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AS-Level Accounting Unit 1 Revision Notes

Mrs Carpenter- Unit 1 Accounting Revision Notes:

Purpose of Preparing Accounts:

Accounting records all financial transactions that occur during a period of

time, for example the financial year. This is necessary so that the owner can
control their business and control how it is performing and use the accounts
to make good business decisions. It also means that the owner can:

 Provide records of information that is required by HM Revenue and

Customers for tax purposes and VAT returns
 Provide records required by suppliers of additional finance, e.g. banks

Accounting Records: Subsidiary Books and Ledger Accounts:

 Invoices-
o Sales Invoices-records sales made by the business
o Purchase Invoices- record the purchases made by the
business
 Bank Statement-Records all transactions made to or from the
businesses bank account
 Cash Book Counterfoil-Records any payments the business had
made via check

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  Paying-in Slip Counterfoil-records any payments of cash that the
business has paid into their bank account
 Till Receipts-Records any sales that the business has made
 Bank Statement-Evidence of standing orders (when a fixed payment
is made each month by the business bank account under their
authority), direct debits (when either a fixed or variable amount is
paid by the business through their bank account) and bank charges.
 Credit Notes-either received by the business to keep a track of what
they owe or sent out to credit customers to remind them of their
balance.

Subsidiary Books-

o General Journal-This is used when there isn’t another appropriate

book of prime entry. This has six main uses: when fixed assets are
purchased on a credit basis, when fixed assets are sold on credit, when
a business first comes into existence, when a business finally closes,
for the correction of errors and for recording inter-ledger transfers.
The source documents used would be the purchase invoices for capital
expenditure and sales invoices for sales of capital items.

Four Day Books:

o Purchase Day Book-is a list of all credit purchases made. The source
documents are the purchase invoices received
o Sales Day Book-A list of all credit sales made. The source documents
are the copy sales invoice that has been sent out to credit customers
o Purchase Returns Day Book-A list of all the credit notes received from
suppliers. The credit notes are the source documents.
o The Sales Returns Day Book-This is a list of all of the goods returned to
the business and a copy of their credit notes.

Verification of Accounting Records:

Creating Trial Balances:

Debit Credit
o Cash o Capital
o Bank o Sales
o Rent o Returns out
o Wages o Trade Payables
o Purchases o Loans
o Fixed Assets o Discount Received
o Returns in o Payments to suppliers

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 o Trade Receivables
o Opening Stock
o Discount Allowed
o Payments by customers

Preparation of Bank Reconciliation Statements:

1. Put closing balance in the new cash book

2. Put all things that appear in the bank statement but not yet in the cash
book in the new cash book (on the opposite side to what it appeared in
the Bank Statement)
3. Check for any errors and messed up numbers e.g. 163 instead of 136,
and if there are any adjust the cash book
4. Balance up the new cash book
5. Use the new cash book balance to start the bank reconciliation
statement
6. Add cheques that have gone out of cash book but not yet the bank
statement (un-presented cheques)
7. Deduct cheques that have come into the cash book but not yet the bank
(Lodgements)
8. Total up the Bank reconciliation statement. The balance should be the
same as the original bank balance

Example of the layout of the bank reconciliation statement:

Cash book balance 100

+ Un-presented cheque

K Hill (50)

-Un-presented Lodgements

M Burns 40

Balance 90-this should equal the old bank

‘ balance

Control Accounts:

Control accounts are a check for errors.

They are a summary of all of the individual accounts in the sale/purchase

ledger.

Sales Ledger Control Accounts:

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Opening balance always starts on debit side along with any further credit
sale. Anything offsetting these amounts is on the credit side.

Example of a sales ledger control account:

Opening balance of money owed Cash Payments from Customer

Credit Sales Discounts Allowed
Returns In
Bad Debts
Contra to Purchase Ledger
Balance b/f
Balance c/d

Purchase Ledger Control Accounts:

Opening balance always starts on the credit side along with any further credit
purchases. Anything offsetting this amount goes on the debit side

Example:

Cash Payments to suppliers Opening balance of money owed to

Discounts received suppliers
Returns out Credit purchases
Contra to sales ledger
Balance b/f
Balance c/d

Making Entries to Eliminate Errors:

Suspense Accounts:

Suspense accounts can be used to eliminate errors. The side on the trial
balance with the least should be topped up with a suspense entry.

This amount should then be entered in the suspense account on the same
side that it appeared in the trial balance to allow you to see how much it is out
by.

From here the suspense account will be used to correct errors in all the other
accounts by debiting or crediting the incorrect amounts and doing the
opposite in the suspense account. Eventually, the suspense account will
balance and will no longer be needed as the trial balance will balance.

You should also make journal entries to record the corrections made,
showing the changes made in each account.

Example-

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Question-

1. Rent of £200 has been entered in the rates account

2. The wages account has been under cast by £400
3. Payment made to Tom £146 entered in cash book but not in
Tom’s account
4. Payment for insurance £273 debited in cash book and credited to
insurance account.
a) Prepare journal entries to show the necessary corrections
b) Prepare a suspend account to correct the errors
c) State which side of the trial balance was larger before the discovery of
the errors

Journal Entries:

1. Credit rates £200 to remove entry

Debit suspense £200
Debit Rent £200
Credit Suspense £200
2. Debit wages £400 to top it up
Credit suspense £400
3. Debit Tom £146 to pay him
Credit suspense £146
4. No effect on trial balance but
Credit cash book (double the amount of remove error) £546
Debit insurance in the same way-£546

Suspense Account

Rates 200 Rent 200

Wages 400
Balance 546 Tom 146
Original error on trial balance. Debit side had 546 LESS or credit side had 546
MORE.

