Association of Accounting Technicians (AAT) Introduction to Bookkeeping (Level 2) Syllabus

When checking a supplier's invoice, what key items should be verified before authorising it for payment?

Check that the invoice matches the purchase order and goods received note (correct goods, quantities and prices), that calculations of totals, discounts and VAT are correct, that the supplier details and address are correct, and that the goods were actually received in good condition.

Why must purchase invoices be authorised before payment?

Authorisation provides an internal control ensuring that only valid, correctly priced invoices for goods/services actually received are paid, preventing fraud, duplicate payments and overpayments.

What is VAT (Value Added Tax)?

VAT is an indirect tax charged on the sale of most goods and services in the UK. VAT-registered businesses charge VAT on sales (output tax) and reclaim VAT on purchases (input tax), paying the difference to HMRC.

Define output tax and input tax.

Output tax is VAT charged by a business on its sales to customers. Input tax is VAT a business pays on its purchases and expenses, which it can usually reclaim. VAT due to HMRC = output tax − input tax.

If goods are sold for £200 net and the standard VAT rate is 20%, calculate the VAT and the gross total.

$\text{VAT} = £200 \times 20\% = £40$ and $\text{Gross} = £200 + £40 = £240$.

How do you calculate the net amount and VAT from a VAT-inclusive (gross) figure at 20%?

Net $= \text{Gross} \times \frac{100}{120}$ and VAT $= \text{Gross} \times \frac{20}{120}$ (i.e. divide the gross by 6 to find the VAT at 20%).

When a trade discount is given, on which amount is VAT calculated?

VAT is calculated on the net amount after deducting the trade discount (the discounted price), not on the original list price.

How are the totals from the sales day book transferred (posted) to the ledgers?

The sales day book is totalled, then: the total of net sales is credited to the sales account in the general ledger, the total VAT is credited to the VAT account, and the total gross is debited to the sales ledger control account. Each individual gross amount is also debited to the customers' accounts in the sales (subsidiary) ledger.

How are the totals from the purchases day book posted to the ledgers?

The total net purchases is debited to the purchases account, the total VAT is debited to the VAT account, and the total gross is credited to the purchases ledger control account. Each individual gross amount is credited to the suppliers' accounts in the purchases (subsidiary) ledger.

What is the general (nominal) ledger?

The general (nominal) ledger contains all the impersonal accounts of the business — assets, liabilities, capital, income and expenses — including the control accounts. It is the main ledger from which the trial balance and financial statements are prepared.

What is the sales (debtors) ledger?

The sales ledger is a subsidiary ledger containing a separate personal account for each credit customer, showing how much each customer owes the business. Its total should agree with the sales ledger control account.

What is the purchases (creditors) ledger?

The purchases ledger is a subsidiary ledger containing a separate personal account for each credit supplier, showing how much the business owes each supplier. Its total should agree with the purchases ledger control account.

What is the purpose of a control account?

A control account in the general ledger summarises the total of all the individual accounts in a subsidiary ledger (e.g. the sales ledger control account totals all customer balances). It acts as a check on the accuracy of the subsidiary ledger and provides a single figure for the trial balance.

When processing money received from a credit customer, which accounts are debited and credited?

Debit the cash book (bank/cash), and credit the sales ledger control account (and the individual customer's account in the sales ledger) to reduce the amount owed by the customer.

When making a payment to a credit supplier, which accounts are debited and credited?

Debit the purchases ledger control account (and the individual supplier's account in the purchases ledger), and credit the cash book (bank), reducing the amount owed to the supplier.

Describe the steps to balance a ledger account.

1) Total both the debit and credit sides. 2) Insert the larger total as the total on both sides. 3) Find the difference and enter it on the smaller side as the 'balance carried down' (balance c/d). 4) Bring the balance down (balance b/d) on the opposite side below the totals as the opening balance for the next period.

On a ledger account, what do the terms 'balance c/d' and 'balance b/d' mean?

'Balance c/d' (carried down) is the balancing figure entered to make both sides equal at the period end. 'Balance b/d' (brought down) is that same balance entered on the opposite side at the start of the next period, representing the opening balance.

Does a debit balance brought down represent an asset or a liability?

A debit balance brought down typically represents an asset or an expense (e.g. money owed to the business, cash held). A credit balance brought down typically represents a liability, capital or income (e.g. money the business owes).

What is a two-column cash book?

A two-column cash book has two money columns on each side — one for cash and one for bank — recording all cash and bank receipts (debit side) and payments (credit side) in a single book.

What is a three-column cash book and what is the extra column for?

A three-column cash book has columns for discount, cash and bank on each side. The extra discount column records settlement (cash) discounts: discount allowed to customers on the debit/receipts side and discount received from suppliers on the credit/payments side. The discount columns are memorandum totals posted separately to the discount accounts.

In the three-column cash book, where are the discount allowed and discount received totals posted?

The total discount allowed (debit-side column) is posted to the debit of the discounts allowed account and credited to the sales ledger control account. The total discount received (credit-side column) is posted to the credit of the discounts received account and debited to the purchases ledger control account.

What is a 'contra' entry in the cash book?

A contra entry occurs when cash is paid into the bank or withdrawn from the bank for business use. Both the debit and credit are within the cash book itself (one column cash, the other bank), so it is marked with a 'C' in the folio column and not posted elsewhere.

What is the petty cash book used for?

The petty cash book records small, low-value cash payments (e.g. postage, stationery, refreshments, travel) made from a small float of cash kept on hand, keeping these out of the main cash book.

Explain the imprest system of petty cash.

Under the imprest system a fixed float (imprest amount) is set. As money is spent, vouchers are kept. At the end of the period the cashier reimburses the petty cashier with exactly the total spent, restoring the float to the original imprest amount. Float restored = imprest amount − cash remaining = total vouchers.

Under the imprest system, if the imprest is £150 and £108 has been spent, how much cash should remain and how much is reimbursed?

Cash remaining $= £150 - £108 = £42$. The reimbursement to restore the float $= £108$, bringing it back to the imprest of £150.

What is a petty cash voucher and what must it show?

A petty cash voucher is the document authorising and recording a petty cash payment. It shows the date, details/description of the expense, the amount (net and VAT if applicable), a voucher number, and signatures of the person claiming and the person authorising.

How is VAT recorded in the petty cash book?

When a petty cash payment includes recoverable VAT (and a valid VAT receipt is held), the payment is analysed into its net amount in the relevant expense column and the VAT in a separate VAT analysis column, so the input VAT can be reclaimed.

How is the petty cash book both a book of prime entry and part of the ledger?

As a book of prime entry it is the first record of petty cash transactions. The analysis column totals are posted to the relevant expense and VAT accounts in the general ledger. When it forms part of the double entry (the credit for payments and debit for the cash held), it also acts as the petty cash ledger account.

Explain how the cash book functions as both a book of prime entry and a ledger account.

The cash book is a book of prime entry because cash and bank receipts and payments are first recorded in it. It is also a ledger account because it is the bank/cash account itself within the double-entry system — the debit and credit columns ARE the bank/cash account, so no separate cash account is needed in the general ledger.

At the period end, what does a debit balance on the bank column of the cash book represent?

A debit balance brought down on the bank column represents money in the bank (a bank asset). A credit balance brought down would represent a bank overdraft (a liability/amount owed to the bank).