AP1 student notes

Study Notes aat

QCF Level 3

ACCOUNTS PREPARATION I
(API)

STUDENT NOTES

© Kaplan Financial Limited, 2011

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ii KAPLAN PUBLISHING

CONTENTS
SESSION TITLE PAGE

1 Introduction to API 1

2 Key definitions 3

3 Double entry and the trial balance 5

4 Accounts preparation 37

5 SSAP 5 VAT 43

6 Fixed assets 49

7 Depreciation 53

8 Disposal of fixed assets 61

9 Irrecoverable and doubtful debts 75

10 Accruals and prepayments 81

11 Control accounts and reconciliations 91

12 Suspense accounts and errors 101

13 SSAP 9 Stock 107

14 The extended trial balance 111

15 Solutions to session 3 121

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SESSION 1: INTRODUCTION TO API
This session covers the background for API
The new Accounts Preparation units are designed to develop the student’s
double entry bookkeeping skills.

The student will need to deal with fixed asset accounting, including acquisition,
depreciation, disposal and completing relevant accounting entries. They also
need to be familiar with recording transactions in a fixed asset register and
understand the purpose of such records.

The student will need to complete an extended trial balance. There will be a
range of accounting adjustments such as writing off an irrecoverable debt, an
allowance for doubtful debt adjustment, accruals, prepayments and
reconciliations that the student should be able to deal with.

For each section of the exam there will be a range of short answer questions
testing the student’s knowledge of principles of accounts preparation.

Assessment

Section 1 is about accounting for fixed assets.
There will be two independent tasks.
These will require managing a range of transactions such as addition, disposal
and depreciation, relating to fixed asset accounting.

Section 2 is about accounting adjustments.
There will be five independent tasks.
Journal entries will be required to record the adjustments in the extended trial
balance and then extending these balances correctly to the profit and loss or
balance sheet columns.

The assessment for the units will be two hours computer based and the
computer will mark the assessment for the student.

Learners will be expected to demonstrate competence in both sections of the
assessment.

Successful completion of this Accounts Preparation I will result in the award of
two QCF units:

Accounting for fixed assets (skills)
Extending the trial balance using accounting adjustments (skills).

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AAT STUDY NOTES (STUDENT) : API

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SESSION 2: KEY DEFINITIONS
Assets
Fixed – Asset for long term use in the business

Current – Assets that are currently cash or will soon be converted into cash in
the trading activities of the business

Liabilities

Current – Creditors that are due to be paid within 12 months

Long-term – Creditors which are due to be paid over the longer term

Capital – Monies or goods invested by the owner/owners of the business

Drawings – Monies or goods taken out of the business by the owner/owners of
the business

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Example 1
Place the following under the correct heading –

1 A customer owes the business £10,000
2 The business owes a supplier £2,000
3 The business owns a van worth £1,000
4 The business has a bank overdraft of £1,500
5 The owner of the business introduces £30,000 into the business
6 The business owes £50,000 on a mortgage
7 The business owns computer equipment worth £3,000
8 Year end stock is valued at £5,000
9 The business has cash in hand of £100
10 The owner of the business takes goods worth £500

FIXED ASSET CURRENT ASSET

CURRENT LIABILITY LONG TERM LIABILITY

CAPITAL DRAWINGS

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SESSION 3: DOUBLE ENTRY AND
THE TRIAL BALANCE
In order to complete API you must have sound knowledge of double entry before
you can move onto the more difficult aspects of API.

Main Principles
Dual Effect – Every transaction that a business makes has two effects

E.g. Purchase a motor vehicle for cash

Every transaction must be of corresponding equal amounts. For every
transaction you must have at least one DEBIT entry and one CREDIT entry

DEBITS will increase CREDITS will increase
Expenses Liabilities
• Purchases • Loans
• Rent and rates • Mortgages
• Light and heat • Creditors
• Wages and salaries
• Motor expenses
• Stationery
Assets Income
• Motor vehicles • Sales
• Equipment • Rents received
• Computers • Interest received
• Furniture
• Land and buildings
• Debtors
• Stock
• Cash/bank
Drawings Capital

To help you remember these use the mnemonic:

DEAD CLIC

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Ledger accounting
Dr Cr
Date Detail £ Date Detail £

Example 1

John Dunn started trading as a sole trader on the 1 March 2003.
The following transactions took place in the first month of trade.
You are required to prepare the double entry for all the transactions.
NB – Only set up one debtors control account and one creditors control account;
subsidiary ledgers come in later when dealing with reconciliations
1 John introduced £2,000 into the business bank account
2 Made purchases of £175 worth of goods for resale from H Mills on credit
3 Purchased £150 worth of fixtures and fittings, paying by cheque
4 Made cash sales of £275
5 Made purchases of £114 worth of goods from D Frazer on credit
6 Paid rent of £15 by cash
7 Paid stationery expenses of £27 by cash
8 Returned goods to H Mills to the value of £23
9 Made credit sales of £77
10 Purchased a motor vehicle for £300 and paid by cheque
11 Paid cash wages of £117
12 Withdrew £44 worth of cash

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SESSION 3: DOUBLE ENTRY AND THE TRIAL BALANCE

JOURNAL
1 Dr
Cr

2 Dr
Cr

3 Dr
Cr

4 Dr
Cr

5 Dr
Cr

6 Dr
Cr

7 Dr
Cr

8 Dr
Cr

9 Dr
Cr

10 Dr
Cr

11 Dr
Cr

12 Dr
Cr

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Using the journal entries that you prepared above, write up the Ledger
accounts to show the first months transactions.

Bank

Capital

Purchases

Creditors (PLCA)

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Fixtures and fittings

Sales

Cash

Rent

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Stationery

Purchase returns

Debtors (SLCA)

Motor vehicles

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Wages

Drawings

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Example 2
Sasha Glew started trading as a sole trader on 1 December 2003

The following transactions took place in the first month of trade

You are required to prepare the double entry for the following transactions,
enter them into the relevant ledger accounts and close them off.

