e) What entry is needed in the suspense account to balance the trial balance. Do not enter a zero in the unused column cell. (1 mark) Debit Credit Amount name £ £ Suspense End of Task 18 | P a g e Task 6 (7 marks) This task is about the principles of contract law. This task contains parts (a) to (d). (a) Identify whether the following statements about contracts are true or false. (3 marks) Statement TRUE FALSE Mr B buys a lottery ticket and promises a friend that if he wins, he will buy his friend a diamond ring. If Mr B wins, he is legally obligated to buy his friend a diamond ring. Ms C sees a fake replica hand gun for sale in a shop window display and approaches the shop keeper to buy the hand gun. The shop keeper is legally bound to sell the hand gun to Ms C. Mrs A makes an offer to buy goods on e-bay. Within 5 hours she changes her mind and decides to send another message to revoke her offer, before sending this message she notices the seller has sent a message accepting her offer. Mrs A is legally bound to buy the goods. (b) Identify which one of the following types of court would specifically hear only criminal cases. (1 mark) Supreme court Crown court High court County court 19 | P a g e (c) Identify which TWO of the following are sources of UK law. (2 marks) Common law. A contract. An Act of Parliament. A letter of intent. (d) Identify which one of the following situations would create a void contract. (1 mark) Undue influence or duress inflicted on a party before a contract was signed. The contract terms include law breaking activities. Misrepresentation by a party before the contract was signed. Breach of contract terms by either party to the contract. End of Task 20 | P a g e Task 7 (10 marks) This task is about bookkeeping systems, receipts and payments, and the importance of information and data security. This task contains parts (a) to (d). XZ Traders is a business run by a sole trader called Barry Evans. Barry is a self- employed plumber and employs three full-time staff in his business. Ruth Evans, who is Barry’s wife, undertakes all accounting matters on behalf of the business. The business accounts are currently recorded using a manual system, however a cloud based payroll and VAT system has been installed in the last few years with the help and support of a local accounting practice. The payroll and VAT system does not currently have a password, because Ruth is very bad at remembering passwords. Ruth is considering moving all business accounts to a fully digital and cloud based system. (a) Explain TWO benefits and TWO drawbacks of using a digital bookkeeping system. (4 marks) 21 | P a g e (b) Identify TWO characteristics of useful information that would most likely improve, if Ruth decided to use a fully digital accounting system. (2 marks) Comparable Consistent Understandable Reliable Timely (c) Explain to Ruth TWO reasons why it is important to ensure the security of data kept in the payroll and VAT system. (2 marks) 22 | P a g e (d) Explain to Ruth TWO ways that data and information can be retained more securely in a digital and cloud based system, other than by using passwords. (2 marks) End of Task 23 | P a g e Task 8 (14 marks) This task is about the external business environment. This task contains parts (a) to (e). Based on the forces of supply and demand for pricing and output in the beef industry. (a) Identify for each statement below, what is most likely to happen to price and output in the beef industry. (6 marks) Statement Price Output An increase in the population of the country. The market price of chicken decreases. Farmers face increasing costs to feed and raise their cows. Picklist: Increase, Decrease, Remains the same. Risk and uncertainty are important concepts in the world of business. (b) Identify whether each statement below is true or false. (2 marks) TRUE FALSE Risk is the chance of a future outcome occurring, all potential outcomes are known and the likelihood of each outcome is measurable. Uncertainty cannot be measured, but gives a high degree of control to a business over the situation. (c) Identify TWO advantages of globalisation for a business. (2 marks) Growth in product sales and profitability. Volatile exchange rate movements. Complex international laws and regulations. Lower tax rates. Outbreak of war. 24 | P a g e (d) Identify the key principle of an effective tax system, that is explained by each statement below. (2 marks) Statement The tax burden on society, should fall heavier on those individuals or businesses, who have the ability to pay it. A tax system should be clearly understood and simple to work out how much tax a taxpayer must pay. Picklist: Convenience, Efficiency, Transparency, Equity, Certainty. Household consumption and business investment in an economy is falling, businesses are struggling to sell goods and services, which is causing a fall in national income and higher unemployment, as businesses lay off workers. (e) Identify TWO actions that could be taken by a government to help solve this economic problem. (2 marks) Reduce rates of taxation in the economy. Increase rates of taxation in the economy. Increase interest rates. Decrease interest rates. Reduce government spending in the economy. End of Task 25 | P a g e 26 | P a g e 1 Revision Notes 27 | P a g e The different classifications of law Common law and equity Common law is a body of customary and accepted laws, established from previous court case rulings or decisions made by a judge. Also called case law, because previous legal cases provide the ‘unwritten laws’ that exist in the legal system, that help courts interpret the actual ‘written laws’ that are made by Acts of Parliament. Equity deals with the ‘fairness’ of justice. Courts administer both equity and common law, equity is supreme in all disputes. Civil and criminal law Criminal Law Civil Law The law of crime and criminal punishment The law of civilian rights e.g. divorce, child custody, e.g. murder, assault, theft and fraud. breach of contract and negligence. Offenders may receive a prison sentence, Offenders maybe required to financially given probation or a fine. compensate an injured party. Burden of proof is 'beyond reasonable doubt', more Burden of proof is based on evidence and serious crimes determined by a jury. 'probable cause'. Ruling is determined by a judge. Criminal cases are heard by the Civil cases are heard by the Magistrates and Crown Courts. County and High Courts. Public law and private law Public law is part of the legal system that governs issues which are of direct concern to society as whole e.g. environmental law, international law, taxation law and criminal law. Public law deals with the powers, rights and obligations of government and society. Private law is part of civil law that manages the relationship between private ‘citizens’ and companies. Acts of Parliament (statute law) An Act of Parliament (a statutory law) can introduce new laws or change existing laws. A law is passed initially by the introduction of a Bill, which has to be passed by both the House of Commons, the House of Lords and be given Royal Assent by officials, acting on behalf of the Monarchy. European Union Law and the European Convention of Human Rights The UK is no longer a member of the European Union. EU legislation is now part of UK legislation and under the control of UK Parliament. EU laws operate within member states of the European Union. The UK is a member of the European Convention on Human Rights (ECHR) that protects the human rights of people. 