General things - particularly RTFQ!

Observations

As a tutor, I see many problems caused by students not reading the full question (or, as I like to call it RTFQ!)

Reading the assessment performance feedback documents published by AAT, it is clearly evident that it’s not just my students who fail to ‘RTFQ’. Missing out key information or, worse still, seeing what you think is there and not what is actually there, can cause you to under-perform on tasks so, where you normally meet or exceed expectations, you move into the borderline or below requirements grade criteria.

If I could provide one cure-all antidote shot, it would be ‘inject’ every one of my students with the RTFQ serum so they never, ever fail to RTFQ again. Sadly, I can’t ‘magic’ this so I have to hope my students remember to take a couple of extra seconds to RTFQ every time.

I know what you’re thinking, it’s easy for me to say all of this, and in the heat of battle when you’re in the middle of your assessment, nervous and a little upset that things aren’t going quite as planned RTFQ really is the last thing on your mind but please, take a breath, look up/around/away from the screen for a couple of seconds then refocus on that pesky task. You’ll be surprised what this can do for you. Also, if you’re really struggling with a task (e.g. Statement of financial position – SFP - isn’t balancing), flag the task, move on and come back to it – often this will ‘fix’ the problem as you’ve got a fresh pair of eyes again. Also remember that, in the event of your SFP not balancing, you will get credit for things you have got right – just because you’ve not balanced is not the end of the world - use any workings boxes provided..

Another issue I find a regular problem is that students sometimes forget that units are linked. What do I mean? Level 2 financial accounting units (PBKT & CJBS) link with Level 3 units (ACPR and FSTP) which, in turn link to Level 4 units (FSTM, CSHM and CRDC). I often find students starting Level 4 Financial Statements have forgotten how to deal with an accrual or prepayment. This type of problem is particularly evident at the beginning of the year when we’re starting the new level. Students have had a summer break and it seems the sun, sea and Sangria have melted away their ability to carry our end of year adjustments. Similarly, BSCT, CSTR, BDGT & FPFM are linked. Once you’ve passed your assessment, that is not then end of it – you need to move up to the next level – You don’t stand on the bottom of a staircase and magically find yourself at the top, do you? (Not unless you’ve got a Stannah Stairlift of course). Think of each unit as a step up to the next level/course/qualification.

I also see many posts from distance learners asking for the best order to study units. Whilst I would always recommend asking your training provider in the first instance, here’s my thoughts:

	Financial Accounting	Management Accounting	‘Other stuff’
Level 2	1.       PBKT 2.       CJBS	3.       BCST	4.       CPAG 5.       WKAF
Level 3	1.       ACPR 2.       FSTP	3.       CSTR	4.       SDST 5.       ITAX 6.       PETH
Level 4	3.       FSTM	1.       BDGT 2.       FPFM	Options 4.       1 5.       2 Then: 6.       ISYS

Looking at level 2 – my reasoning for having CPAG at no 4 is to give you time to learn what is going on with the debits and credits in PBKT & CJBS and gain a good understanding of what the computerised accounting system is actually doing for you. Basic Costing is at no 3 purely to give a little ‘light relief’ after the first two units. WKAF is left to last as it may draw on some knowledge gained from the other units.

Level 3

Getting the financial accounting units out of the way early is good - your knowledge from Level 2 is a little fresher in your mind. It’s amazing how many students I see forgetting what one should enter into the Sales/Purchase Ledger Control Accounts and, more importantly, on which side of the T-account you would find such entries.

SDST is left to no 4 as you’re often asked to work out profit – well if you’ve not learned how to calculate profit manually in ACPR and FSTP, how can you possibly expect to know how to tell a spreadsheet to do it?

ITAX can, actually, be done at any time – maybe even as no 1. You learn how to construct the VAT control account here – some of which may be useful in FSTP.

PETH is left to last because it’s horrible and needs focus.

Level 4

Getting the management accounting units done first is good because they follow on from CSTR at level 3. BDGT is quite a straight-forward unit but FPFM is a lot heavier but follows on well from BDGT.

FTSM is a good one to do next, that way your financial accounting knowledge may still be fresh (ish).

Your options should be done next – I always CRDC and CSHM for those in industry and PTAX and BTAX for those in practice. EXTA could be useful for anyone.

ISYS should always be your very last unit as it draws upon knowledge you’ve gained from every single unit at all three levels. Traditionally, students find this unit quite difficult because it’s all words – accountants like numbers and balances.

Think of it this way, 45 words a day will give you your 5,000 words report within 4 months – surely even the most challenged student can find 45 words to write every day? Also think of this, how sad would it be if you didn’t achieve your goal because you procrastinated? I’ve seen too many go that way – please don’t be one of them.

These are just a couple of things I wanted to say - feel free to ignore them if you don't agree but, whatever you do, don't give up half way through a unit. Persevere - it will be worth it!