(a) Sasha introduced £1,500 cash
(b) Made credit purchases of £296
(c) Paid rent of £28 in cash
(d) Transferred £100 worth of cash to a business bank account
(e) Made credit sales of £54
(f) Purchased stationery £15 and paid by cheque
(g) Made cash sales £49
(h) Returned goods to a supplier £18 (these goods where originally purchased
on credit)
(i) Made credit sale £29
(j) Paid for £18 worth of repairs in cash
(k) Sasha had £14 worth goods returned to her (these goods had originally
been sold on credit)
(l) Paid a supplier £278 by cheque (these goods had originally been
purchased on credit)
(m) Made cash purchases £125
(n) Purchased a motor vehicle £395 paying by cheque
(o) Paid £15 worth of motor expenses in cash
(p) Purchased fixtures and fittings on credit £120

Cash



Capital

Purchases

Creditors (PLCA)

Rent



Bank

Sales

Debtors (SLCA)

Stationery



Purchase returns

Repairs

Sales returns

Motor vehicles



Motor expenses




Trial balance
Once the ledger accounts have been prepared and closed off you are then in a
position to prepare the TRIAL BALANCE.

Definition
A list of balances taken from the nominal/general ledger. The trial balance is
used to establish that the dual effect/double entry has been successful.

Generally
• List of balances from the ledgers’ brought forward balances
• The starting point for preparing profit and loss account and balance sheet of
an organisation
• Does not guarantee that double entry is correct (covered later)

Example of a trial balance

Detail Dr Cr

Bank 11,700
Capital 12,500
Purchases 3,250
Creditors 1,500
Sales 1,800
Debtors 800
Purchase returns 250
Drawings 100
Sales returns 200

Total 16,050 16,050
–––––– ––––––

Notice that the debit and credit columns should equal one another. This proves
that for every debit entry a credit entry of the corresponding amount has gone
through, although it does not prove that the transaction has gone to the correct
account!



Example 3

Complete the trial balance for Sasha Glew from Example 2.

Trial balance as at 31 December 2003

DEBIT CREDIT
£ £
Cash
Capital
Purchases
Creditors
Rent
Bank
Sales
Sales ledger control account
Stationery
Purchase returns
Repairs
Sales returns
Motor vehicles
Motor expenses
Total



Activity 1
James started a business on 1 January 20X1 selling furniture. In the first year of
trading he entered into the following transactions.

(a) Paid £40,000 into a business bank account.
(b) Made purchases from Bill for £2,000 cash.
(c) Purchased goods costing £6,000 from Samantha, and agreed to pay within
one month.
(d) Paid £400 for insurance in cash.
(e) Bought storage units for £1400 on credit from Jo.
(f) Paid £300 cash for advertising.
(g) Sold furniture to Pete for £3,000 cash.
(h) Paid the telephone bill of £240 in cash.
(i) Paid Samantha £2,000 on account.
(j) Sold further furniture to Chris for £8,000 on credit.
(k) Bought stationery for £160 cash.
(l) Paid Jo in full.
(m) Received £2,000 from Chris.
(n) Withdrew £1000 cash to pay for a holiday for himself.

(Treat bank and cash as the same)

You are required to prepare the double entry for the following transactions,
enter them into the relevant ledger accounts and close them off.



Cash

Capital

Purchases



Creditors

Insurance

Advertising

Telephone



Stationery

Storage units

Sales

Debtors



Drawings

Prepare the Trial Balance for James

Trial Balance as at 31 December 20X1

Detail Dr Cr
£ £



Activity 2
Show by means of T accounts how the following transactions during
January 20X1 would be recorded in the books of Clive for January.

(a) Started business by putting £10,000 in a business bank account.
(b) Made purchases for £200 cash.
(c) Made further purchases from Margaret for £400 on credit.
(d) Paid rent of £1000 cash.
(e) Bought stationery for £60 cash.
(f) Bought a second-hand van from Peter for £4,000 and promised to pay him
soon.
(g) Made a sale to Greg for £1000 cash.
(h) Paid Margaret £100 cash.
(i) Made a sale on credit to Dean for £140.
(j) Bought more stationery for £40 cash.
(k) Paid cash of £150 for motor expenses.
(l) Paid Peter £1000.
(m) Took £300 from the business to pay for his own living expenses.
(n) Received £100 from Dean.

(Treat bank and cash as the same)



Bank

Capital

Purchases



Creditors

Rent

Stationery

Van



Sales

Debtors

Motor expenses

Drawings



Prepare the Trial Balance for Clive

Trial Balance as at 31st January 20X1

Detail Dr Cr
£ £



Trial Balance – other methods
You may come across the situation where you do not have to prepare all the
ledger accounts for an organisation.
It could be that these have already been prepared on your behalf and you are
purely given a list of balances. The twist is that you will not be told whether the
balances are debit or credit!

Recap

Debits Credits

Fixed assets Loans
Debtors Mortgages
Stock Creditors
Cash Sales
Purchases Interest received
Discounts allowed Rent received
Sales returns Discounts received
Expenses Purchase returns

The following could be either:

Bank

A debit (DR) balance represents money in the bank
A credit (CR) balance represents an overdraft

VAT (Value added tax)

A debit (DR) balance represents a refund due from HMRC
A credit (CR) balance represents a liability owed to HMRC



Example 4
(a) Close off the following ledger accounts

Sales
Date Details Amount Date Details Amount
2000 £ 2000 £
30-Nov Balance B/d 309,000
30-Nov Debtors 10,200

Sales returns
2000 £ 2000 £
30-Nov Balance B/d 2,968
30-Nov Debtors 1,400

Debtors control
2000 £ 2000 £
30-Nov Balance B/d 106,840 30-Nov Sales returns 1,645
30-Nov Sales 11,985 30-Nov Bank 2,700
30-Nov Discount allowed 50

Bank charges
2000 £ 2000 £
30-Nov Balance B/d 367
30-Nov Bank 87



Discounts allowed
2000 £ 2000 £
30-Nov Debtors 50

Insurance
Date DetailsAmount Date Details Amount
2000 £ 2000 £
30-Nov Bank 700

Rent paid
2000 £ 2000 £
30-Nov Bank 300

VAT
2000 £ 2000 £
30-Nov Sale returns 245 30-Nov Balance b/d 16,512
Sales 1,785



(b) Prepare the trial balance from the ledger accounts above and the
following list of balances

Account name £
Motor vehicles 37,200
Office equipment 9,700
Other debtors 56,540
Cash 190
Creditors 47,910
Capital 19,381
Purchases 126,003
Commission paid 890
Wages 42,078
Rates 1,200
Electricity 981
Telephone 1,585
Motor expenses 900
Miscellaneous expenses 1,500
Bank 4,313