28 | P a g e The key features of a contract A valid (or legal) contract can be written or verbal, it is a legally binding promise by one party to fulfil an obligation to another party, in return for consideration (normally money). A legally binding contract must comprise five basic elements which is offer, acceptance, consideration, capacity and intention to create legal relations. Offer can be defined as the expression of willingness to contract with the intention that it becomes legally binding, when accepted by the other party. An invitation to treat is not an offer in law e.g. the display of goods in a shop or goods sold at an auction. An offer can be terminated: Rejection by the offeree. Operation of the law e.g. anything that is law breaking. Lapse of time e.g. after ‘unreasonable delay’ by the offeror. Failure to agree conditions. Death of a party. Revocation e.g. offer withdrawn before acceptance. Acceptance e.g. a contract is formed and the offer brought to an end. The meaning and consequences of acceptance A contract becomes legally binding in law, when acceptance of an offer has been communicated to the offeror by the offeree. Acceptance can be made orally, in writing or by conduct by a seller, but only effective when it is communicated or received. The meaning of and need for consideration If no consideration is given by either party to a contract, the contract is not legally binding. Consideration can be defined as “valuable consideration in the sense of the law and may consist of some right, interest, profit or benefit or responsibility accruing to either party or undertaken by the other.” Capacity and legality Parties to a contract must have capacity to contract for it to be legally binding. Capacity is a legal term that refers to the minimum mental capacity required by law for a person to enter into a legal agreement. A contract must have intention to create legal relations (legality) for it to be legally binding. Examples of lack of capacity to contract Children (minors) under 18 years of age. Some persons with disabilities or mental health issues. Voluntary intoxication e.g. drugs and alcohol. 29 | P a g e The meaning of discharging a contract A discharged contract means that each party is freed from their obligations and the contract is brought to a legal end, this may be due to the following reasons: Performance. Breach of contract. Mutual agreement. Impossibility of performance. Lapse of time. Void and voidable contracts A void contract is one that violates the law. The contract is illegitimate and unenforceable from the moment it is created even if there was offer and acceptance. A contract is deemed void if it includes law breaking activities, or a party did not have the minimum mental capacity required by law e.g. mentally incapacitated, drunk or a minor. A voidable contract unlike a void contract, is a valid contract but rendered unenforceable by a court for the following reasons: Failure to disclose material facts, misrepresentation or fraud by either party. Undue influence or duress inflicted on the other party. Breach of contract by either party. 30 | P a g e The economic environment A market is any place (physical or virtual) whereby buyers and sellers come into contact for the purpose of exchanging goods or services. Diagram to show supply and demand Price Supply P1 Demand Q1 Quantity sold Demand Demand represents the total quantity that buyers are willing to purchase at the existing market price. The law of demand states that if the market price falls, the quantity demanded (consumed) from buyers will rise, and vice versa. Factors that may cause a change in demand Advertising. Population of a country. Expectations of buyers. Price of substitute goods or services. Price of complimentary goods or services. Income of buyers (households). Tastes and fashion. The effect of an increase in demand (if supply is unchanged) is to initially create a shortage in the market and this puts pressure on the market price to rise. The effect of a decrease in demand (if supply is unchanged) is to initially create a surplus in the market, which puts pressure on the market price to fall. 31 | P a g e Supply Supply represents the total quantity that sellers are willing and able to make or sell at the existing market price. The law of supply states that if the market price rises, the quantity supplied by sellers will rise, and vice versa. Factors that may cause a change in supply Climate (weather). Price of factors of production (resources). Resource availability. Taxation. Subsidies. Goods in joint supply. Expectations of sellers. Technology. The effect of an increase in supply (if demand is unchanged) is to initially create a surplus in the market, which puts pressure on the market price to fall. The effect of a decrease in supply (if demand is unchanged) is to initially create a shortage in the market, which puts pressure on the market price to rise. Uncertainty and risk Risk and uncertainty are important concepts in the world of business. Risk is the chance (or probability) of a future outcome occurring such as winning or losing sales or profits. All potential outcomes are known and the likelihood of each outcome is measurable. Uncertainty implies that the chance (or probability) of a future outcome occurring is unknown, unpredictable or too complex to be measured, although the impact of the event can be understood. Uncertainty cannot be measured and is uncontrollable. The global business environment It is the case today that many businesses operate in a global business environment. Globalisation means that the whole world is increasingly behaving like a single market and countries are strongly interdependent on each other for the provision of goods or services. Advantages of trading internationally Opportunities for growth in sales and profits. Significantly lower tax rates, subsidies, grants or finance can be available. International sourcing of resources can lower costs for a business. Uncertainty and risk of trading internationally Exchange rates. Political, economic and legal risk. Outbreak of war. 32 | P a g e How changes in exchange rates may change business costs A UK retailer buys TV sets overseas from a US manufacturer for $250 per TV set. The current exchange rate between the UK and US is $2.00 = £1. The cost (in pounds) to import the US good $250 ÷ $2.00 = £125.00 per TV set. If the pound now weakens against the dollar falling to $1.50 = £1… The cost (in pounds) to import the US good $250 ÷ $1.50 = £166.67 per TV set. How government raises finances through the tax system A direct tax is administered and paid ‘directly’ by the individual or business expected to pay it e.g. corporation tax and income tax. An indirect tax is a tax indirectly collected from an individual or business that is expected to pay it e.g. value added tax (VAT), it is the business (seller) that collects and pays any VAT to HMRC on behalf of the consumer. The functions of a tax system Taxation raises money to fund government spending. Taxation can discourage consumption. Taxation helps redistribute income and wealth. Taxation can be used to ‘fine tune’ an economy. The key principles of an effective tax system Equity (Fairness) e.g. distributed towards those individuals (or business) who have the means and ‘ability to pay it’. Certainty e.g. tax systems should be clearly understood and simple to use for the tax payer (not arbitrary). Convenience e.g. administration should not be time consuming or complex. Economy (or efficiency) e.g. tax systems should be economical and efficient to run for a government. Transparency (or compliance) e.g. tax payers need to be honest, clear and obvious about their tax affairs when dealing with the tax authorities. 