Disposal of non-current assets

Disposal of non-current assets

Well Howdy!

It's been a while since I 'blogged' but, like Freddie Kruger, I'm back!

I though in this article, I would briefly look at Disposal of non-current assets and the T-accounting needed to calculate profit.

Have a look at the Slideshow below then we'll work through an example:



So, Let's say we have a car we paid £25,000 for and over the past couple of years, we've accumulated £12,000 of depreciation against it. Today we're going to sell it for £9,000. Have we made a profit?

Step
1	Open a Disposals T-account
2	Dispose of asset	Debit Disposals £25,000	Credit Asset £25000
3	Transfer accumulated depreciation to Disposals account	Debit Disposals £12,000	Credit Accumulated depreciation £12,000
4	Record sale proceeds (if any)	Debit Bank £9,000	Credit Disposals £9,000

The Disposals T-account will look like this:

We can follow a similar process for Part-exchange.

Let's use similar figures to the last example but, instead of selling the car, we use it a part payment for a new vehicle. 

We were given a part exchange allowance of £11,000 against the purchase of a new car which cost £30,000.

Step
1	Open a Disposals T-account
2	Dispose of asset	Debit Disposals £25,000	Credit Asset £25,000
3	Transfer accumulated depreciation to Disposals account	Debit Disposals £12,000	Credit Accumulated depreciation £12,000
4	Record Part exchange	Debit Asset with part exchange allowance £11,000	Credit Disposals with part exchange allowance £11,000
		Debit Asset with amount paid £19,000	Credit Bank/Loan with amount paid £19,000

The T-account for Disposals look like this:

Remember, when balancing off the T-account, if the debits outweigh the credits, you have a loss on disposal, whilst credits exceeding debits mean you have a profit on disposal.

I some tasks, you may have to calculate the accumulated depreciation - remember to RTFQ (Read The Full Question). as it's so common for students to miss key information.

I hope this little article helps.

Until next time

Correcting errors

Errors and how to correct them

Despite our attempts to maintain double entry and make sure that we do not make errors, sometimes mistakes cannot be avoided. Therefore, we need strategies to correct mistakes.

We can separate errors into two types:

• ·         Errors revealed by an imbalance in the trial balance
• ·         Errors not revealed by the trial balance

We shall deal with each type in turn:

Errors revealed by an imbalance in the trial balance
Type of error	Description		Correction	Example
One-sided entry	Only one side of the double entry has been made in the ledger accounts e.g. the debit and not the credit		Make the missing entry and post the other side to the suspense account	Error £10 cash purchase only credited to cash Correction Dr Purchases £10 Cr Suspense £10
Entry duplicated on one side, nothing on the other	Instead of posting a transaction as a debit in one account and a credit in another, both accounts are posted with debit entries, or both with credit entries. One account is correct but the other is out of balance by twice the amount of the posting		Post the account that was posted on the wrong side with twice the amount, and post the other side to suspense	Error £10 cash purchase credited to both cash and purchases Correction Dr Purchases £10 Cr Suspense £20
Unequal entries normally caused by a transposition error	The correct amount is entered on one side, but there is an error in the writing in the other side of the entry. Often this is caused by a transposition error in the incorrect entry, where the digits in a number are transposed. If this is the only error in the accounts then the difference between the debits and credits will be divisible by 9		In the account with the wrong posting, post an amount to bring the entry to the right amount, and post the other side to the suspense	Error £10 cash purchase debited to purchases as £100 (correct credit to cash) Correction Dr Suspense £90 Cr Purchases £90
Account balance incorrectly transferred to the trial balance	This may be because of a calculation error when calculating the balance on a ledger account, or it may be that a balance which has been calculated correctly in the ledger is entered incorrectly to the trial balance		In the account with the wrong balance, post an amount to bring the balance to the right amount, and post the other side to suspense	Error £1,000 debit balance on purchases account written into trial balance as a£100 debit balance Correction Dr Purchases £900 Cr Suspense £900
Balance omission	A balance on a general ledger account is omitted from the trial balance completely		Enter the missing balance on the correct side and enter the suspense account with the same amount on the other side	Error £1,000 debit balance on purchases account omitted Correction Dr Purchases on Trial Balance £1,000 Cr Suspense on Trial Balance £1,000
Errors not revealed by the trial balance
Type of error		Description	Correction	Example
Error of principle		The double entry is arithmetically correct but the wrong type of account has been used (e.g. non-current asset debited with expenses)	Remove the incorrect entry and post it to the correct account	Error Motor expenses of £100 have been debited to the motor vehicles cost account Correction Dr Motor expenses £100 Cr Motor vehicles cost £100
Error of original entry		Both the debit and credit entries have been made using the wrong amount because: ·         The transaction was recorded in the book of prime entry at the incorrect amount, or ·         The wrong figure was picked up from the primary record (e.g. a transposition was made), this figure was used to write up the book of prime entry and so to make both the debit and the credit entry	In both accounts, post an amount to bring the entry to the right amount	Error Motor expenses of £100 have been recorded as £10 in the purchases day book Correction Dr Motor expenses £90 Cr PLCA £90
Error of omission		A transaction has been completely omitted from the ledger accounts	Make the appropriate posting	Error Cash purchases of £10 have not been corrected Correction Dr Purchases £10 Cr Cash £10
Reversal of entries		The correct figure has been used and a debit and a credit entry made but the debit and the credit are on the wrong side of the respective accounts	Remove the incorrect entries and make the correct ones by posting the accounts correctly but with double the amount	Error Cash purchases of £10 have been debited to cash and credited to purchases Correction Dr Purchases £20 Cr Cash £20
Error of commission		The double entry is arithmetically correct but the wrong account of the same type has been used (e.g. a phone expense is debited to the electricity account rather than the telephone account	Remove the incorrect entry and post it to the correct account	Error Motor expenses of £100 have been debited to the office expenses account Correction Dr Motor expenses £100 Cr Office expenses £100