Trial balance as at 30 November 2000

DEBIT CREDIT
£ £
Sales
Sales returns
Debtors control
Bank charges
Discounts allowed
Insurance
Rent paid
VAT
Motor vehicles
Office equipment
Other debtors
Cash
Creditors control
Capital
Purchases
Purchase returns
Commission paid
Wages
Rates
Electricity
Telephone
Motor expenses
Miscellaneous expenses
Bank

Total



Activity 3
Prepare the trial balance from the following list of balances

Capital 30,000
Drawings 12,000
Sales 45,625
Purchases 32,652
Rates 2,530
Light and heat 3,560
Interest received 356
Motor vehicles 2,853
Fixtures and fittings 1,520
Cash 560
Bank overdraft 237
Creditors 3,500
Debtors 6,526
Discounts received 650
Discounts allowed 560
Sales returns 150
Wages 10,000
Rent 4,500
Insurance 1,500
Stationery 980
Advertising 600



Trial balance as at …….
£ £

Capital

Drawings

Sales

Purchases

Rates

Light and heat

Interest received

Motor vehicles


Cash

Bank overdraft

Creditors (PLCA)

Debtors (SLCA)

Discounts received

Discounts allowed

Purchase returns

Sales returns

Wages

Rent

Insurance

Stationery

Advertising


SESSIONS 4: ACCOUNTS
PREPARATION
Financial statements of an organisation are made up of:

• Balance sheet
• Profit and loss account (Income statement Ltd Company)
• Cash flow statement (not examined in this syllabus)

The following are examples of a Profit and loss account and a Balance sheet.
You should ensure that you make yourself familiar with the formats.

Profit and loss account for the year ended 31 December 2005
For ....................................................
£ £
Sales X
Less: Cost of sales
X
Opening stock

Purchases X
Closing stock (X) X
–––––– ––––––

Gross profit X
––––––
Sundry income X
Expenses
Rent X
Rates X
Electricity X
Depreciation X
Irrecoverable debt X
Stationery X
Telephone X
––––––
Total expenses X
––––––
Net profit X
––––––



Balance Sheet as at 31 December 2005
For ...................................................
£ £ £
Fixed assets Cost Depreciation
Fixed assets X X X
–––––– ––––––

Current assets
Stock X
Debtors X
Less allowance of doubtful
debt (X)
–––––– X
Bank X
Prepayment X
––––––
X
––––––
Current liabilities
Creditors X
Accrual X
––––––
(X)
––––––

Net current assets X
––––––

Total assets less current liabilities X

Long term liabilities (X)
––––––
Net assets X
––––––

Financed by
Capital X
Profit X
Drawings X
––––––
X
––––––


SESSION 4: ACCOUNTS PREPARATION

Example 1
At the end of the financial year the following trial balance was drafted for Harry
who owns an event organisation business.

Prepare the profit and loss account and balance sheet from this information.

Trial balance for the year ended 31 December 2009 for Harry trading as Aster
Florists.

Description Dr Cr

Sales 689,250
Purchases 414,875
Opening stock 69,376
Closing stock BS 65,456
Closing stock P&L 65,456
Salaries and wages 115,654
General expenses 82,440
Shop fittings 48,140
Computer equipment 12,900
Debtors 58,200
Creditors 45,320
Bank – current account 4,658
Cash 550
VAT 13,500
Discounts allowed 8,740
Discounts received 3,658
Drawings 22,000
Bank – deposit account 20,000
Capital 105,805

Total 922,989 922,989
––––––– –––––––



Profit and Loss account for the year ended 31 December 2009 for Harry
trading as Aster Florists.

£ £

Sales

Less: Cost of sales

Opening stock

Purchases

Closing stock

Gross profit

Sundry income

Discounts received

Expenses
Wages

General expenses

Discounts allowed

Total expenses

Net profit


SESSION 4: ACCOUNTS PREPARATION

Balance sheet as at 31 December 2009 for Harry trading as Aster
Florists
£ £ £
Fixed assets Cost Depreciation
Shop fittings

Computer equipment
––––––– ––––––– –––––––

Current assets

Stock

Debtors

Bank

Cash
–––––––

Current liabilities

Creditors

VAT
–––––––

Net current assets
–––––––
Total assets less current liabilities

Long term liabilities
–––––––
Net assets
–––––––
Proprietors funds

Capital

Profit

Drawings
–––––––

–––––––



The accounting equation

Assets – liabilities = Capital + profit – drawings


SESSION 5: SSAP 5 VAT
VAT is a consumer tax, in that all of us have to pay it. The HM Revenue and
Customs (HMR&C) collect it.

The main issue is that if each of us where to pay VAT individually to HMR&C, it
would be an administrative nightmare!!!!

To prevent this, VAT is collected on behalf of HMR&C through registered
businesses.

Registered businesses
A VAT registered business must charge VAT on sales. But it can reclaim VAT on
purchases.

VAT on sales – OUTPUT VAT
VAT on purchases/expenses – INPUT VAT

The difference between these two amounts must be paid to/received from
Customs.

If output VAT is greater than input VAT, then the business must pay that amount
over to HMR&C and vice versa.

Rates of VAT and calculating VAT
VAT is currently charged at two main rates:

Standard rated items – VAT is charged at 17.5%
Zero-rated items – VAT is charged at 0%

There is a reduced rate VAT that is 5% – this is applicable to domestic fuel only.

Calculating standard rated VAT
Invoices are usually broken down under three headings:

GROSS (VAT inclusive)
VAT (VAT element)
NET (VAT exclusive)



The VAT structure

Gross 117.50%

VAT 17.50%

Net 100.00%

You need to understand how to calculate VAT from either a gross or a net
amount. The calculation in each case is different.

GROSS x 17.5 / 117.5 or (7/47) = VAT element
NET x 17.5% = VAT element

Double entry and accounting for VAT
Sales invoice

Dr Debtors X Gross invoice
Cr VAT control X VAT element
Cr Sales X Net invoice

Purchase invoice

Dr Purchase X Net invoice
Dr VAT control X VAT element
Cr Creditors X Gross invoice

The VAT would appear in the VAT control account as follows:

VAT control

Input VAT X Output VAT X

Payable to HMR&C X

X X

Example 1
1 Graham purchases 4 units for resale at £500 plus VAT each on credit

2 Graham then sells 3 of the units for £1,000 plus VAT each on credit

3 Graham then sells the remaining unit for £900 plus VAT for cash



Required

Prepare the journal entries for the above transactions.