33 | P a g e Government control of an economy Monetary policy is any action by a government to influence the cost of borrowing (credit) in an economy e.g. increasing or decreasing interest rates. Fiscal policy means changing taxation and/or government spending directly in an economy, to influence levels of national expenditure (demand). Increase demand Decrease demand in the economy in the economy Monetary policy Decrease interest rates Increase interest rates Decrease taxation Increase taxation Fiscal policy Increase government spending Decrease government spending Corporate social responsibility (CSR) Corporate social responsibility (CSR) is concerned with a business being aware of the impact of its actions or conduct on its stakeholders and how to act in the best interests of society. A stakeholder is any organisation or individual person that has an interest in the business. The objectives of CSR can be remembered as PEEL, which stands for Philanthropic, Economic, Ethical and Legal. Customers are prepared to pay premium prices for brands that represent strong ethical and social values. A business with a reputation for excellent CSR may attract more shareholders or investors who are willing to invest in the business. Business ethics Business ethics is concerned with the moral principles or values that guide the right kind of behaviour or conduct of a business, business ethics is one objective of corporate social responsibility. Sustainability and the natural environment Sustainability means that a business can operate without compromising the ability of future generations to inherit existing natural resources. Society needs clean air, fresh water and a non-toxic environment to live. The aims of sustainability extend also to the social equality of stakeholders and the economic (financial) viability of the business. Triple bottom line reporting Triple bottom line reporting is a framework that measures sustainability success: Profit (economic) e.g. minimise costs, maximise sales, profit and cash-flows. People (social) e.g. maximise stakeholder welfare. Planet (environmental) e.g. minimise harm to the natural environment. 34 | P a g e The fundamental principles of ethics for AAT members The code of ethics can be remembered using the acronym PIPCO. Professional competence and due care Integrity Professional behaviour Confidentiality Objectivity Types of organisation Liability for Distributing Accounting Ownership Management Net assets Taxation debts profits regulations Sole trader Unlimited Individual pays takes drawings Sole trader Sole trader Sole trader Liability for a Capital income tax on None from the sole trader profits earned business Individuals pay Each partner Unlimited income tax on takes drawings Partnership Partners Partners Liability for a Capital None their share of from the partner profits earned business Dividends paid Company pays to shareholders Companies Act Board of Limited Liability corporation tax Company Shareholders Equity from profits and Accounting Directors for Shareholders on company earned by the Standards profits earned company Individuals pay Each partner Partnership Act, Limited Liability income tax on takes drawings Companies Act LLP Members Members Capital for Members their share of from the and Accounting profits earned business Standards Charity Not for profit, legislation and Board of Limited Liability earns a surplus Charity Public benefit Funds Tax Exempt statements of Trustees for Trustees or incurs a recommended deficit practice Buying an ‘off the shelf’ company An off the shelf company is a limited company which has already been legally set up and pre-registered at Companies House. An off the shelf company has never traded (it is not active) and is ready to be used immediately by the purchaser. The benefits of using ‘off the shelf’ companies A purchaser can save time. Can make it easier and quicker to set up a bank account and obtain a bank loan. It can give the impression the company already has an established history. The limitations of using ‘off the shelf’ companies Uncertainty surrounding the companies past history. Risk of scammers who sell ‘off the shelf’ companies that had an active business. Established history is not normally enough to get a good credit rating. 35 | P a g e Pre-incorporation contracts Unless a company is ‘incorporated’ (registered) it has no legal existence and no capacity to enter into a legal contract. Pre-incorporation contracts are made by ‘promoters’ on behalf of a company, before the company has actually been legally incorporated. A pre-incorporation contract is intended as a temporary agreement for legal arrangements prior to the actual act of incorporation. Business names that cannot be used Business names that are ‘offensive’. Business names that contain ‘sensitive’ words or expressions. Business names that are ‘similar’ to an existing business or trade mark. The different functions of a business A function is a team of people, or department that specialises in an activity, process or operation that is required to be performed routinely by an organisation. Functions are formalised and are more likely to exist in large organisations that have ‘a place for everything and everything in its place’. The finance function The role of the finance function includes the production of statutory financial statements and providing a service (information, support, advice and guidance) to both internal and external stakeholders. How a finance function contributes to the organisation Managing funds effectively. Management accounting. Financial accounting. Auditing. Corporate social responsibility (CSR) reporting. The information technology (IT) function The role of the IT function is to establish, monitor and maintain information technology systems that provide services and information for the organisation and its stakeholders. How an IT function contributes to the organisation Installation and maintenance of computer network systems. Facilitates sharing of information by integrating technology and networks. Maintains the integrity of data security e.g. accuracy and data protection. Improves the efficiency of how data is processed and reported. Improves customer service. Integrating the organisation externally with its suppliers and customers. 36 | P a g e The operations function Operations is any business function that is responsible for managing the process of making, selling and delivering goods, performing customer services or supporting customers. How operations contributes to the organisation Production (manufacturing). Performing services. Customer support. Logistics e.g. handling, movement and storage of goods. Merchandising e.g. managing customer point of sale displays. The marketing and sales functions The marketing function can be defined as “the management process responsible for identifying anticipating and satisfying customer requirements profitably” (Chartered Institute of Marketing). How a marketing function contributes to the organisation Product management. Pricing decisions. Promotion ideas. Placement of products or services. A sales function is responsible for selling products or services to customers. Sales teams normally work close together, to build and maintain better customer relations. The main goal of the sales function is to increase sales. The human resource (HR) function A human resources (HR) function embraces the philosophy that “employees are the organisations most valued asset”, it can influence and motivate employees in a more positive way and improve business productivity and performance. How a HR function contributes to the organisation Recruitment and selection of excellent staff. Preparing new staff. Training and development of employees. Motivating employees. Appraisal of staff. Managing staff discipline, dismissal and redundancy. Ensuring compliance with the law. Managing personnel records, pensions and payroll. Staff communication. 