Association of Accounting Technicians (AAT) Principles of Bookkeeping Controls (Level 2) Syllabus

What is the golden rule governing every journal entry?

Total debits must equal total credits. Every journal entry must balance, applying the double-entry principle.

What are opening entries for a new business, and how are they recorded in the journal?

Opening entries record the assets, liabilities and capital that a new business starts with. Assets are debited, liabilities are credited, and capital is the balancing figure, recorded via a journal entry using the accounting equation.

State the accounting equation used to determine opening capital.

$$\text{Capital} = \text{Assets} - \text{Liabilities}$$ Capital is the residual balancing figure when opening assets and liabilities are journalised.

A new business opens with assets of £30,000 and liabilities of £8,000. What is the opening capital, and how is it journalised?

$$\text{Capital} = 30{,}000 - 8{,}000 = \pounds 22{,}000$$ The journal debits the assets (£30,000), credits the liabilities (£8,000), and credits capital £22,000 as the balancing figure.

What is an irrecoverable debt (bad debt)?

A debt owed by a credit customer that the business has decided will not be paid and is therefore written off as an expense (a loss to the business).

What is the journal entry to write off an irrecoverable debt (ignoring VAT)?

Debit Irrecoverable debts expense account, Credit Sales ledger control account (and remove the amount from the individual customer's account in the subsidiary ledger).

When writing off an irrecoverable debt that included VAT, what is the journal entry?

Debit Irrecoverable debts (net amount), Debit VAT control account (VAT element being reclaimed), and Credit Sales ledger control account (full gross amount).

Why is the irrecoverable debts account debited when a bad debt is written off?

The write-off is an expense/loss to the business. Expenses are increased by debit entries, so the irrecoverable debts expense account is debited while the receivable (SLCA) is credited to remove the asset.

Why is the journal used to record payroll transactions?

Payroll involves several accounts (wages expense, income tax/PAYE, National Insurance, pension, net wages) and is not a routine entry in another book of prime entry, so the totals are journalised before posting to the ledgers.

In payroll, what is the difference between gross pay and net pay?

Gross pay is the total earnings before deductions. Net pay is the amount actually paid to the employee after deductions. $$\text{Net pay} = \text{Gross pay} - \text{Deductions}$$

List the main deductions from an employee's gross pay in a UK payroll.

Income tax (PAYE), employee's National Insurance contributions (NICs), and other deductions such as employee pension contributions. These are owed to HMRC/pension provider rather than paid to the employee.

Name an employer payroll cost that is in addition to gross pay.

Employer's National Insurance contributions (and employer's pension contributions). These are an extra cost to the employer, not deducted from the employee's pay.

What is the wages and salaries control account used for in payroll accounting?

It is a clearing account that temporarily holds the total payroll cost. Gross pay and employer's costs are credited from the wages expense, and it is cleared by the amounts paid to employees (net pay) and to HMRC/pension provider, leaving a nil balance.

What is a trial balance?

A list of all the ledger account balances at a particular date, with debit balances in one column and credit balances in another, used to check that total debits equal total credits.

What is the primary purpose of preparing a trial balance?

To check the arithmetical accuracy of the double-entry bookkeeping by confirming that total debit balances equal total credit balances, and to provide a starting point for preparing financial statements.

Which types of accounts normally have a DEBIT balance in the trial balance?

Assets, expenses, and drawings normally carry debit balances (remembered by the mnemonic DEAD: Debit = Expenses, Assets, Drawings).

Which types of accounts normally have a CREDIT balance in the trial balance?

Liabilities, income/revenue, and capital normally carry credit balances.

Does a balanced trial balance guarantee the accounts are free from error? Explain.

No. A balanced trial balance only confirms total debits equal total credits. Several errors (those not disclosed by the trial balance) can exist even when it balances.

List the six classic types of error NOT disclosed by the trial balance.

Error of omission, error of commission, error of principle, error of original entry, error of reversal of entries, and compensating errors. (Plus errors of complete reversal.)

What is an error of omission?

A transaction is completely omitted from the books, with no entry made on either the debit or credit side. The trial balance still balances.

What is an error of commission?

A correct amount is posted to the wrong account but of the same type/class, e.g. posting an expense to the wrong expense account. Debits still equal credits.

What is an error of principle?

A transaction is posted to a fundamentally wrong type of account, e.g. recording capital expenditure (a non-current asset) as revenue expenditure (an expense). The trial balance still balances.

What is an error of original entry?

The wrong amount is recorded in the book of prime entry and then posted to both accounts, e.g. recording £450 as £540. Both sides carry the same wrong figure so the trial balance balances.

What is an error of reversal of entries?

The correct accounts and amount are used but the debit and credit entries are reversed (the entry that should be debited is credited and vice versa). The trial balance still balances.

What are compensating errors?

Two or more separate errors that cancel each other out, e.g. a debit total overstated by £100 and a credit total also overstated by £100. The net effect leaves the trial balance in balance.

Give three examples of errors that ARE disclosed by (cause a difference in) the trial balance.