What does this mean for the trial balance?

Before we can proceed to find the error(s), we should now create a Suspense account to hold the error until such time as we are able to clear it.

	Trial Balance					Suspense Account
Total Debits	190,467	Total Credits	191,996		Trial Balance	1,529
Suspense account	1,529
	191,996		191,996

If we draw up a trial balance and it does not balance we have to have a procedure to find errors:

1)      Check your totalling of both columns (debit and credit) – it is very easy to enter the wrong number on your calculator

2)      Calculate the difference between the two columns. This may reveal the error straight away. Divide the difference by 9, if it works out to a whole number, your error could be in a transposition of figures.

3)      Check that each account balance has been brought into the trial balance correctly.

4)      Ensure all balances from the main/nominal/general ledger have been brought into the trial balance and that the cash and bank balances are on the correct side of the trial balance.

5)      Check your balancing of each T-account.

6)      Look in each t-account for an amount that is the same as the difference you are looking for.

7)      Look in the ledger accounts for a figure that is exactly half of the difference in the trial balance. If you find one, check that the double entry has been carried out correctly for this transaction.

8)      If all else fails, check that all of your double entry has been carried out correctly.

Clearing the Suspense Account

Using the example from earlier, we will now proceed to clear the suspense account.

After finding that the trial balance did not balance and having created a suspense account to hold the difference, we have now found the following errors:

a)      Payments for motor expenses of £350 were correctly recorded in the cash payments book, but credited to the motor expenses account.

b)      Payment for postage of £67 was correctly recorded in the cash payments book but entered into the postage account as £76.

c)       An invoice (including VAT) for £470 was omitted from the sales day book.

d)      When the discounts allowed account was balanced the balance was undercast by £100.

e)      Cleaning costs of £240 were included in the cash payments book, but were not posted to the cleaning costs account.

f)       The balance from the miscellaneous expenses account of £498 was omitted from the trial balance.

Solution

We have our Suspense account in place, so now we can deal with each error in turn:

a)      Double entry that has taken place

Cr            Bank                                                      £350

Cr            Motor Expenses                                               £350

To correct this we have to reverse the error, and then make the correct entry:

Dr           Motor Expenses                               £700 (2 x £350)

Cr            Suspense                                             £700

b)      Error is £9 (£9 too much in the postages account) so we have to reduce the postages account by £9:

Dr           Suspense                                             £9

Cr            Postage                                                               £9

c)       This error has no impact on the trial balance but we must still record the sale:

Dr           SLCA                                                      £470

Cr            Sales                                                      £400

Cr            VAT                                                        £70

d)      Undercast means that we have calculated a balance that is too small.

Dr           Discounts Allowed                           £100

Cr            Suspense                                             £100

e)      The cleaning costs have not been recorde3d in the cleaning expenses account, so we must now record them.

Dr           Cleaning Costs                                  £240

Cr            Suspense                                             £240

f)       The £498 balance from the Miscellaneous Expenses account was omitted from the trial balance so we must now include it a sit should have been originally:

Dr           Miscellaneous Expenses                                £498

Cr            Suspense                                             £498

Our Suspense T-account should now be completed to ensure that it has been cleared (i.e. there is no remaining balance left on the account):

Sometimes we may be unsure where to post an amount so we can create the Suspense Account to hold the amount until we establish where we should be posting it.

E.g.        a purchase of a special part for a machine valued at £700, paid by cheque.

                Dr           Suspense                                             £700

(Because we do not know whether to debit the machine account [Asset] or maintenance account [expense])

Cr            Bank                                                      £700

               

Later, we find that we should have posted the debit entry to the machinery maintenance account so:

Dr           Machinery Maintenance              £700

Cr            Suspense                                             £700