37 | P a g e Outsourcing activities in the finance function Outsourcing is the contracting out of work-related activities and tasks, to be completed externally by another business (a third-party provider). The alternative to outsourcing is to provide the service internally by a business, using its own internal employees. Examples of finance activities that can be outsourced Payroll administration, compliance and reporting. VAT administration, compliance and reporting. Company legal administration. Tax advice, compliance and reporting. Actions can be taken if there is insufficient liquidity for a business Solvency means a business is able to pay its debts as they fall due. Capital (investment) introduced by the shareholders or business owner(s). Obtain more finance (debt) from banks and other financial institutions. Chase trade receivables and collect money faster. Reduce the purchase of raw materials (or goods for resale). Delay supplier payments (trade payables). Delay the purchase of non-current assets. Demonstrating good business relationships Professional behaviour. Courtesy and punctuality. Active listening and communication skills. Helping out other team colleagues. Meeting deadlines and goals. Compliance with laws, policies and procedures. The benefits of good business relationships Good relationships foster collaboration, which helps to share information. Good relationships build positive friendship, which reduces conflict and disputes. Good relationships establish trust and goodwill. Good relationships help to establish more effective communication channels. Good relationships are word-of-mouth marketing and promote the business. Good relationships with customers bring high levels of repeat business. The principles of effective communication The process of communication, is that a sender sends a message using an appropriate ‘medium’ e.g. letter, text, voice, telephone call, Teams or e-mail etc. A receiver reads or listens to the message and confirms their understanding. Communication can be verbal (speaking), non-verbal (body language) and written (e-mail, letter or report). 38 | P a g e Process of effective communication Clear objectives about what will be communicated, to who and by when. Plan for communication e.g. consider the recipient and communication medium. Read through and double check the information or message, before sending it. Sender should ask for feedback and confirmation the message has been read. Policies and procedures Policies are a set of rules, or guidelines that employees must comply with e.g. what they must and must not do. Procedures are the step-by-step instructions, checklists or processes that must be followed to comply with policies e.g. instructions for how something must be done. Information Types of information and documentation received by a finance department: Purchase orders, statements, purchase invoices and credit notes from suppliers. Customer remittance advices. Bank statements. Inventory control. Types of information and documentation produced by a finance department: Budget information. Cash information e.g. cash-flow forecasts and current bank account balance. Taxation information e.g. VAT Returns, PAYE and Corporation Tax. Financial information e.g. reporting assets, liabilities, income and expenses. Sales invoices, credit notes and statements sent to customers. The characteristics of useful information The ACCURATE criteria is a useful framework for assessing the characteristics of useful and effective information. A Accurate e.g. reliable and not false, incorrect, or misleading. C Complete e.g. all that was requested by a user is provided. C Cost beneficial e.g. the benefits exceed the cost to provide information. U User friendly e.g. presented in a way the recipient can understand. R Relevant e.g. the recipient ‘got what they asked for’. A Authoritative e.g. information is valid, it can be trusted and relied upon. T Timely e.g. delivered to the recipient by the deadline agreed. E Easy to use e.g. summarised, charts, colour, no jargon etc. Other characteristics of useful information include comparable and consistent. 39 | P a g e Valid and invalid sources of information The accountant must understand the importance of recognising valid and invalid sources of information. To determine a valid source of information, an accountant needs to exercise scepticism. Credible sources may include your own professional body (AAT), HMRC and articles published by well-established and known accounting firms. Invalid sources of information could be social media blogs, unknown websites or articles which do not provide source links for the information, there is a higher risk that the information could be wrong, untrue or it contains errors and mistakes. The benefits of obtaining information from multiple sources Multiple sources can be more reliable than a single source of information. Multiple sources reduce the effect of bias and may give a more objective view. Multiple sources often give different opinions and views about certain topics. Multiple sources help to compare and gain a fuller and wider understanding. Multiple sources can help validate and confirm facts or logic. Primary and secondary sources of information Primary sources of information “come straight from the horse’s mouth”, the original source of where the information came from e.g. government legal and tax publications, or bank statements sent by a bank. Secondary sources of information are “second-hand information”, written by researchers that interpret or comment on an original event or source e.g. historical newspaper reports, encyclopaedia’s, articles, reviews and academic books. The importance of data and information security Sensitive information must be protected from unauthorised access. Most computer networks today are part of the internet, therefore cyber risk poses an alarming threat to business, including damage to brand and reputation, theft, fraud, extortion and meltdown of critical IT systems. There is also a legal risk of failing to comply with laws and regulations and the potential legal consequences of fines and compensation payments, under General Data Protection Regulations (GDPR). Examples of data security Web security e.g. gateways, firewalls and malware protection. Training programs for staff highlighting the do’s and don’ts of social media usage. Any sensitive data encrypted. Strong passwords e.g. no sharing of passwords and changing passwords. Tighten up physical security around the office. Back up files and use secure cloud based, or remote storage. Prepare a response plan in the scenario of a cyberattack. 40 | P a g e Business communication The meaning of communication is that a sender exchanges information with a recipient (the ‘receiver’) and uses a communication medium to do this e.g. face to face, text, phone, letter or e-mail. Communication can be written, verbal (speaking) or non-verbal (body language). Examples of business communication Business letters and e-mails. Reports. Spreadsheets. Intranet. Social media communication. An accountant must be able to produce written communication using an acceptable business language, that is clear, structured and follows a logical progression. Your AAT exam assessment will require you to write a business letter or email. Business letters and e-mails The senders name, business name and address. The recipient’s name, business name and address. The date of the letter. A reference or title for the letter. Opening salutations e.g. Dear Sir or Madam (if the name of the recipient is unknown), or the title Mr, Mrs, Miss or Ms (if the recipient’s name is known). A brief introduction setting out the main purpose of communication. The main body e.g. write in short paragraphs, with clear and logical progression, avoid the use of informality (also called ‘slang’), avoid words or expressions that a recipient maybe unfamiliar with and would not understand (also called ‘jargon’). Closing salutations e.g. Yours sincerely, Yours faithfully, Regards, Kindest regards etc. Standard approaches to the closure of an e-mail or letter may include ‘Yours sincerely’ (if the recipient’s name is known such as Dear Mr Smith), or ‘Yours faithfully’ (if the recipient’s name is unknown such as ‘Dear Sir’). The sender’s name and job title. It is important that a recipient knows who the sender is and what they do in the business. Business letters or e-mails can be used for legal purposes, they must be accurate, be polite and convey a professional image about you and your business. A business would normally have policies regarding how communication must be made. 41 | P a g e Reports Reports are an official written document used to inform a recipient