Accounting

AS 1
Theory
 Contents
Definitions……………………….......…………………………………………………………………………………. Pg 1
Reasons……………………………………………………………………………………………………………………. Pg 2
Stakeholders………………………….…………………………………………………………………………………. Pg 2
Accounting Process……………………………………………………………………………………………………. Pg 3
Trial Balance……………….………….…………………………………………………………………………………. Pg 4
Control Accounts…………………….…………………………………………………………………………………. Pg 5
Bank Reconciliation Statements………………………………………………………………………………………. Pg 6
Dealing with Bad Debt…………….…………………………………………………………………………………. Pg 7
 Definitions
Accrued Expenses
A liability for services that have already been ‘used but have not yet been paid’ (1) by the
business at the end of the accounting period (1) will increase expenses in the income
statement (1) and increase current liabilities in the balance sheet (1)

Current Asset
Resources (assets) that are intended to be turned into cash (1) within the next twelve
months (1).

Depreciation
The apportionment of the cost (1) of a non-current asset over its useful economic life (1).
The amount by which falls in value (1). The drop in value of a non-current asset (1) over a
certain period of time (1). Fall in value of a non-current asset (1) due to wear and
tear/obsolescence etc (1).

Direct Debit
Where authority is granted by the business (1) to a third party for fixed (1) or variable
payments (1) to be made at the request of that third party (1).

Non-Current Asset
Resources (assets) held for more than one financial year (1) with a view to generating
profits for the business (1). Resources not purchased primarily for resale (1).

Outstanding Lodgement
Funds (that have been debited) in the cash book (1) that have not yet been processed by
the bank (1) and therefore not shown on the bank statement (1).

Prepaid Expenses
An expense that has been paid in advance (1) which relates to the next accounting period
(1). Reduces expenses in the income statement (1) and increases current assets in the
balance sheet (1).

Standing Order
Where a fixed (1) payment (1) is made at regular intervals (1) by the bank, on the
instructions of the business (1).

Unpresented Cheque
A cheque drawn (and credited) in the cash book (1) that has not yet been processed by the
bank (1) and therefore not shown on the bank statement (1).

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 Reasons to Keep Accurate Accounting Records
To record what has happened in the past (1) to enable the owner to produce an income
statement (1) and balance sheet (1).

Based on what has happened in the past, it will enable the owner to forecast for the future
(1) and produce forecast income statements and balance sheets (1) together with cash
budgets (1).

It will enable the owner to monitor what has actually happened in the business (1)
compared to what was forecast to happen (1) and take corrective action if necessary (1).

To enable HM Revenue and Customs (1) to collect the correct amount of income tax (1) and
value added tax (1).

To enable fraud to be detected (1) by checking against external records (1) for example a
bank statement, etc. (1)

To assess performance/to see how successful the business is (1) by reviewing profitability
and liquidity (1).

To provide evidence to support application for finance (1) and that the business will be able
to repay loan of £10 000 and interest (1).

To monitor amounts owed by the business (1) and amounts owed to the business (1)

Stakeholders in a Business
Bank (1): to ensure that they are repaid amounts due (1).

Suppliers (1): to check that they will be paid amounts due (1).

Customers (1): to check that they will be supplied with orders made (1).

Government (1): to confirm the amount of taxes due (1).

Local Community (1): to provide jobs in the local area (1).

Trade Unions (1): to ensure that Mark is offering his employees good terms and conditions
(1).

Competitors (1): to compare the performance of their business against Mark’s (1).

Potential Investors (1): to check whether the business is worth investing in (1).

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 The Accounting Process

Stage 1 Sales invoices Purchases invoices Purchases credit note Sales credit note
Source Documents

Stage 2 Sales day book Purchases day book Purchases returns day Sales return day book
Subsidiary books book

Stage 3 Dr customer account Dr Purchases account – Dr Supplier account – Dr Sales returns account –
Ledger Account – Double (trade receivable) – Sales General ledger Purchases ledger General ledger
Entry ledger
Cr Supplier account – Cr Purchases returns Cr Customers account –
Cr Sales account – General Purchases ledger account – General ledger Sales ledger
ledger

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 The Trial Balance
The trial balance only proves the arithmetical accuracy of the records (1) it does not prove
that amounts have been posted to the correct accounts (1).