Effect of Errors on Profit Calculations:

Income Statement

Sales  if this reduces, Gross profit reduces

(Less returns in)  if this increases, Profit reduces

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Less costs of goods sold  this gets taken away from sales.
Anything added in this section reduces
profit. Anything Taken Away in this
section increases profit.

Opening Inventory

+purchases

+carriage in

- Returns out

- closing stock

Gross Profit

Less Expenses  if these increase Net profit decreases.

Net profit

Things that don’t affect profit:

- Purchase of asset-Fixed Asset

- The cash Book
- Capital
- Creditor + Debtors

Limitations of Trial Balances and Control Accounts:

Trial Balances-

 The six invisible errors

 Only gives condensed information about each account
 It doesn’t give information about whether a profit or loss has been
made, or about the financial situation of the business at the end of the
financial period.
 it does allow checking for errors in total and can allow the cash book
and other ledgers to be checked.

Control Accounts-

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  Lack of details as it is only a summary account but it does allow
checking for errors in total and can allow the cash book and other
ledgers to be checked.
 The six invisible errors cannot be identified
 If there are errors in any of the documents or accounts used to make
this account, the information in the account will also be wrong.

Errors Not Visible on the Trial Balance:

COPROC

Compensating Errors-these cancel each other out if there is the same wrong
amount on each side of two different accounts, it will not be visible. Example-
if rent was overstated by £100, but it was also recorded in the Cash book as
£100 too much.

Omission- when a transaction is completely missed from the ledgers. £100 of

sales was completely missed from the ledgers.

Principle-Same as commission but completely the wrong class of account.

This will affect profit. A vehicle costing £23,500 is posted to the motor
expenses account. Both profit and fixed assets will be understated by
£23,500.

Reversal of Entries-when the correct amount figures and accounts are used
but both entries are on the wrong side of each account meaning that they
balance. £70 of goods were purchased from P Smith and P Smith was debited
with £70 and the purchase account was credited with £70.

Original Entry-When the wrong amount is entered to start with. For example,
£167 instead of £176.

Commission-when the correct amount is entered on the correct side of a

wrong, but similar account. This type of error will not affect profit. If £600
Rent was paid, and the Rates account was debited with £600.

Trading and profit and loss accounts and balance sheets including simple
adjustments:

The Business Equation:

Capital (Total money invested) + -Liabilities = Assets

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 Credit Sales:

1. Enter Details in Sales Day Book

2. Debit individual Customer’s Account
3. Credit Sales account

Later when they pay:

4. Debit Cash Book

5. Credit Customer’s account to offset what they owe.

Credit Purchases:

1. Enter details in purchase day book

2. Credit Suppliers Account
3. Debit purchases account
Later when you pay
4. Credit Cash Book
5. Debit Suppliers Account

Example of an Income Statement Layout:

Income Statement for X for the year ending XXXX

Sales £ £

Less Returns In

Less Costs of Goods Sold

Opening Inventory

+ Purchases

- Returns Out

- Closing Inventory
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Gross Profit
 XXXXXXX

(XX)

XXXXX

XX

XXX

(X)

(XX)

(XX)

XXX

(X)

(X)

XX

Balance Sheet Example

Balance Sheet for X as at 31st March XXXX

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 £ £ £

Fixed Assets:

Van XXXXX (XX) XXX

Current assets:

Trade Receivables XX

Prepayment X

Bank XX

XXXXX
Current Liabilities: X
Trade Payables XX
Accruals (XXX)

XX

XXXXX

Long Term Liabilities

(XXX)
Bank Loan
XX
Balancing Figure-

Represented By:
XXX
Capital
XX
+Profit
(XXX)
- Drawings
XX
Balancing Figure-

Income Statement Adjustments:

- Returns In-Deducted from Sales at the very top

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 - Returns Out-Show Returns Out Deducted From Purchases Under Costs
of Goods Sold
- Carriage In-Add to purchases in costs of goods sold section
- Carriage Out-Include as an expense
- Discount Received-Add to Gross Profit
- Discount Allowed-Include as an expense
- If the owner takes stock for their own use-deduct from purchases
under costs of goods sold
- Provision for Bad Debts-Add decrease for this year to Gross Profit or
include increase for this year as an Expense
- Accrual-add to Relevant expense
- Prepayment-Deduct from relevant expense
- Depreciation-include this year’s amount as an expense
- For bad debt written off, include as an expense

Balance Sheet Adjustments:

- Accrual-Include as a current liability

- Prepayment-include as a current asset
- Depreciation-take all years depreciation including this years away from
cost value of the relevant fixed asset, showing it across the 3 columns
- Provision for bad debts-show the whole new provision deducted from
trade receivables in current assets.

Depreciation:

The loss of value of fixed assets due to:

- Usage/wear and tear

- Passage of time
- Depletion (Not-Complete)
- Obsolescence (Out of Date)

There are two main methods of depreciation:

1. Straight line method-when you take off the same amount every year
from your asset. Usually a % of the original cost
2. When you deduct as % of the latest value each year. This method is
more realistic as it properly reflects the way assets lose value.

Provision for Depreciation Account:

Used to record the amount written off each year and shows the total
depreciation to date.

Credit provision for depreciation with New Year’s amounts

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Debit income statement as an expense.

Selling a Fixed Asset:

If a profit is made on the sale:

Debit disposals account to make it balance

Credit income statement- add to Gross Profit

Is a Loss is made on the Sales:

Credit disposals to make it balance

Debit income statement- add as an expense

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