about a certain matter or topic. A standard approach for report writing normally includes: A title for the report and a date when it was published. An introduction e.g. purpose of the report briefly explained. A main body e.g. findings, results and summary explained. Conclusion and recommendations e.g. a summary to end the report, along with any recommendations about what needs to be done and the main reasons why. Appendices e.g. written materials, or other information that may be relevant for a recipient of the report to review. A report can also number and sub-section different parts of the report to structure it more effectively for example, 1.0 Introduction, then 2.0 Main body (findings) and then sub-sections using a decimal number, 2.1, 2.2, 2.3 etc for the main body. Spreadsheets Spreadsheets can be a useful communication tool for example, they can create pie charts or column charts for recipients to visualise information, also organise and summarise data, to make it easier to read and understand figures at a glance. Intranet The intranet is an internal rather than external website, that restricts access to a limited group of users, such as employees of a business. Intranets can be used by employees to search for information, communicate across the business and manage workflow. Examples of information communicated using an intranet Business news and announcements. Accessing training, or health and safety materials. On-line employee feedback and instant messaging. Access to internal forms e.g. booking holidays, or reclaiming expenses. A calendar to schedule events and internal meetings. Social features that create profiles, submit comments and posts. Social media postings A social media post is any information or data submitted by a third party to a social media outlet that is capable of being displayed e.g. Facebook and Twitter. Inappropriate social media postings include degrading comments, violent threats, illegal activities and sexually explicit content. Cyberbullying or harassment can cause social anxiety and depression to a victim. Social media postings can violate dignity, intimidate, humiliate or be obscene to a recipient, this is unacceptable. 42 | P a g e Planning workload Routine tasks are work activities that are undertaken regularly such as each day, or each week. Non-routine tasks are work activities that are performed irregularly and on an ‘ad hoc’ basis (as and when necessary). Prioritising, monitoring and reviewing workload Effective note-taking and documentation of key information is vital for planning workload for example, taking notes when dealing with customer queries or during meetings with your line manager or a colleague. A ‘to-do list’ (or ‘list of things to do’) is very similar to a shopping list, important bullet points are kept as notes from perhaps a meeting or a conversation. A list helps to keep information all in one place and to plan and prioritise workload, if all tasks are listed in one place it is likely that things will not be forgotten. A ‘to-do list’ like a shopping list, also allows work to be prioritised on the basis of importance or urgency. Other tools such as Microsoft Teams calendar, diaries and wall planners, also makes it easier to schedule important tasks, events and meetings. The importance of communicating There is an importance to communicate with others whilst undertaking work tasks that have been assigned, in particular if you have a query, or a deadline may not be met. 43 | P a g e Revision of Introduction to Bookkeeping Invoice An invoice is a dated document that lists goods delivered or services performed, including the amount due and any value added tax (VAT) if applicable. Credit note A credit note is a negative or ‘reverse’ invoice, it shows that a customer does not have to pay the full amount of an invoice due. Calculating VAT amounts 1/5 x the net amount (excluding VAT) = the VAT amount. 1/6 x the total amount (including VAT) = the VAT amount. The ‘rounding down’ rule for VAT When a business supplies goods or services, the VAT amount may not always work out as a neat figure in pounds and pence. In such cases VAT is normally ‘rounded down’ to the nearest penny, not rounded up. Types of discount Bulk discounts A bulk discount is a discount available on the item price of the product when you buy more than a certain quantity (volume). Trade discount Trade discounts could be offered to customers (buyers) based on their status, amounts they spend, or the frequency of how often they purchase goods from the seller. Trade discounts encourage trade and allow the buyer to make a profit by reselling the goods at a higher price. Trade and bulk discounts are deducted at the time the invoice is prepared to work out the net amount to be shown on an invoice, this is because these discounts are 100% certain. Always deduct trade and bulk discounts from the net amount to be shown on an invoice, then calculate the VAT amount. Prompt payment discounts (PPD) A prompt payment discount (PPD) may also be called an early payment discount or a cash discount. It is a reduction from the total amount of an invoice due (including VAT) in order to incentivise the buyer to pay an invoice earlier. Prompt payment discounts (PPD) are not deducted at the time the invoice is prepared because it is not 100% certain whether the PPD will be taken. A PPD is therefore calculated on the full amount of the invoice due, including VAT. If a PPD is taken then a credit note will be issued by the seller and the customer’s account balance updated for the credit note amount. 44 | P a g e The day books (also called books of ‘original’ or ‘prime entry’) Day books keep a record of a business's past transactions. In a manual bookkeeping system the day books will complete the first entries in the accounting system for transactions such as invoices, credit notes, bank receipts and payments. The details from these documents are recorded every day, hence the term ‘day books’ or books of ‘prime entry’, meaning of first importance. At the end of each accounting period the day books are totalled (amounts added up) and the summary amounts posted to the general ledger accounts using a double entry system. Transactions recorded in the day books are also used to update the receivables ledgers (customer accounts for credit sales) and payables ledgers (supplier accounts for credit purchases). The day books (also called books of ‘original’ or ‘prime entry’) Sales Day Book (SDB records sales invoices issued to credit customers). Sales Returns Day Book (SRDB records credit notes to reverse sales invoices issued to credit customers, due to goods returned or disputes with customers). Discounts Allowed Day Book (DADB records credit notes to reverse sales invoices, due to prompt payment discounts allowed for customers, if settling sales invoices early). Purchase Day Book (PDB records purchase invoices issued from credit suppliers). Purchase Returns Day Book (PRDB records credit notes received from suppliers to reverse purchase invoices issued from credit suppliers, due to goods returned or disputes with suppliers). Discounts Received Day Book (DRDB records credit notes received from suppliers to reverse purchase invoices, due to prompt payment discounts received from suppliers, if settling purchase invoices early). Cash Book (CB records all cash and bank transactions for the business). Petty Cash Book (PCB records very small cash transactions for the business). Journal Book (JN records any postings made to the general ledger for accounting adjustments that are not recorded in any other day book, such as to correct errors and omissions). 