Errors Revealed by the Trial Balance

Error of Omission (1) – where both sides of the transaction have been omitted from the
records (1).

Compensating Error (1) – where debit and credit errors cancel each other out (1).

Error of Commission (1) – where an amount is posted to an incorrect account of the correct
type (1).

Error of Principle (1) – where an amount is posted to an incorrect class of account (1).

Error of Original Entry (1) – where an error is made transferring an amount from the source
document into the book of original entry (1).

Error of Reversal (1) – where the account that should have been debited is credited and vice
versa (1).

Errors Not Revealed by the Trial Balance

Transposition Error (1) – where the figures of an amount are transposed (1).

Addition Error (1) – in the trial balance itself or in a general ledger account (1).

Posting Error (1) – where one side of a transaction is posted to the wrong side of an
account (1).

Partial Omission Error (1) – where one side of the transaction is not posted (1).

Unequal Posting Error (1) – where the debit side of the transaction does not equal the credit
side (1).

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 Control Accounts

Benefits of Using Control Accounts

Verifies the balances in the ledger (1). The balance on the control account should agree with
the totals of the individual accounts in the sales ledger (1). If these do not agree it indicates
an error in either the sales ledger (1) or the control account (1) or both (1).

Provides up-to-date/instant management information (1) of total receivables (debtors) (1)

Acts as a check on staff (1) so makes it more difficult for fraud to be committed (1) because
there is a division of responsibility/independent check (1)

Assists in the preparation of final accounts (1) saving time (1) by identifying total
receivables (debtors) (1) to be recorded as a current asset on the balance sheet (1).

Limitations of Control Accounts

The purchases ledger control account verifies the arithmetical accuracy (1) of the ledger, but
does not prove that each individual account balance is correct (1).

Errors Not Revealed by Control Accounts

Error of Omission (1): where a transaction has been completely omitted from the records
(1).

Compensating Error (1): where equal and opposite errors cancel each other out (1).

Error of Comission (1): where an amount is posted to an incorrect account of the correct
type (1).

Error of Original Entry (1): where an error is made transferring an amount from the source
document into the book of original entry (1).

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Bank Reconciliation Statements

Key Definitions

Outstanding Lodgement
Funds (that have been debited) in the cash book (1) that have not yet been processed by
the bank (1) and therefore not shown on the bank statement (1).

Unpresented Cheque
A cheque drawn (and credited) in the cash book (1) that has not yet been processed by the
bank (1) and therefore not shown on the bank statement (1).

Reasons for Reconciling his Cash Book and Bank Statements

Enables missing entries in the cash book to be accounted for (1) preventing errors in the
financial statements (1). For example, the direct debit payment to Shop Maintenance
Ltd, bank interest, bank charges and the dishonoured cheque from P Hunter (1)

Enables errors in the cash book to be identified (1) and corrected (1), preventing errors in
the financial statements (1). For example the cheque received from Umar Alam (1)

Enables errors on the bank statement to be identified/investigated (1) and notified to the
bank for correction (1)

Enables out-of-date cheques to be identified (1) and cancelled in the cash book (1) acts as a
deterrent to fraud (1) due to the bank statement being an independent accounting record
prepared by the bank (1).

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Dealing with Bad Debt

In the Ledger Accounts

The full amount should be treated as a bad debt (1) and be debited to bad debts account
(1) and transferred to the profit and loss account (1) and credited to the debtors control
account (1).

The profit will reduce (1) by [mention figure for mark] (1) and debtors will be reduced by
[mention figure for mark] (1), thus reducing the net assets of the business (1).

In the Financial Statements

The bad debt written off will appear as an expense (1) in the income statement (1).

The effect on the Page 7 of 10

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