Prepare the VAT account/control account to show the above transactions.

Explain whether the balance on the VAT control account is a debtor or a creditor

1 Dr
Dr
Cr

2 Dr
Cr
Cr

3 Dr
Cr
Cr

VAT control

Example 2
1 Abdul purchases 3 units for resale at £600 plus VAT each on credit

2 Abdul then sells 2 of the units for £1,500 plus VAT each on credit

3 Abdul then sells the remaining unit for £800 plus VAT for cash



Required

Prepare the journal adjustments for the above transactions.

Prepare the VAT account/control account to show the above transactions.

Explain whether the balance on the VAT control account is a debtor or a creditor

1 Dr
Dr
Cr

2 Dr
Cr
Cr

3 Dr
Cr
Cr

VAT Control



Activity 1

A business that is registered for VAT has the following records relating to sales,
purchases and expenses.
Sales for the quarter ending 31 March 20X4 of £236,175 (including VAT)
Purchases and expenses of £143,600 (excluding VAT).
At 1 January 20X4 there was an amount of £8,455 owing to HM Revenue and
Customs and this was paid on 28 January 20X4.
Required
Write up the VAT control account for the quarter ending 31 March 20X4.

VAT control account
£ £

Explain what the balance on the account represents.


SESSION 6: FIXED ASSETS
Definition
The fixed assets of a business are the assets that are purchased with the
intention of being for long term use within the business, it is important to
differentiate between capital and revenue expenditure.
Capital expenditure – expenditure on fixed assets and is recorded on the
balance sheet as a fixed asset.
Revenue expenditure – expenditure for the expenses of the business such as
telephone. Revenue expenditure is recorded in the profit and loss account.
The following document is an invoice relating to a purchase of an asset.

SALE INVOICE

West Yorks Machine Supplies Ltd
49 St Pauls Street
Leeds
LS1 2TE

Telephone: 01302 721326
Fax: 01302 721325
VAT registration: 235721718
Date/Tax point: 27 December 2009
Invoice no: 7422
Your order no: FE763

Pickering Engineering
Hawsker Lane
Whitby
North Yorkshire

£
To: Supply and fit:
One 2000 Cutting Machine 25,000

VAT @ 17½% 4,375

Balance to pay £29,375

TERMS NET 30 DAYS

Approved by: B Curran / J Curran



Fixed asset purchases would be recorded in the ledgers as follows:

Dr Cr
Fixed asset account 25,000 Net invoice (Dr)
VAT 4,375 VAT element (Dr)
Bank/Creditors 29,375 Gross invoice (Cr)

*Note that each classification of fixed asset has its own ledger account, i.e. one
for motor vehicles, another for fixtures and fittings etc

This is nearly always the double entry for a VAT registered business but there is
one exception. VAT CANNOT BE RECLAIMED ON THE PURCHASE OF
MOTOR CARS, so the debit to the fixed asset account is for the gross amount of
the invoice.

It may be the case that when you purchase a fixed asset, the invoice amount
includes items other than the fixed asset itself. Prime examples would be motor
vehicles when insurance or road tax is included.

Financing fixed asset acquisitions
There are a number of different options available for financing the purchase of
fixed assets. The following are a few examples:

Borrowing – Loans

Hire purchase


SESSION 6: FIXED ASSETS

Finance and operating leases

Accounting for finance leasing and hire purchase

Accounting for operating leasing

Fixed asset register
Obviously the fixed assets of a business will tend to be expensive items that the
organisation will wish to have good control over. In particular the organisation
will wish to keep control over which assets are kept where and check on a
regular basis that they are still there.

Therefore most organisations that own a significant number of fixed assets will
maintain a fixed asset register as well as the ledger accounts that record the
purchases of the fixed assets.

Layout of a fixed asset register
The purpose of a fixed asset register is to record all relevant details of all of the
fixed assets. The format of the register will depend on the organisation, but the
information to be recorded for each fixed asset will probably be similar.

An example of a fixed assets register is given overleaf.



Extract from the Fixed Asset Register

Plant and Machinery

Asset Date Description Cost Depreciation NBV Funding Disposal Disposal
type purchased method proceeds date

Plant and 1 Aug 00 1512 Cutting 20,000 Cash
machinery Machine

Year
Ended
31 Dec 00 2,000 18,000

Year
Ended
31 Dec 01 2,000 16,000

Year
Ended
31 Dec 02 2,000 14,000

Year
Ended
31 Dec 03 2,000 12,000

Year
Ended
31 Dec 04 10,000 27 Dec 04


SESSION 7: DEPRECIATION
Principles behind depreciation
Fixed assets as we have previously established are capitalised in the balance
sheet at the point when they are purchased. However this is not the end of the
story.

The accruals concept states ‘costs incurred in a period should be matched with
the income produced in the same period’. This concept applies to fixed assets in
that an asset is purchased with the view that it will help generate income for the
business.

Therefore in accordance with the accruals concept some of the cost of the fixed
asset should be charged to the profit and loss account each year that the asset is
used.

What is depreciation?
It is the measurement of the cost of the fixed asset consumed in a period. It
reflects the wear and tear of a fixed asset in a period.

Calculating depreciation
There are three key factors to consider:

Cost of the asset

Useful economic life

Residual value

There are two main ways of calculating depreciation

Straight line/on cost

With this method the amount of depreciation charged each year to the profit and
loss account remains exactly the same. This means that the book value of the
fixed asset is reduced by the same amount each accounting period.

There are two different ways that you may be asked to calculate straight-line
depreciation.

Formula

Cost – residual value OR Cost – residual value x %



Example 1 using the formula
Cost – residual value

A new oven has been purchased by Ian for his cafe, calculate the depreciation
charge per year for the oven

Cost £100,000
Residual value £25,000
Useful economic life 5 years

Activity 1
A pub lease has been acquired by Kat, calculate the depreciation charge per
year for the lease

Cost £700,000



Percentage terms using the formula
Cost – residual value x %

Example 2
Roxanne’s business policy for her hairdressing business is to depreciate fixed
assets at 25% on cost each year

What is the depreciation charge each year if one of the assets costs £15,000?