45 | P a g e The general ledger The five financial elements are represented by general ledger accounts for recording business transactions, these are assets, liabilities, capital (equity), income (revenue) and expenses (costs). The five financial elements are represented in the financial statements for a business. The financial statements Assets, liabilities and capital (equity) are presented in the statement of financial position for a business, which reports information about the wealth and liquidity position of the business. Income (revenue) and expenses (costs) are presented in the statement of profit or loss, which reports information about sales, costs and profits earned (or losses incurred) by the business. The financial statements provide information which is useful for users such as banks and business owners to make economic decisions. Assets Resources controlled by the business as a result of past events and from which future benefits (money) are expected to flow to the business. Premises, machines, motor vehicles, office equipment or furniture and fittings. Inventory the business currently holds for resale. Trade receivables (money to be ‘received’ and owed from credit customers). Money in the bank. Cash in hand. Liabilities Present obligations of the business arising from past events and in future money will be paid out by the business to settle outstanding balances. VAT amounts owed to HMRC. Wages owed to staff. Bank loans and overdrafts. Trade payables (money to be ‘paid’ and owed to credit suppliers). Capital The residual interest (whatever is left) from the assets of the business after deducting all liabilities of the business. The balance of assets less liabilities (net assets) represents what is owed by the business to the owner of the business. A drawings account also records any money taken from the business by the owner. A drawings account is kept separate to the capital account because it provides more information. 46 | P a g e Income Money earned or received by the business from the sale of goods or services, or from other investments and income sources. Cash sales (sales that were for cash, not on credit). Credit sales (sales that were on credit). Rent received from rental of business premises. Bank interest received. Discounts received (prompt payment discounts) from suppliers. Expenses Costs incurred or paid for by the business in the normal course of trade, such as the cost of goods purchased for resale and other expenses consumed. Cash purchases (purchases that were for cash, not on credit). Credit purchases (purchases that were on credit). Rent payments for business premises. Premises insurance, light and heat. Staff wages. Motor vehicle running costs. Advertising and marketing. Depreciation (an expense for the wear and tear, or fall in value of long-term assets used by the business, such as for machines, computers and motor vehicles). Bank interest and bank charges. Discounts allowed (prompt payment discounts) to credit customers. Accountancy and legal services. Income and expenses are used to work out the amount of profit the business has generated. Any profits earned are owed to the owner of the business and will increase the capital account balance of the owner. 47 | P a g e  The double entry system and dual effect The general ledger is a double-entry accounting system, whereby ledger accounts are kept to record all the financial elements needed to produce a statement of profit or loss (reporting general ledger account balances for ‘income’ and ‘expenses’) and a statement of financial position (reporting general ledger account balances for ‘assets’, ‘liabilities’ and ‘capital’). Accounting transactions recorded in a general ledger system require a corresponding and opposite entry every time a transaction is entered into the system. Debit (left hand side) entries made should always be equal to credit (right hand side) entries made, and so amounts posted as debits and credits must always agree. DEAD CLIC Don’t get clouded in the double entry logic, ledgers are just balances kept for the five financial elements and you are either increasing or decreasing these balances according to the rules of double entry. Important double entry terminology DEAD CLIC defines what is the ‘normal balance’ or the natural state for a T account. DEAD CLIC is an acronym that defines elements of the financial statements and indicates whether each element would be overall a debit or credit balance. It can be used for determining the correct debit or credit balance that would exist in a ledger account, but the element must be determined first. It can also be used to determine the correct double entry to increase or decrease a ledger account balance. DEAD CLIC Debit Credit Expenses Liabilities Assets Income Drawings Capital Increase balance Decrease balance The elements Natural state (as per the (opposite to natural state) natural state) Income Credit Credit Debit Expenses Debit Debit Credit Assets Debit Debit Credit Liabilities Credit Credit Debit Capital Credit Credit Debit 48 | P a g e Coding ledger accounts Ledgers normally contain a set of numbered (coded) accounts that will be used to make entries and track financial transactions. Each ledger account would have its own unique ledger code for example, general ledger expenses could use code ‘0980’ to represent advertising expenses and code ‘0981’ to represent motor vehicle expenses. Examples of cost codes Numerical (numbers only) Alphabetical (letters only) Alpha-numerical (mixture of letters and numbers) Different types of code: General ledger codes Customer account codes Supplier account codes Product codes The trial balance A ‘trial balance’ (a ‘trial of balances’) as the name suggests is an accounting statement where all debit and credit balances from the general ledger (a double-entry system) are shown together to test their equality. The receivables and payables ledgers are independent from the general ledger and are not included in a trial balance. The total money owed from credit customers or money owed to credit suppliers of the business are represented by the receivables and payables ledger control accounts which are general ledger accounts shown in the trial balance. Exam tasks will not require you to prepare a trial balance for a business but its purpose must be understood. In a double entry system whenever a debit entry is made, a corresponding credit entry of equal amount is also made in a general ledger (double entry) system. When all general ledger accounts are totalled and balanced the trial balance will test the accuracy of the double entry process. The accounting equation The accounting equation states that the sum of the business’s total assets less its total liabilities (net assets) would be equal to the capital (equity) owned by the owner of the business. Capital is the residual interest (whatever is left) from the assets of the business after deducting all of its liabilities, it is a credit balance according to the rules of double entry and represents what is owed by the business to its owner. Because of the double entry principle, the accounting equation should always hold true. Total Assets (debits) - Total Liabilities (credits) = Capital (a ‘credit’ balance remaining). The three rearrangements of the accounting equation are shown below. A-L =C L+C=A A-C =L 49 | P a g e The receivables ledger When a significant amount of detailed information is needed for credit sales transactions made to customers of a business, then a subsidiary ledger is commonly used. Subsidiary ledgers are kept when there is a large amount of transaction information that needs to be recorded, a subsidiary ledger avoids large volumes of transactions that would otherwise be recorded in the general ledger. The ‘receivables ledger' is also called the ‘sales ledger’ and also called ‘trade receivables’, it represents ledgers kept for each customer account, including the total balance owed by each customer to be ‘received’ by the business. It is a breakdown of the total amount of receivables that would be included in the general ledger. The receivables ledger is not part of the double entry general ledger system, it is maintained separately and independently. The receivables ledger records the detailed transaction history for all credit customers of the business, which would