Aat Level 3 - Advanced Book Keeping

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The Dual Effect Principal

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The principal of the dual effect is that each and every transaction that a business makes has two effects

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The Separate Entity Concept

Back 2

The Separate Entity concept is that a business is a completely separate entity from the owner

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Asset

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An asset is an item of value controlled by a business. Assets may be tangible or intangible

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Liability

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A liability is an obligation to something of value (such as an asset) as a result of past transactions or events

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Equity

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This is the 'residual interest' in a business and represents what is left when the business is wound up, all the assets sold and all the outstanding liabilities paid

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Accounting Equation

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Assets - Liabilities = Capital + Profit - Drawings

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Income

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This is the recognition of economic benefit to the entity in the reporting period

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Expense

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This is the recognition of outflow of economic benefit from an entity in the reporting period

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Sales Day Book

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The Sales Day Book is simply a list of the sales invoices that are due to be processed for a given period

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Sales Returns Day Book

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The Sales Returns Day Book is simply a list of the credit notes that are to be processed for a given period

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Purchases Day Book

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The Purchases Day Book is simply a list of the purchases invoices that are to be processed in a given period

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Purchases Returns Day Book

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The Purchases Returns Day Book is simply a list of credit notes that have been received from suppliers for a given period

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Cash Book

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A cash book is a record of cash receipts and payments that can form part of the double entry bookkeeping system as well as being a book of prime entry

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Discounts Allowed Day Book

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The discounts allowed day book is used to record the discounts that have not been deducted at the point of the invoice being recorded within the sales day book but instead were offered on a conditional basis

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Discounts Received Day Book

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The discounts received day book is used to record the discounts that have not been deducted at the point of the invoice being recorded in the purchases day book but instead were offered on a conditional basis

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Petty Cash Book

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A petty cash book is one in which all petty or small payments made through the petty cash system are recorded systematically

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General Ledger

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A general ledger contains all the ledger accounts for recording transactions occurring within an entity

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Subsidiary Ledger

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A subsidiary ledger provides details behind the entries made in the general ledger

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Subsidiary Sales Ledger

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Sales Ledger - It is a set of accounts for individual receivable

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Subsidiary Purchases Ledger

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Purchases Ledger - It is a set of accounts for individual payables

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Trial Balance

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A trial balance is the list of the main balances on all of the ledger accounts in an organisations general ledger

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Taxable Person

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Taxable Persons are businesses which are registered for VAT

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Output VAT

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The VAT charged on Sales or taxable supplies

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Input Tax

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VAT paid by a business on purchases or expenses

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Gross Pay

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Gross Pay is the wage or salary due to the employee for the amount of work done in the period

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Net Pay

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Net Pay is the amount the employee will actually receive after appropriate deductions have been made

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PAYE

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The PAYE scheme is a national scheme whereby employers withhold tax and other deductions from their employees' wages and salaries when they are paid

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National Insurance

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National Insurance is a state scheme run by HMRC which pays certain benefits including: retirement pensions, widow's allowances and jobseeker's allowance. The scheme is funded by people who are currently in employment and have earnings above a certain level

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Non-Current Asset

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The non - current assets of a business are the assets that were purchased with the intention of long term - use within the business

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Capital Expediture

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Capital Expenditure is expenditure on the purchase or improvement of non-current assets

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Revenue Expenditure

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Revenue Expenditure is all other expenditure incurred by the business other than capital expenditure

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Cost (Asset)

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Cost should include the cost of the asset and the cost of getting the asset to its current location and into working condition.

Therefore Purchase Price + Additional Costs (Delivery, Legal, Professional and Installation Costs as well as test runs)

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Transfer Journal

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The transfer journal is the primary record which is used for transactions that do not appear in the other primary records of the business

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Production Cost

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Production cost is the direct cost of production (materials, labour and expenses) plus an appropriate amount of normal production overheads relating to production of this asset

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Tangible Non Current Asset

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Assets which have a tangible, physical form

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Intangible Non Current Asset

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Assets for long term use in the business that have no physical form e.g. patents, licences and goodwill

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Goodwill

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The asset arising from the fact that a going concern business is worth more in total than the total value of its tangible net assets. Goodwill can arise from many different factors including good reputation, good location, quality products and quality after sales service.

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Depreciation

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Depreciation is the measure of the cost of the economic benefits of the tangible NCAs that have been consumed during the period.

Consumption includes the wearing out, using up or other reduction in the useful life of a tangible NCA whether arising from use or effluxion of time or obsolescence through changes in technology

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Carrying Amount

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The cost of the Non Current Asset less the accumulated depreciation to date

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Useful Economic Life

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Is the estimated life of the asset for the current owner. This can be defined in time (years) or output (activity)

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Residual Value

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Is the amount that is estimated the asset will be sold for when it is no longer of use to the business

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Depreciable Amount

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The cost of an asset less any residual value. This is the amount that will be depreciated in full by the end of the estimated useful life

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Straight Line Method

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The straight line method calculates a consistent amount of depreciation over the life of the asset

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Diminishing Balance Method

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The diminishing balance method of depreciation allows a higher amount of depreciation to be charged in the early years of an asset's life compared to the later years. This reflects the increased levels of usage of such assets in their earlier periods of their lives

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Units of Production Method

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This is based on the actual usage of the asset. Higher depreciation is charged when there is higher activity and less is charged when there is a lower level of operation.