Activity 2
Phil has a business policy to depreciate fixed assets at 15% on cost each year.

What is the depreciation charge each year if his motor van cost £26,000?

Example 3
Eric owns a bed and breakfast, his business's policy is to depreciate fixed assets
at 33% on cost each year.

What is the depreciation charge each year if his computer cost £1,800 and has a
residual value of £600?

Activity 3
Andy’s business policy is to depreciate fixed assets at 15% on cost each year.

What is the depreciation charge each year if his tractor for his farm costs £4,200
and has a residual value of £200?



Reducing balance/depreciation on the net book value
With this method of depreciation a different charge for depreciation is made in
the profit and loss account each period. It assumes that an asset is used up
more quickly in the first few years of ownership.

It is calculated by multiplying the asset's net book value (the cost of the asset that
has not been charged to the profit and loss account) and multiplying it by a set
percentage.

Example 4
Fixtures and fittings in Dev’s corner shop cost £40,000
His business policy is to depreciate these assets at 10% per annum on a
reducing balance basis

Calculate the depreciation for the first three years of ownership.

Activity 4
Vivian’s fixtures and fittings in her corner shop cost £20,000
Her business policy is to depreciate these assets at 25% per annum on a
reducing balance basis

Calculate the depreciation for the first 3 years of ownership.

Accounting for depreciation
As with any adjustment to the financial statements, double entry is always
applied and at least two accounts will be affected.

Double entry

Dr Depreciation expense account X
Cr Accumulated depreciation* X

*Note that each classification of fixed asset has its own accumulated depreciation
ledger account i.e. one for motor vehicles, another for fixtures and fittings etc



Monthly depreciation
An organisation's policy may be to calculate depreciation on a monthly basis
rather than on an annual basis.

If this is the case, the calculation is the same except for the fact that you need to
time apportion the annual depreciation charge.

Carla’s business has a financial year ending 31 December 2006. Depreciation is
calculated on the basis of complete months of ownership. Calculate the
depreciation charge for each of the following assets.

Example 5
Cost of fixtures and fittings £100,000
Date of acquisition 1 April 2006

Activity 5
Cost of building £700,000
Date of acquisition 1 June 2006

Activity 6
Cost of motor car £40,000
Depreciation 10% per annum on a reducing balance basis
Date of acquisition 31 July 2006



Recording assets in the fixed asset register

Activity 7
The following is an extract of a purchase invoice for Staplers office supplies.

SALE INVOICE

Computer Supplies Limited
High Street
Nottingham
NE34 1AN

Telephone: 0116 259 4562
Fax: 0116 649 3255
Date/Tax point: 31 October 2009
Invoice no: 7245

To
Staplers Office Supplies
Pencils Business Centre
Pencil Lane
Leicester
LE3 3EX

£

Laser Printer 1,550.00
Delivery 15.00
Printing paper 75.00
1,640.00

VAT @ 17½% 287.00

Total £1,927.00

TERMS NET 30 DAYS

Approved by: B Dell



Further information

• Staplers has a policy of capitalising expenditure over £1000
• Computer equipment is depreciated at 30% on a straight line basis
• Fixed assets are depreciated in the year of acquisition but none in the year
of disposal

Record the acquisition in the fixed asset register:

(a) The acquisition during the year ended X09

(b) Depreciation for the year ended X09

Fixed Assets Register

Description Acquisition Cost Depreciation NBV Funding Disposal Disposal
Date Source Proceeds Date
Computer
Equipment
Computer 30/6/X7 5,000.00 Cash
Network
Y/E 31/12/X7 1,500.00 3,500.00

Y/E 31/12/X8 1,500.00 2,000.00

Y/E 31/12/X9

Laser Printer 30/10/X9

Y/E 31/12/X9


SESSION 8: DISPOSAL OF FIXED
ASSETS
When a fixed asset is disposed of, it is unlikely that the proceeds from sale will
be equal to the value of the fixed asset in the balance sheet (the net book value).

The difference between the net book value and the sale proceeds will be either a
profit or a loss on the disposal of a fixed asset.

Profit – this will occur where the net book value is lower than the sale proceeds.

Loss – this will occur where the net book value is higher than the sale proceeds.

Steps to disposing of a fixed asset

Firstly open disposals T Account, then:

Step 1 – Remove the original cost of the disposed asset from the asset account

Step 2 – Remove the accumulated depreciation of the disposed asset from the
accumulated depreciation account

Step 3 – Enter the sale proceeds received/receivable for the disposed asset

Example 1
Veronica has a motor vehicle with a net book value of £2,800. The motor vehicle
had originally cost £7,000.

Veronica sells the asset for £3,000 cash.

Required

Show the journal entries to dispose of the fixed asset above and calculate the
profit or loss on the disposal of the fixed asset.



Disposal

–––––– ––––––

–––––– ––––––

Motor vehicles

–––––– ––––––

–––––– ––––––

Accumulated depreciation

–––––– ––––––

–––––– ––––––

Activity 1
During the year Sarah sold a machine that had originally cost £20,000 for £3,000.
At the date of sale the asset's accumulated depreciation was £15,000.

Required

Show the journal entries to dispose of the asset and prepare the disposal
account to calculate the profit or loss on disposal.


SESSION 8: DISPOSAL OF FIXED ASSETS

Disposal account

–––––– ––––––

–––––– ––––––

Machine account

–––––– ––––––

–––––– ––––––

Accumulated depreciation account

–––––– ––––––

–––––– ––––––

Example 2
Bob sold a car that had been purchased for £25,500. Depreciation on motor
vehicles is calculated at 25% on a straight-line basis. The car was owned for 3
years before it was sold. Sale proceeds were £1,500

Required




Disposal

–––––– ––––––

–––––– ––––––

Motor vehicle account

–––––– ––––––

–––––– ––––––


–––––– ––––––

–––––– ––––––

Activity 2
A building that had depreciation for ten years at 2% on cost was sold during the
year for £50,000. Its original purchase price was £43,000.