include sales invoices, credit notes and money received from each credit customer. The general ledger account that represents the total amount owed by credit customers of a business is the receivables ledger control account (RLCA), it contains only a summarised total amount posted for all credit customers of a business and does not give a detailed transactions history for each credit customer. The day books (books of prime entry) will post all the detailed transactions recorded such as invoices and credit notes, to the receivables ledger account of each credit customer. At the end of each month the totals (summary) from the day books will be posted to the receivables ledger control account in the general ledger and each customer account in the receivables ledger will be totalled and balanced. Sales documents sent to a customer Sales invoices and credit notes are the most obvious examples of sales documents a business would send to their customers. Sales order forms are documents that confirm a sales transaction between the buyer (customer) and seller (the business). It is an internal document generated by the business which would list sales quantities for goods ordered, the date of order and a description of the goods, it may also confirm the amount of the sale normally excluding any VAT. Sales quotations often precede sales order forms to allow a prospective customer to officially see the details and costs of an order. A delivery note is a document that details all the goods included in a delivery. It is often signed by the person (buyer) receiving delivery of the goods as official confirmation that supply has taken place. Statements of account are documents that detail all transactions that took place between the business (seller) and a customer (buyer) for a given period of time. It is good practice to send regular statements of account to all credit customers to let them know how much they owe the business and to confirm invoices, credit notes or payments that took place during the period. Statements of account look very similar to a bank statement. 50 | P a g e Sales documents sent from a customer Purchase orders forms can also be generated internally by the customer (buyer) and sent to the business (seller) and this document is the same as a sales order described above. It confirms a sales transaction between the buyer (customer) and seller (the business). Remittance advices are documents that detail payments that have been made by the customer (buyer), the document details the invoices and/or credit notes accounted for in the payment, the date payment was made and the method of payment used e.g. cheque, BACS, or faster payments. A remittance means a sum of money that has been sent. A goods returns note is a document that accompanies goods returned back to a supplier which are damaged or unwanted. A customer may internally generate this form which is then sent with the goods as an official confirmation of the quantity and description of the goods that were sent back. Discrepancies Discrepancies are illogical differences that exist between two or more facts for example, a discrepancy found between a sales order form and a sales invoice which has been prepared from the sales order form. Exam requirements may ask you to check details between different documents prepared, such as the sales quantity, sales price and amounts recorded, and to identify whether they agree or disagree. Discrepancies indicate that details do not match and so errors are likely to have arisen which means corrections will need to be made. Examples of discrepancies that maybe found Under or over payments by customers. Missing transactions (omissions) and duplicated transactions. Incorrect type of goods. Incorrect product codes. Incorrect quantity of goods. Incorrect calculations of net, VAT and total amounts. Incorrect VAT rate. Incorrect discounts (trade, bulk and prompt payment). Incorrect dates and terms of payment. Non-delivery of goods. 51 | P a g e The payables ledger When a significant amount of detailed information is needed for credit purchases made from suppliers to a business, then a subsidiary ledger is commonly used. Subsidiary ledgers are kept when there is a large amount of transaction information that needs to be recorded, a subsidiary ledger avoids large volumes of transactions that would otherwise be recorded in the general ledger. The ‘payables ledger' is also called the ‘purchases ledger’ and also called ‘trade payables’, it represents ledgers kept for each supplier account, including the total balance owed to each supplier to be ‘payable’ by the business. It is a breakdown of the total amount of payables that would be included in the general ledger. The payables ledger is not part of the double entry general ledger system, it is maintained separately and independently. The payables ledger records the detailed transaction history for all credit suppliers to a business, which would include purchase invoices, credit notes and money paid to each credit supplier. The general ledger account that represents the total amount owed to credit suppliers by a business is the payables ledger control account (PLCA), it contains only a summarised total amount posted for all credit suppliers to a business and does not give a detailed transactions history for each credit supplier. The day books (books of prime entry) will post all the detailed transactions they have recorded such as invoices and credit notes, to the payables ledger account of each credit supplier. At the end of each month the totals (summary) from the day books will be posted to the payables ledger control account in the general ledger and each supplier account in the payables ledger will be totalled and balanced. Purchases documents sent from a supplier Purchase invoices and credit notes are the most obvious examples of purchases documents a supplier would send to their customers. Sales order forms are documents that confirm a sales transaction between the buyer (customer) and seller (the supplier). It can be an internal document generated by the supplier which would list sales quantities for goods ordered, the date of order and a description of the goods, it may also confirm the amount of the sale normally excluding any VAT. Sales quotations often precede sales order forms to allow a prospective customer to officially see the details and costs of an order. A delivery note is a document that details all the goods included in a delivery. It is often signed by the person (buyer) receiving delivery of the goods as official confirmation that supply has taken place. Statements of account are documents that detail all transactions that took place between a supplier (seller) and a customer (buyer) for a given period of time. It is good practice for a supplier to send regular statements of account to all its credit customers to let them know how much they owe and to confirm invoices, credit notes or payments that took place during the period. 52 | P a g e Purchases documents sent to a supplier Purchase orders forms can also be generated internally by the customer (buyer) and sent to the supplier (seller) and this document is the same as a sales order described above. It confirms a sales transaction between the buyer (customer) and seller (the business). Remittance advices are documents that detail payments that have been made by the customer (buyer) to the supplier, the document details the invoices and/or credit notes accounted for in the payment, the date payment was made and the method of payment used e.g. cheque, BACS, or faster payments. A remittance means a sum of money that has been sent. A goods returns note is a document that accompanies goods returned back to a supplier which are damaged or unwanted. A customer may internally generate this form which is then sent with the goods as an official confirmation of the quantity and description of the goods that were sent back. Discrepancies Discrepancies are illogical differences that exist between two or more facts for example, a discrepancy found between a purchase order form and a purchase invoice, or a goods returned note and a credit note. Exam requirements may ask you to check details between different documents prepared, such as the purchase quantity, purchase price and amounts recorded, and to identify whether they agree or disagree. Discrepancies indicate that details do not match and so errors are likely to have arisen which means corrections will need to be made. Examples of discrepancies that maybe found Under or over payments to suppliers. Missing transactions (omissions) and duplicated transactions. Incorrect type of goods or product code. Incorrect quantity of goods. Incorrect calculations of net, VAT and total amounts. Incorrect VAT rate. Incorrect discounts (trade, bulk and prompt payment). Incorrect dates and terms of payment. Non-delivery of goods. 