Bookkeeping Controls

Accounting for Sales

Accounting Principles

Dual Effect - For every transaction that a business encounters there are two effects.

Separate Entity - The owner and the business are seen as two separate entities for accounting (not legal) purposes. Look at transactions from the business' perspective.

Accounting Equation - Assets - Liabilities = Capital + Profit - Drawings

Ledger Accounting

Every entry has two sides - Debit (Dr) / Credit (Cr)

Sales

Credit Sales

Sale Returns

Discounts Allowed

Accounting for Purchases

Credit Purchases

Purchase Returns

Prompt Payment Discounts

Dr Sales
Dr VAT
Cr PLCA

Dr PLCA
Cr Discounts Allowed
Cr VAT

Dr PLCA
Cr Sales
Cr VAT

Ledger Accounts and the Trial Balance

Ledger Accounts

Constructing a Trial Balance

Balancing off Ledger Accounts

  1. Insert the bal c/d on the other side referring to it as the bal b/d
  1. On the side with a smaller total find the difference between the two totals and insert it here. This is known as the bal c/d
  1. Insert the highest total on each side of the ledger.
  1. Find the total of each side and make a note.

The balances brought down (bal b/d) are transferred and listed on the trial balance on the same side they were brought down.

Errors and Suspense Accounts

Errors

Errors Detected by the Trial Balance

Errors Undetected by the Trial Balance

Single Entry

Casting (addition) Error

Transposition Error

Extraction Error

If an amount or balance of a ledger account has been incorrectly recorded. (e.g. recording £2591 on the debit side and recording the credit side as £2951)

Only one side of the entry being made.

Omission (of a ledger balance)

Two entries on one side

If a ledger account hasn't been balanced correctly due to a casting error therefore the trial balance won't balance.

If a ledger account balance is incorrectly recorded on the trial balance as an incorrect figure or on the wrong side.

If a ledger account balance is accidentally left off of the Trial Balance.

A debit in two accounts or a credit in two accounts rather than a debit with an opposite credit(s)

Error of Original Entry

Compensating Error

Error of Omission

Error of Commission

Error of Principle

Reversal of Entries

When the wrong figure is recorded for the debit and the credit entry so the incorrect figure appears on both sides.

This is where two separate errors of the exact same amount are made, one for the credit entry and one for the debit entry

When an entire transaction is omitted from the ledger accounts.

When an equal credit and debit entry are made but one of the entries has been made to the wrong account. Genuine silly mistake.

Similar to the Error of Commission although the entry was made deliberately but in the wrong type of account. Lack of knowledge , doesn't know difference between different expenditures etc

(e.g. recording an expense entry in a capital account)

When Debit and Credit entries are entered into the correct account although they're on the wrong sides.

Irrecoverable Debts

VAT

NO VAT

Dr Irrecoverable Debt Expense
Cr SLCA (and sub sale ledger)

Dr Irrecoverable Debt Expense (net)
Dr VAT
Cr SLCA (gross)(and sub sale ledger)

Contra Entries

If you buy and sell from a business and you have receivables and payables then you can net off the amounts if both businesses agree.

Both payables and receivables reduced:
Dr PLCA (and sub purchase ledger)
Cr SLCA (and sub sale ledger)

Suspense Accounts

  • To hold a Trial Balance difference before correction
  • When the correct posting for an item is uncertain - the suspense account is used as a temporary holding account until the correct account is identified

Control Accounts and Reconciliations

Cause of Errors

  • Casting Errors in a day book that will only affect the control account.
  • Invoices recorded incorrectly in the day book which will affect the control account and sub ledger balances.
  • Casting errors in the sub ledger, either in an individual account or when listing the sub ledger balances.
  • Posting individual entries twice, affecting the sub ledger.
  • Omitted items, showing an incorrect balance for either for control account or the sub ledger.
  • Transactions recorded in the control account but ommited from the sub ledger.
  • Transactions recorded in the sub ledger but omitted from the control account.

VAT

Payment of VAT

Refund of VAT

Dr VAT Control Account
Cr Bank Account

Dr Bank Account
Cr VAT Control Account

Reconciliation

Ensuring the total of the control account agrees with the total of the sub accounts is referred to as CONTROL ACCOUNT RECONCILIATION

Should be performed regularly to highlight and errors

AGED RECEIVABLES LISTING - list of receivables balances analysed by length of time.