Required




Disposal

–––––– ––––––

–––––– ––––––

Building account

–––––– ––––––

–––––– ––––––


–––––– ––––––

–––––– ––––––

Part exchange
You may come across a situation where instead of selling a fixed asset for cash,
an old asset is taken by the supplier in part exchange for a new asset. A
cheque/cash is paid for the net cost of the new asset, after offsetting the part
exchange value of the old asset.

It is important that the new asset is recorded at its full cost, not the net amount
for which a cheque/cash is paid. So in this situation you have got to deal with
both the sale of one asset and the purchase of another.

Journals for part exchange
£ £
1 Dr Disposal account X
Cr Fixed asset cost account X

2 Dr Accumulated depreciation X
Cr Disposal account X

3 Dr Fixed asset cost account X (with part exchange value)

4 Dr Fixed asset cost account X (with net cost)
Cr Bank/creditors X



Example 3
During the year Sarah part exchanged a machine that had originally cost £20,000
and had accumulated depreciation of £17,000.

The new machine cost £15,000 and a cheque for £14,000 was written for the
remaining balance.

Required

Prepare the journal entries to account for the disposal and purchase of the
assets and write up the disposal account to calculate the profit or loss on
disposal.

Disposal account

–––––– ––––––

–––––– ––––––

Machine account

–––––– ––––––

–––––– ––––––




–––––– ––––––

–––––– ––––––

Activity 3
Bob part exchanged a car at a trade in value of £2,500. The car originally cost
£24,000 and had been depreciated for 4 years at 10% on cost. The new vehicle's
full cost was £27,000.

Required

disposal.

Disposal

–––––– ––––––

–––––– ––––––



Motor vehicle account

–––––– ––––––

–––––– ––––––


–––––– ––––––

–––––– ––––––

Part-exchange with VAT
You may be asked to deal with a situation where a business registered for VAT
disposes of a fixed asset to a supplier in part exchange for a new asset. As
previously, a cheque/cash is paid for the net cost of the new asset, after
offsetting the part exchange value of the old asset.

It is important that the new asset is recorded at its full cost, not the net amount
for which a cheque/cash is paid, and also excluding VAT. Similarly, the gross
part-exchange value of the fixed asset disposed of should be split between net
sale proceeds and output VAT.

Note that, in the year of disposal, the cost of the fixed asset disposed of will be
exclusive of VAT in the accounting records. The split of the gross cost between
fixed asset cost and input VAT would have been done in a previous year when it
was first purchased.



Journals for part-exchange of fixed assets with VAT

£ £
1 Dr Disposal account X (as normally)
Cr Fixed asset cost account X

2 Dr Accumulated depreciation X (as normally)

3 Dr Fixed asset X Account for the gross
Dr VAT (input VAT) X cost of the new fixed
Cr Creditors X asset purchased split
between asset cost and
input VAT

4 Dr Creditors X Account for the gross
Cr VAT (output vat) X part-exchange value
Cr Fixed asset disposals X received on the fixed
asset disposed – split
between disposal value
and output VAT

5 Dr Creditors X Make net payment to
Cr Cash X conclude the
transaction

Example 4
During the year Fernando disposed of a van in part exchange for a new van.
This van had originally cost £15,000 plus VAT at 17.5% several years ago and
had accumulated depreciation of £12,750.

The new van cost £20,000 plus VAT at 17.5%. The gross part-exchange
allowance including VAT was £4,935. A cash settlement was paid for the net
amount outstanding.

Required

disposal.



Solution

£ £
1 Dr Disposal account (as normally)
Cr Fixed asset cost account

2 Dr Accumulated depreciation (as normally)
Cr Disposal account

3 Dr Fixed asset Account for the gross
Dr VAT (input VAT) cost of the new fixed
Cr Creditors asset purchased – split
between asset cost
and input VAT

4 Dr Creditors Account for the gross
Cr VAT (output vat) part-exchange value
Cr Fixed asset disposals received on the fixed
and output VAT

5 Dr Creditors Make net payment to
Cr Cash conclude the
transaction

Disposal of fixed asset

–––––– ––––––

–––––– ––––––



Activity 4
During the year Jamie disposed of a fixed asset in part exchange for a new fixed
asset. This asset had originally cost £30,000 plus VAT at 17.5% several years
ago and had accumulated depreciation of £18,800.

The new fixed asset cost £35,000 plus VAT at 17.5%. The gross part-exchange
allowance including VAT was £9,400. A cash settlement was paid for the net
amount outstanding.

Required

disposal.

Solution

£ £
1 Dr Disposal account (as normally)
Cr Fixed asset cost account

2 Dr Accumulated depreciation (as normally)
Cr Disposal account

3 Dr Fixed asset Account for the gross
Dr VAT (input VAT) cost of the new fixed
Cr Creditors asset purchased – split
between asset cost
and input VAT

4 Dr Creditors Account for the gross
Cr VAT (output vat) part-exchange value
Cr Fixed asset disposals received on the fixed
and output VAT

5 Dr Creditors Make net payment to
Cr Cash conclude the
transaction



Disposal of fixed asset

–––––– ––––––

–––––– ––––––

Recording acquisition and disposals in the fixed asset register

Activity 5
The following is an extract from a purchase invoice by Staplers office supplies

SALE INVOICE
Computer Supplies Limited
High Street
Nottingham
NE34 1AN

Telephone: 0116 259 4562
Fax: 0116 649 3255
Date/Tax point: 30 November 2009
Invoice no: 7245

To
Staplers Office Supplies
Pencils Business Centre
Pencil Lane
Leicester
LE3 3EX

£

Computer Netbook 1,375.00
Delivery 25.00
Carry case 50.00
1,450.00

VAT @ 17½% 253.75

Total £1,703.75

TERMS NET 30 DAYS

Approved by: B Dell



The following relates to the sale of a vehicle (part exchange)

Reg No: ST 08 PLS

Date of sale 31/10/09

Selling price ex VAT £2,000

Further information

• Staplers has a policy of capitalising expenditure over £1,000
• Computer equipment is depreciated at 30% on a straight line basis
• Vehicles are depreciated at 20% on a reducing balance basis
• Fixed assets are depreciated in the year of acquisition but none in the year
of disposal

Record the acquisition in the fixed asset register:

(a) The acquisition during the year ended X09

(b) Depreciation for the year ended X09

(c) Any disposals in the year ended X09

Fixed Assets Register

Description Acquisition Cost Depreciation NBV Funding Disposal Disposal
Date Source Proceeds Date
Computer
Equipment
Computer 30/6/X7 5,000.00 Cash
Network
Y/E 31/12/X7 1,500.00 3,500.00
Y/E 31/12/X8 1,500.00 2,000.00
Y/E 31/12/X9 1,500.00 500.00

Laser Printer 30/10/X9 1,565.00 Credit
Y/E 31/12/X9 469.50 1,095.50

Computer
Netbook 31/11/X9

Y/E 31/12/X9

Motor Vehicles
ST 07 PLS 1/6/X7 7,500.00
Y/E 31/12/X7 1,500.00 6,000.00
Y/E 31/12/X8 1,200.00 4,800.00
Y/E 30/09/X9

ST 09 SLP 1/2/X9 10,000.00
31/12/X9


SESSION 9: IRRECOVERABLE AND
DOUBTFUL DEBTS
Debtors should only be included as assets in a balance sheet if they are
expected to settle the amounts due from them. The prudence concept requires
an organisation to recognise future losses as soon as it becomes aware of their
existence. This means that as soon as an organisation is aware that a debt may
not be settled, then the asset value should be reduced by an adjustment being
put through the accounts.

Irrecoverable debts (Bad debts)
This is a debt that will NOT be recovered. It should be completely removed from
the ledger accounts and therefore from the balance sheet.

Double entry to account for an irrecoverable debt:

Dr Irrecoverable debt X (P and L)
Cr SLCA X (Balance sheet)

Doubtful debts
This is a debt about which there is some question as to whether or not the
amount will be settled. We must recognise this doubt in the accounts but we
should not write off the debt completely, because the cash may be received. In
any event we need to keeping pressing for it to be settled. Therefore we still need
to show the debt as outstanding.

Example 1
Shauna has debtors at her year-end of £25,000.

There is concern about whether £5,000 of this will be settled.

Dr Doubtful debt adjustments 5,000(P and L)
Cr Allowance for doubtful debts 5,000 (Balance sheet)

The allowance for doubtful debts is offset against the debtors balance in the
balance sheet.



Balance sheet extract
Debtors 25,000
Less allowance for doubtful debts (5,000)
––––––
20,000

This treatment clearly shows that there is doubt as to whether the debt will be
received but does not write it off and we can continue chasing it.

Changes in allowance
As you are aware, any item that appears in the balance sheet is carried forward
into the next accounting period. This means that there may be a balance on the
allowance for doubtful debts account brought forward.

It is unlikely that the allowance will stay the same from one year to the next, so
you may need to change the amount carried in the balance sheet.

The key thing to remember is that you only need to take account of either the
increase or the decrease in the allowance, in the profit and loss account.

Increase
Dr Doubtful debt adjustments X
Cr Allowance for doubtful debts X

In each case you would only enter the increase in the allowance

Decrease
Dr Allowance for doubtful debts X
Cr Doubtful debt adjustments X

In each case you would only enter the decrease in the allowance

Example 2
Mina has debtors at the year-end of £50,000. There is a allowance for doubtful
debts brought forward of £8,000. She feels that in this accounting period that this
allowance should be increased to £10,000.


SESSION 9: IRRECOVERABLE AND DOUBTFUL DEBTS

Required

Prepare the journal entries to account for the increase in the allowance

Activity 1
Susan has debtors at the year-end of £35,000. There is a brought forward
allowance for doubtful debts of £4,300. Susan believes the allowance should be
10% of the year-end debtors figure.

Required

Prepare the journal entries to account for the new allowance

Types of provision for doubtful debts
There are two main types:

• Specific allowance – calculated by reference to a particular invoice or
debtor balance.
• General allowance – this is an allowance against debtors as a whole,
normally expressed as a percentage of the debtors balance.

Example 3
A business has debtors of £356,000 of which £16,000 are to be written off as an
irrecoverable debts. Of the remainder, a specific allowance is to be made
against a debt of £2,000 and a general allowance of 4% is required against the
remaining debtors. The opening balance on the allowance for doubtful debts
account is £12,000.

Show the entries in the allowance for doubtful debts account, the sales ledger
control account and the irrecoverable debt expense account.



Workings

Allowance for doubtful debts
£ £
Balance b/d 12,000

£ £
Balance b/d 356,000

Irrecoverable debt expense account
£ £


SESSION 9: IRRECOVERABLE AND DOUBTFUL DEBTS

Activity 2
A business has debtors of £712,000 of which £32,000 are to be written off as
irrecoverable debts. Of the remainder a specific allowance is to be made against
a debt of £4,000 and a general allowance of 4% is required against the remaining
debtors. The opening balance on the allowance for doubtful debts account is
£24,000.

Show the entries in the allowance for doubtful debts account, the sales ledger
control account and the irrecoverable debts expense account.

Workings

Allowance for doubtful debts
£ £
Balance b/d 24,000

£ £
Balance b/d 712,000



Irrecoverable debt expense account
£ £

It is very important that you deal with these allowances in a set order:

1 Deal with any irrecoverable debt write off first – remove it from the accounts
completely
2 Calculate the specific allowance
3 Calculate the general allowance
4 Calculate the total allowance and enter into the accounts (not forgetting to
deal with the increase or decrease in the total allowance only)


SESSION 10: ACCRUALS AND
PREPAYMENTS
An organisation's profit and loss account and balance sheet is prepared on the
basis of the accruals concept. Income is included on the basis of when it is
earned, irrespective of whether it has been received in cash, and expenditure is
included on the basis of when it is incurred, irrespective of whether it has actually
been paid.
This principle applies not only to sales and purchases but also to other income
and expenses.

Accrual
Definition

An expense incurred in a period but not yet paid for – accounting for the accrual
records this expense in the ledger accounts as below:

Accounting for an accrual – Journal entry
Dr Expense account * X
Cr Accruals X (current liability in BS)

*Will depend on the expense that the accruals relates to i.e. will be rent and rates

Example 1
A business has a year-end of 31 December 2006. The last phone bill received
and paid during the year covered the period to 31 October 2006.

Post year-end an invoice that covered November, December 2006 and January
2007 was received. The phone charge for that period was £600.

Required

Calculate the year-end accrual for the phone expense.