53 | P a g e Revision of Principles of Bookkeeping Controls Types of errors not disclosed by the trial balance Errors and omissions occur in the general ledger that do not cause an imbalance between the total of all debit and credit balances in a trial balance. This makes these types of error more difficult to detect. These types of error can be remembered using the acronym ‘TOPCROC’. Exam tasks can require you to identify different types of error from examples given or to prepare journal entries to correct errors. T Transposition A digit (number) for an amount posted is reversed incorrectly for both a debit and credit entry made. O Original entry Documents such as invoices or credit notes are prepared incorrectly or the wrong amounts are posted incorrectly to the day books. P Principle An amount incorrectly posted to the wrong general ledger account and the wrong financial element. C Commission An amount incorrectly posted to the wrong general ledger account but the right financial element. R Reversal of entries Debit and credit entries are incorrectly posted the wrong way round. O Omission No entry has been made in the general ledger (a transaction is not recorded). C Compensating Very rare but can happen, two independent errors create an imbalance between debit and credit amounts, but each error compensates and cancels out the other (so no imbalance would exist in the trial balance). 54 | P a g e Types of errors disclosed by the trial balance Errors and omissions occur in the general ledger that do cause an imbalance between the total of all debit and credit balances in a trial balance. This makes these types of error easier to detect because the trial balance will not balance. These types of error can be remembered using the acronym ‘TESCOS’. Exam tasks can require you to identify different types of error from examples given or to prepare journal entries to correct errors using a suspense account. T Transposition A digit (number) for an amount posted is reversed incorrectly for a debit amount posted but the credit amount is correctly posted, or vice versa. E Extraction A general ledger balance in error is balanced incorrectly. The incorrect balance is ‘extracted’ and shown incorrectly in a trial balance. S Single entry A debit entry is posted without any corresponding credit entry, or vice versa. C Casting A column in a day book is added up (‘casted’) incorrectly and the incorrect amount posted from a day book to the general ledger. O Omission A general ledger balance in error is missed out altogether from a trial balance. S Same sided Two debit entries are posted in error without any corresponding credit entry, or vice versa. Suspense accounts A suspense account balance is opened each time an imbalance exists between the total of all debits and credits in a trial balance. A balance is opened in a suspense account to ensure equality between the total of all debits and credits in a trial balance, it is a temporary account and will be closed whenever the errors can be found and corrected. A suspense account can also temporarily store financial transactions until they can be verified and the correct general ledger accounts for the posting is determined. Example Trial Balance (totals before the suspense account opened) 154,896 155,279 Suspense account opened (debit balance) 383 Trial balance totals agree but errors need to be found 155,279 155,279 In the example above the total debit amounts and total credit amounts in a trial balance do not agree and a suspense account is temporarily opened to hold the amount of any imbalance. An amount of £383 is missing on the debit side (£155,279 - £154,896) which becomes a suspense account balance to ensure the trial balance debit and credit totals do agree. 55 | P a g e The purpose of a bank reconciliation A bank reconciliation is the process of agreeing a closing cash book balance recorded by the business to the closing balance shown on the bank statements. A bank reconciliation is an important internal control to help a business identify any errors or omissions from its cash receipts or payments recorded. It also helps to discover any cash fraud in a more timely manner. Bank reconciliations are typically performed daily, weekly or monthly by a business to ensure the cash book maintains an accurate and up-to-date bank balance. Reasons for performing a bank reconciliation Detecting errors Identifying fraudulent transactions and theft Keeping track of trade receivables and trade payables The process for a bank reconciliation 1. Compare and match receipts recorded in the cash book (receipts are ‘debits’ in the cash book) to receipts recorded on the bank statements (receipts are ‘credits’ on a bank statement) AND Compare and match payments recorded in the cash book (payments are ‘credits’ in the cash book) to payments recorded on the bank statements (payments are ‘debits’ on a bank statement). The end result of step 1 is to discover unmatched receipts and payments from comparing both sets of records. 2. Revise the cash book by making entries in the cash book for items that appear on the bank statements but are not recorded in the cash book. Examples of such items include bank interest received, bank charges and interest paid, automated payments or receipts (such as BACS and faster payments) that have been omitted (missed) from the cash book. An exam task may provide a cash book and expect you to enter missing items not in the cash book, as well as total and balance the cash book. An exam task alternatively could ask for the debit or credit entries to revise a cash book. The end result of step 2 is to have an accurate and up-to-date closing balance for the cash book. 3. Complete a bank reconciliation statement that will agree the closing balance in the revised cash book to the closing balance shown on the bank statements. A bank reconciliation statement adjusts the closing balance shown on the bank statement for ‘timing differences’ to agree this closing balance to the cash book. Earlier timing differences are items recorded in the cash book in the previous month and are now clearing ‘early’ on the bank statements in the following month. Earlier timing differences are not reconciling items for the current month and these items should be ignored when completing step 2 above. 56 | P a g e Payment methods and the impact on the bank account Date of At a later No effect on payment date bank balance Cash Cheque Debit card Credit card Bank draft Standing order Direct debit Direct credit BACS CHAPS Faster payments 57 | P a g e The receivables ledger control account (RLCA) The general ledger account that represents the total amount owed by credit customers is the receivables ledger control account (RLCA), the entries in this account are the summarised total amounts entered from the day books. An example of a receivables ledger control account (RLCA) is shown below. Using the principle of DEAD CLIC, the balance brought down (b/d) is on the debit side because the receivables ledger control account is an asset (customers owe money to the business). All entries within this ac