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Provision for Accumulated Depreciation

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AKA Accumulated Depreciation

Is used to reduce the value of the Non-Current Asset in the statement of Financial Position

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Disposal Account

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The account which is used to make all of the entries relating to the sale of the asset and also determines the profit or loss on disposal

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Extended Trial Balance

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Is a working paper which allows the initial trial balance to be converted into all of the figures required for the preparation of the final accounts

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Statement of Profit or Loss

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Summarises the transactions of a business over an accounting period and determines whether the business has made a profit or loss for that accounting period of time

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Statement of Financial Position

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The statement of financial position is a summary of all of the assets and liabilities of the business on the last day of the accounting period

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Current Assets

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Those that are expected to be realised within the business in the normal course of trading (usually a period less than one year)

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Current Liabilities

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The short term payables of the business. This means payables that are due to be paid within twelve months of the statement of financial position date

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Non Current Liabilities

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Payables that will be paid over a longer period, which is in excess of one year of the statement of financial position date

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Ethics

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The moral principles that govern a person's behaviour or the conducting of an activity

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Integrity

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A member must be straight forward and honest in all professional and business relationships. Integrity also implies fair dealing and truthfulness

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Objectivity

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A member must not allow bias, conflict of interest or undue influence of others to over ride professional or business judgements

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Professional Competence

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A member has the knowledge and ability to discharge their responsibilities in accordance with current developments in practice, legislation and technique

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Due Care

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A member must act diligently and in accordance with applicable technical and professional standards when providing professional services i.e. must not be negligent

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Confidentiality

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A member must, in accordance with the law, respect the confidentiality of information acquired as a result of professional and business relationships and not disclose any such information to third parties without proper and specific authority unless there is a legal or professional right or duty to disclose

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Professional Behaviour

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A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession

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Transparency

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Openness, clarity, lack of withholding of relevant information unless necessary

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Fairness

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Means a sense of even-handedness and equality. Acting fairly is an ability to reach an equitable judgement in a given ethical situation

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Cost of Inventory

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Cost is defined in IAS 2 as 'that expenditure which has been incurred in the normal course of business in bringing the product or service to its present location and condition.

This expenditure should include, cost of purchase and cost of conversion

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Net Realisable Value

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IAS 2 - The actual or estimated selling price (net of trade before settlement discounts) less all further costs to completion and all costs to be incurred in marketing, selling and distribution

NRV can be summarised as the actual or estimated selling price less any future costs that will be incurred before the product can be sold

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Aged Receivable Analysis

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An aged receivable analysis shows when the elements of the total debt owed by the customer were incurred

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Irrecoverable Debt

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Is a debt that is not going to be received from the credit customer

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Allowance for doubtful debt

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Is an amount that is netted off against the receivables balance in the statement of financial position to show that there is some doubt about the recoverability of those amounts

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Specific Allowance

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A specific allowance is an allowance against identified specific debts

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General Allowance

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An allowance against receivables as a whole normally expressed as a percentage of the receivable balance

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Sales Ledger

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A collection of records for each individual receivable of the organisation

AKA receivables ledger

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Purchases Ledger

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A collection of records for each individual payable of the organisation

AKA payables ledger

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The Accruals Concept

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The accruals basis of accounting requires that transactions should be reflected in the financial statements for the period in which they occur. This means that the amount of income should be recognised as it is earned and expenses when they are incurred. This is not necessarily when cash is received or paid

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Accrual of Expense

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An accrual is an expense that has been incurred during the accounting period but has not been paid by the period end i.e. a liability

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Prepayment of Expense

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A prepayment made during the accounting period (and therefore debited to the expense account) for an expense that relates to the following accounting period

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Accrual of Income

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Is income that has been earned but has not yet been received

AKA accrued income

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Prepayment of Income

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Is payment received in advance of it being earned

AKA prepaid income, deferred income

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Single Entry Error

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If only one side of a double entry has been made then this means that the trial balance will not balance

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Casting Error

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If a ledger account has not been balanced correctly due to a casting error this means that the TB will not balance

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Transposition Error

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If an amount in a ledger account or balance on a ledger has been transposed then the TB will not balance

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Extraction Error

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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 then it will not balance

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Omission Error

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If a ledger account is inadvertently omitted from the TB then it will not balance

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Two Entries on One Side

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If a transaction is entered as 2 debits in 2 accounts or as 2 credits then the TB will not balance

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Error of Original Entry

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This is where the wrong figure has been entered into both accounts, the TB will balance however it is wrong

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Compensating Error

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This is where two seperate errors are made, one on each side which cancel each other out, therefore the TB balances but it is wrong

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Error of Commission

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When either the credit or debit entry has been entered into the wrong account i.e. rent rather than electricity, the TB will balance however it is incorrect

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Error of Principle

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When either the credit or debit entry has been entered into the wrong account i.e. entry to P+L rather than Statement of FP, the TB will balance however it is incorrect

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Error of Omission

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This is where an entire double entry has been missed from the ledger accounts, the TB will balance but it is not correct