A single entry (only one side posted), posting different amounts to the debit and credit sides, posting two entries to the same side, casting/addition errors, transposition errors in one account, and balancing errors.

What is a transposition error and how can you spot it in a trial balance difference?

Digits are reversed when recording a figure, e.g. £540 entered as £450. The resulting difference is always divisible by 9. $$540 - 450 = 90, \quad 90 \div 9 = 10$$

What is a suspense account?

A temporary account opened to make the trial balance balance when the debit and credit totals disagree, or to hold an entry whose correct account is not yet known. It holds the difference until the error is found and corrected.

How is a suspense account cleared?

By identifying the errors that caused the imbalance and posting correcting journal entries. Once all errors are corrected, the suspense account balance is reduced to nil and the account is closed.

If the trial balance debit total is £500 greater than the credit total, on which side is the suspense account opened?

On the credit side. A credit entry of £500 is made in the suspense account to make the trial balance balance until the error is found.

What is the difference between the cash book and the bank statement?

The cash book is the business's own record of bank transactions (a book of prime entry / ledger). The bank statement is the bank's record of the same account. They are compared during bank reconciliation.

Why might the cash book balance and the bank statement balance differ at a given date?

Because of timing differences (unpresented cheques and outstanding lodgements not yet processed by the bank) and items appearing on the bank statement but not yet recorded in the cash book (e.g. bank charges, interest, direct debits, standing orders, BACS receipts), plus errors.

What is a timing difference in bank reconciliation?

A difference caused because a transaction has been recorded in one record but not yet the other due to a time delay, e.g. cheques written but not yet cleared, or deposits banked but not yet credited by the bank.

What is an unpresented cheque, and how does it affect reconciliation?

A cheque issued/paid by the business and recorded in the cash book but not yet presented for payment at the bank. In the bank reconciliation statement it is deducted from the bank statement balance.

What is an outstanding lodgement (uncleared deposit), and how is it treated?

Money received and recorded in the cash book (banked) but not yet credited by the bank. In the bank reconciliation statement it is added to the bank statement balance.

Which items on the bank statement typically require the cash book to be updated?

Bank charges and interest, direct debits and standing orders, BACS/automated receipts and payments, dishonoured cheques, and any bank errors or items the business had not yet recorded.

What is the correct sequence of steps to prepare a bank reconciliation?

1) Compare the cash book with the bank statement and tick off matching items. 2) Update the cash book for items on the statement not yet recorded (charges, interest, direct debits, BACS). 3) Balance the updated cash book. 4) Prepare the bank reconciliation statement using the updated cash book balance and the bank statement balance, adjusting for timing differences.

When updating the cash book, how are bank charges and dishonoured customer cheques treated?

They are credited (debit/payments side reduces the bank asset) in the cash book because they reduce the bank balance. Bank charges are an expense and a dishonoured cheque removes a previously recorded receipt.

When updating the cash book, how is bank interest received and a BACS receipt from a customer treated?

They are debited in the cash book (receipts side) because they increase the bank balance.

What is the layout/purpose of the bank reconciliation statement?

It reconciles the updated cash book balance to the bank statement balance. Typically it starts with the bank statement balance, adds outstanding lodgements, deducts unpresented cheques, and arrives at the (corrected) cash book balance, proving the two records agree.

Write the formula linking the bank statement balance to the updated cash book balance.

$$\text{Cash book balance} = \text{Bank statement balance} + \text{Outstanding lodgements} - \text{Unpresented cheques}$$

The updated cash book shows £1,200 (debit). The bank statement shows £1,500. Unpresented cheques are £450 and outstanding lodgements are £150. Does the reconciliation agree?

Yes. $$1{,}500 + 150 - 450 = 1{,}200$$ The reconciled figure equals the updated cash book balance of £1,200, so the reconciliation agrees.

Why is it important to update the cash book BEFORE preparing the bank reconciliation statement?

Because items such as bank charges, interest and direct debits are genuine transactions the business simply had not yet recorded. They are not timing differences, so they must be entered in the cash book to give a corrected balance, leaving only true timing differences for the reconciliation statement.

What does the bank reconciliation help to detect or confirm?

It confirms the accuracy of the cash book, identifies omitted or erroneous entries, detects unauthorised transactions or fraud, and ensures the bank balance reported in the financial statements is reliable and agrees with the bank's records.

In the SLCA, how are discounts allowed and irrecoverable debts written off treated, and why on that side?

Both are credited in the sales ledger control account because they reduce the amount owed by customers (reducing the receivables asset). Discounts allowed reduce what the customer pays; irrecoverable debts remove an uncollectable balance.

In the PLCA, how are discounts received and purchases returns treated, and why on that side?

Both are debited in the purchases ledger control account because they reduce the amount owed to suppliers (reducing the payables liability).

What is the journal entry to correct a transaction that was completely omitted from the books (assuming it does not require a suspense account)?

Post the original double entry that was missed: debit the account that should have been debited and credit the account that should have been credited, with a narrative explaining the correction of the error of omission. No suspense account is needed because both sides were missing.