Enables business to focus on chasing older debts.

Payroll Procedures

Gross Pay

Income Tax

Employee's NIC

Employer's NIC

Employee's Pension Contribution

Other Deductions

Total payable to employee before deductions.

Tax owed on gross pay. This is collected from the employee under the PAYE (Pay as you earn) system. The employer collects on the employees behalf and pays to HMRC.


The NIC (National Insurance Contribution) owed by employees on their gross pay.

This is NOT deducted from the employee's gross pay and is treated as a company expense for employing individuals. This is payed by the company to the tax authorities.


This is deducted from the employee's gross pay then payed into a pension fund by the company.

Employer's Pension Contribution

This is NOT deducted from the employee's gross pay. Additional expense to the company. This is payed into a pension fund along with an employee pension contribution.

Items such as charitable donations or trade union subscriptions. These are deducted from the employee's gross pay and payed to the correct parties.

Payroll Calculations

(A) Calculating net pay

(B) Calculating total payroll expense for employer

(C) Calculating liabilities due to various parties such as HMRC / Pension

Net Pay = Gross Pay - PAYE - Employee's NIC - Other Deductions

Total Wages Expense = Gross Pay + Employer's NIC + Employer's pension contribution

Total Employee Liability = PAYE + Employee/Employer's NIC + Employee/Employer's Pension Contribution

Accounting for Payroll

  • Wages Expense Account - This shows the total expense to the business. This is the expense account shown on the Trial Balance.


  • The Liability Accounts - The HMRC Liability account (PAYE and NIC) and other accounts for other liabilities such as pensions.


  • Wages Control Account - One side of each double entry is put through the control account. This account is cleared to 0 each payroll run so there should NEVER be a bal b/d to take to the Trial Balance.

(1)
Dr Wages Expense
Cr Wages Control

(2)
Dr Wages Control
Cr Bank

(3)
Dr Wages Control
Dr HMRC


Dr Wages Control
Cr Pension Liability / Trade Union

Bank Reconciliations

Bank reconciliations compare the bank statement balance with the cash book balance.

Items on the bank statement but not in the cash book

These could be bank charges, interest and other automated payments. The cash book needs to be updated for these items.

Items in the cash book but not on the bank statement

Unpresented Cheques

Uncleared Lodgements

These are cheques that have been issues by the business but are yet to appear on the bank statement. This is because the cheque has not cleared the banking system.

This is money received by the business that hasn't appeared on the bank statement yet. This is usually cheques that haven't cleared the banking system.

In both cases, the cash book is to update and the bank statement is NOT. Unpresented cheques and uncleared lodgements are both reconciling items on the bank reconciliation.

Bank Reconciliation Proforma

Bank Statement Balance + Uncleared Lodgements - Unpresented Cheques = Cash Book Balance

The Banking System

Cheques

  • Drawer - The person writing the cheque.


  • Drawee - The bank of the drawer.


  • Payee - The person to whom the payment is being made.

The Clearing System - This is the how cheques are processed by banks and building societies. This process takes 3 working days.

Banker's Drafts

Also referred to as a bank cheque, this is a cheque issued by a bank and not an individual. Funds are transferred from the individual's account to the bank who issue the cheque to the payee.

Often used for large purchases so that the payee does not need to wait for the cheque to clear and it also removes the risk of the cheque bouncing.

Building Society Cheques

Similar to a banker's draft but a building society cheque can be stopped by the drawer to prevent the payment.

Can issue a cheque instead of cash when a withdrawal is made.

Written by the building society, knowing the cash is available.

Standing Orders

A customer's instruction to their bank to pay a fixed amount at regular intervals to a named party. E.g. Rent.

Direct Debits

Allows authorized recipients to claim payments from a customers bank account. These payments are covered by the direct debit guarantee to protect the customer. Can be variable in amount and frequency.

BACS (Banker's Automated Clearing Services)

An electronic system that processes direct debits, direct credits and standing orders for UK banks. It takes 3 working days for payments to clear.

CHAPS (Clearing House Automated Payment System)

This is a same-day UK electronic transfer. Usually used for large urgent payments.

FPS (Faster Payments Service)

An internet-based system introduced to reduce payment times between different bank's customer accounts. Only takes a few seconds.