Accounts Preparation with Sonya Ashbarry from Eagle Education

Natasha Everard Is there an easy way of remembering what is in the profit n loss and balance sheet

Sonya Clague Ashbarry Good evening everyone.

Sonya Clague Ashbarry Natasha Everard yes there is. The statement of profit or loss is used to calculate profit or loss. In this statement we record INCOME from selling of goods and services that we trade in mostly, and EXPENSES which occur from day to day trading activities. So these are expenses that are “consumed” which means used (more or loss) in one period of time.

Natasha Everard I think the depreciation side of it confused me as to which financial statement part it had to be in

Sonya Clague Ashbarry The statement of financial position shows us the financial position of the business. So here we are looking at assets. At this level you can remember an asset as being something that can be turned into cash. So anything we can sell (vehicles, stock and so on) and obviously our bank can be emptied and we can take the cash out of the safe lol! But unfortunately we need to pay our LIABILITIES. These are our obligations i.e. debts to settle. So the accounting equation is ASSETS (THINGS WE CAN GET CASH FROM) – LIABILITIES (DEBTS WE HAVE TO PAY) = CAPITAL.

Sonya Clague Ashbarry Many people thing of capital as an asset but it’s actually a liability because it’s effectively the sum that is owed the investor once all assets have been liquidated (turned into cash) and all debts are settled).

Kerry Crate Sonja that’s the easiest explanation I have heard

Sonya Clague Ashbarry With respect to deprecation:

Sonya Clague Ashbarry When we buy an asset – so that’s an item that is to be used in the business for longer than an accounting period, with the intention of it helping to generate revenue – then it is capitalised. That means that rather than recording it as an expense in one period in the profit or loss, it’s recorded in the balance sheet as an asset to be used long term.

Sonya Clague Ashbarry Some think that depreciation is a way to reduce a value of an asset, but what we are really doing is rather than charge the full cost of an asset against profits in one accounting period, we are charging the cost of the asset against profits over the amount of accounting periods that we expect to use that asset.

Sonya Clague Ashbarry If we’re using an asset for 5 years, then 20% of the cost of the asset is charged against profits each year for 5 years.

Sonya Clague Ashbarry That charge is recorded as a debit in the profit and loss (depreciation expense account)

Sonya Clague Ashbarry But we need to also show in the statement of financial position how much of the assets original cost has been charged to the P/L Profit or loss so far and for this we use the accumulated depreciation account.

Sonya Clague Ashbarry Does that help Natasha Everard

Sonya Clague Ashbarry Phew my fingers are working fast lol

Paula Rutter so the horror of accruals prepayments 😨 you hear about them all the time – when I did Acpr I was confused on which side to bring them back into the new months accounts. all the c/f b/f c/d and b/d abbreviations

Sonya Clague Ashbarry Oh by the way – I keep slipping into British terminology so the balance sheet is the same as the statement of financial position.

Linda Tong Hi, what’s an easy tip to remember how accruals and prepayments work. I understand the concept but need some sort of rhyme to get it into my head when it comes to dr and cr!

Paula Rutter then you’ve cracked it and you get accrued income….. the books don’t explain it enough …. maybe that would help if you explained it

Sonya Clague Ashbarry Well Paul I’m delighted to announce that in the new standards accruals and prepayments will be much clearer. Still challenging but much clearer. Unfortunately the way the AAT assessed them in my view was old fashioned and doesn’t really reflect what happens in practice. The new syllabus shows clearly the creation of an accrual or prepayment or reversal.

Sonya Clague Ashbarry You need to understand the principle of accruals and prepayments then you’ll problem solve the debtis and credits…..

Sonya Clague Ashbarry let’s look at an accrual first

Sonya Clague Ashbarry In accounting we have to record a transaction in the period that it occured regardless of whether it’s been paid for or not. This is the accruals concept……

Sonya Clague Ashbarry So, an example would be where we are preparing the accounts for 31st December 2015. You pay £100 per month for insurance but you see the balance on the insurance account is £1,100 and it should be £1,200. We don’t know why it’s £100 short but we need to accrue for it because the cost of insurance for the year is £1,200.

Sonya Clague Ashbarry So, Insurance is an expense (in the profit or loss) so it’s a debit following the double entry rules. If you have £1,100 on the debit side of an account, and it should be £1,200 then you have to debit theaccount to increase it by £100.

Sonya Clague Ashbarry The opposite entry is a credit in the accrualsaccount. But you really need to understand why if you want good skills…..it’s a liability in the sfp. Because as far as the readers of accounts are concerned you’re saying you’ve not yet paid the £100, but you’re obligated to do so.

Sonya Clague Ashbarry Once the accounts are finalised, for the nextaccounting period you need to reverse the accrual. So you will DR the accrual account in the sfp. This empties the account so there’s no longer a balance in it.

Sonya Clague Ashbarry You will cr the insurance account. So at the start of the new accounting period you have a credit balance on the insuranceaccount. Looks odd doesn’t it?