Example 2
A business has a year-end of 31 December 2005. The last gas bill received and
paid covered the period from 1 January 2005 to 31 July 2005. The bill was for
£1,400.Gas is expected to accrue evenly over the year.



Required

Based on the information provided, estimate the gas accrual for the year to
31 December 2005.

Accounting for an accrual – Ledger entries

Expense account

Bank X
Accrual account X Expense for the X
year

X X
–– ––

Accrual account

Accrual c/d X Expense account X

X X
–– ––
Accrual b/d X

Example 3
Harry started his business on 1 June 2003.

The bank summary shows payments of electricity expenses of £970 during the
year ended 31 May 2004. At the year end there is an amount of £200 owing for
electricity (this is for the two months April and May)

Write up the electricity account for the year ended 31 May 2004 and close it off
by showing the transfer to the profit and loss account.


SESSION 10: ACCRUALS AND PREPAYMENTS

Electricity account

Note – the accrual account is included so that you can gain a full understanding
of the accounting entries required. Normally, only the expense account is
required in the examination

Accrual account

Example 4
Ollie started his business on 1 June 2003.

The bank summary shows payments for selling expenses of £985 during the year
ended 31 May 2004. Included in this amount is the last payment made of £300,
which was for the quarter ended 31 March 2004.

Write up the selling expenses account for the year ended 31 May 2004 and close
it off by showing the transfer to the profit and loss account and the appropriate
accrual.

Selling expenses

Accrual



Prepayments
Definition

A payment made in advance –the expense relates to a period following the
current accounting period.

Example 5
Andrews’s year-end is 31 December 2006.

The bank summary for premises insurance shows that Andrew paid £1,500.

This was to cover the period 1 January 2006 to 31 March 2007.

Required

Calculate the prepayment as at 31 December 2006.

Example 6
Jason’s year end is 31 December 2008

Jason paid road tax of £120. This was for the period 1 July 2008 to 30 June
2009.

Required

Calculate the prepayment as at 31 December 2008.

Accounting for a prepayment – Journal entry
Dr Prepayments X (current asset in BS)
Cr Expense* X

*Will depend on the expense that the prepayment relates to i.e. will be insurance
and road tax in the examples above.



Accounting for a prepayment – Ledger entries

Expense account*

Bank X Prepayment c/d X
Expense for the X
year

X X
–– ––

Prepayment account*
Expense account X
Balance c/d

X X
–– ––
Balance b/d

Example 7
Jerry started her business on 1 April 2006. During the year ended 31 March
20X7 she made the following payments for rent of £3,000. At the year end she
had paid £600 in advance.

Write up the rent expense account for the year ended 31 March 20X7 and close
it off by showing the transfer to the profit and loss account.

Rent

Prepayment



Example 8
Sophie started her business on 1 January 2006. During the year ended
31 December 2006 she paid £4,000 for administration expenses.

Included in this payment is an amount paid in November of £1,500 relating to the
months of November, December and January.

Write up the administration expense account including the appropriate
prepayment.

Administration expenses

Note – the prepayment account is included so that you can gain a full
understanding of the accounting entries required. Normally, only the expense
account is required in the examination.

Prepayment



Opening accruals and prepayments

In some questions there will be an opening accrual or prepayment brought
forward from the previous accounting period. This needs to be reversed from the
accrual or prepayment account and recorded in the relevant expense account at
the beginning of the financial year.

Example 9
The electricity account for the year ended 30 June 20X3 was as follows:

Opening balance for electricity accrued at 1 July 20X2 £300

The bank payments made during the year were £3,060 and included in this
amount was a payment of £840 relating to the three months ended 30 April
20X3.

Write up the electricity expense account clearly showing the accrual balance
brought forward and the balance carried forward for the year ended 30 June
20X3.

Electricity account

Note – the accrual account is included so that you can gain a full understanding
of the accounting entries required, the opening accrual needs to be reversed at
the beginning of the year and recorded in the relevant expense account.
Normally, only the expense account is required in the examination.

Accrual account



Example 10
The insurance account for the year ended 31 December 20X3 was as follows:

Opening balance for insurance prepaid at 1 January 20X2 £10,000

On the 1 August it paid, in full, the annual insurance invoice of £36,000, to cover
the following year. (1 August 20X3 to 31 July 20X4)

Write up the insurance expense account clearly showing the prepayment balance
brought forward and the balance carried forward for the year ended 31December
20X3.

Insurance account

Note – the prepayment account is included so that you can gain a full
understanding of the accounting entries required, the opening prepayment needs
to be reversed at the beginning of the year and recorded in the relevant expense
account. Normally, only the expense account is required in the examination.

Prepayment account



Income accounts
Some businesses may have sundry types of income, e.g. rental income or
interest received. Adjustments for accruals/prepayments may be required,
similar to those for expenses dealt with above.

Accrued income – income earned not yet received

Dr Accrued income X (current asset B/S)
Cr Sundry income* X

*E.g. rent received/interest received

Prepaid income – income received in advance

Dr Sundry income* X
Cr Prepaid income X (current liability B/S)

*E.g. rent received/interest received

Example 11
A business has two properties, A and B, which are rented out to other parties.
The rental on property A for the year is £12,000 but only £10,000 has been
received. The rental on property B is £17,000 and the client has paid £18,000 so
far this year.

Required

Prepare the journals to account for the accrued and prepaid income on
properties A and B.


SESSION 11: CONTROL ACCOUNTS
AND RECONCILIATIONS
So far in API when we have been looking at sales and purchases, we have only
considered the sales ledger control account (SLCA) and purchase ledger control
account (PLCA).

Both of these control accounts only deal with the total amount of what is owed by
debtors and to creditors.

Therefore individual debtors and creditors balances are required for accounting
and monitoring purposes. This is done via the subsidiary ledgers / memorandum
accounts, were individual transactions are recorded in separate accounts for
each debtor / creditor.

Subsidiary ledgers / memorandum accounts
These are normally referred to as sales ledger / purchase ledger accounts.

These do not form part of the double entry.

What is posted into the control accounts needs to be posted into the appropriate
individual subsidiary ledger accounts.

Example 1
Credit sales

At the beginning of the month the following customers buy goods on credit:

£

Lisa 200
Jane 100
Kate 40
Martyn 60

Total 400

The journal entries into the nominal ledger are:

Dr
Cr

SLCA Sales


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