Sonya Clague Ashbarry The reason being is because when you eventually pay what you owe then the insurance account will be debited leaving a zero balance, which is right, as there so far has been no cost in the currentaccounting period.

Lidiia Gould so, as we are more familiar with spl or trial balance, we assign a debit or credit entry there and the opposite one goes to sfp

Sonya Clague Ashbarry You might find it helpful to draw some ledger accounts and work through the example, the you’ll see what I mean.

Natasha Everard The disposal of fixed assets is another stumbling block for some…

Sonya Clague Ashbarry Lidiia Gould I’m all for understanding the bigger picture. Unfortunately there are not amazing text books out there that explain it clearly enough in my opinion so it can be so tricky. If students don’t quite understand then they tend to resort to remembering. It would be really good if you can learn to understand a profit or loss and statement of financial position, so that when you learn about the adjustments you understand the effect that your adjustments make on the final accounts.

Lidiia Gould its my next chapter, Sonya Clague Ashbarry

Sonya Clague Ashbarry You are right Natasha, but again, if you understand the purpose of each account, what it’s recording and what it tells us, then disposals are a little easier to get to grips with.

Sonya Clague Ashbarry With disposals you have to remember that the original cost of the asset is in the asset at cost account, and the amounts charged to the P/L to date are in the accumulated depreciation account….

Sonya Clague Ashbarry You need to REMOVE the asset from the asset of cost account, remove the depreciation that belongs to it from the accumulated deprecation account and put them in the disposals account….

Sonya Clague Ashbarry You then have the net book value or carrying value of that asset in the disposals account. You then record what you received for the asset if it’s sold and then the difference is a gain or loss. You have to remember it’s not a profit or a loss, really you have either over deprecaited the asset or under depreciated the asset. So you got more or less than you expected the recorded value to be.

Sonya Clague Ashbarry I like ACPR because it’s easy to imagine in real life (if that makes sense). So even though you might not experience it you can imagine how it can work. With cost an revenues that’s more tricky as most of us would struggle to apply it to real life because we have little experience of manufacturing environments.

Natasha Everard it was my favourite unit….just hoping i remember it when starting financial statements.

Sonya Clague Ashbarry It does feel like it’s never ending, but then when you move to level 4, you get the same feeling. I would suggest that you keep reminding yourself how amazing it is that you’re learning and understanding all of this new stuff that hopefully will make a real difference to your career and earning potential!

Sonya Clague Ashbarry Who’s here then? Please introduce yourselves and let us know what you are studying at the moment.

Lidiia Gould Lidiia Gould, still 2 exams to pass for level 2 but have started level 3 now

Natasha Everard when preparing for this exam, what is your best advice?

Sonya Clague Ashbarry I would say the BIGGEST tip, especially for distance learners, is that remember you have paid to use a service, so do ask your mentors/tutors if you would like help. Sometimes a 5 or 10 minute chat, or a short email can make the light bulb light up! Don’t struggle and muddle through. We are keen to help, it’s what makes our jobs interesting and rewarding 🙂

Sonya Clague Ashbarry My daughter is doing PETH at the moment! She likes it lol!

Sonya Clague Ashbarry That’s professional ethics of course.

Natasha Everard i am so lucky to pass peth on 2010 standards…i think anyway 😉

Natasha Everard Does anyone else have any questions???

Sonya Clague Ashbarry Yes, the 2013 is more challenging for sure. it’s going to be interesting to see how it pans out on 2016!

Natasha Everard i so want to finish level 4 before dec 2017 lol

Sonya Clague Ashbarry Yes so does my daughter! She’s 3/4 way through level 3! December 2017 is certainly a motivator for many lol!

Sonya Clague Ashbarry Can I help anybody else this evening?

Sonya Clague Ashbarry Do you want to ask any general questions regarding AAT whilst I’m here?

Sonya Clague Ashbarry I thought I saw something, somewhere about suspense accounts before. Do you know why we use a suspense account?

Natasha Everard Louise Pepperall did you not have a question on suspense accounts?

Natasha Everard Right, thanks to Sonya Clague Ashbarry for an excellent Q & A session again. I really want to thank her for giving up her evening for answering questions. Thank you!!

Sonya Clague Ashbarry Just before we finish I’ll share one more study tip. When I was an AAT student I once taught depreciation to a fellow student who didn’t get it. I was AMAZED by how much of a difference it made to my ability to understand it and recall it.

Sonya Clague Ashbarry So if you get the opportunity to do that, I would for sure. Even if it’s to your dog!

Lidiia Gould Thank you Sonya Clague Ashbarry and Natasha Everard

Sonya Clague Ashbarry You are most welcome. Have a fabulous evening everyone!

Neil Arnott Great session again…well done everyone!

Sonya Clague Ashbarry Goodnight – over and out ! 🙂

Sonya Clague Ashbarry Good luck Emma.